The opportunity may be ripe for investors to buy bank stocks at a discount. Banks are taking a beating this week after President Donald Trump floated the idea of capping credit card interest rates at 10% for one year. JPMorgan Chase has lost more than 5% while Wells Fargo and Citigroup are down 2.5% and 4.1%, respectively, through Tuesday’s close. Bank insiders and analysts have warned that a rate cap could render large parts of the credit card business unprofitable. They also say it would lead banks to stop offering loans to consumers with subprime credit ratings, CNBC’s Hugh Son reported Monday. But JPMorgan’s trading desk doesn’t expect Trump will be able to follow through on this proposal. “To institute interest rate caps, a new law would have to be passed, and Trump does not currently have the votes in the GOP … further, it is unlikely that Dems would attempt to gift Trump a win during an election year,” the traders said in a note Wednesday. “We think this is a buy-the-dip moment for the credit cards and banks with credit card exposure.” Trump on Tuesday also voiced support for the Credit Card Competition Act (CCCA), a long-stalled measure that aims to lower card-swipe costs for merchants. The comments dragged down payment network operators Visa and Mastercard by 4.5% and 3.8%, respectively. The Street isn’t convinced that proposal will gain much traction either: Jason Kupferberg, Wells Fargo analyst: “We understand heightened regulatory sensitivity following recent rate cap headlines, but CCCA has floundered in Congress for 3+yrs and faces an uphill political battle. Believe V/MA [earnings estimates] risk would be modest.” James Faucette, Morgan Stanley analyst: “Headline-driven opportunities for MA/V don’t come too often, but we think this is one of them. Even in an aggressive scenario assuming meaningful fee pressure & credit volume shift off MA/V rails, and lower [value-added services], rev impact is well contained on diversification.” Bryan Keane, Citi analyst: “History has told us buying the sell-offs on fears over potential business model changes has been beneficial for investors.” Mihir Bhatia, Bank of America analyst: “We believe the stock reaction (both down 4-5% today) is overdone given 1) low likelihood of this bill becoming law (simply not enough political support for it), 2) even if it did pass, we see substantial implementation hurdles that would limit any impact to V and MA, and 3) historically, V & MA have shown themselves to be deft at handling political and regulatory risks while managing the economic fallout from changing policies.” Bottom line: This latest pullback may be a blessing in disguise for investors looking for exposure to banks and payment network stocks at lower prices.
