We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Zacks Industry Outlook Highlights Capital One Financial and Navient
Read MoreHide Full Article
For Immediate Release
Chicago, IL – January 13, 2023 – Today, Zacks Equity Research discusses Capital One Financial Corp. (COF - Free Report) and Navient Corp. (NAVI - Free Report) .
The Zacks Consumer Loans industry continues to bear the brunt of muted consumer sentiments, mainly attributable to sky-high inflation, geopolitical matters and recessionary fears. This will, therefore, gradually dampen the demand for consumer loans and hamper top-line growth. Weakening asset quality as economic growth continues to slow down is a major headwind.
Nonetheless, easing lending standards, which have increased the number of clients eligible for consumer loans, and digitization of operations will keep benefiting industry players. Hence, companies like Capital One Financial Corp. and Navient Corp. are worth considering despite industry challenges.
About the Industry
The Zacks Consumer Loans industry comprises companies that provide mortgages, refinancing, home equity lines of credit, credit card loans, automobile loans, education/student loans and personal loans, among others. These help the industry players generate net interest income (NII), which forms the most important part of total revenues. Prospects of the companies in this industry are highly sensitive to the nation’s overall economic condition and consumer sentiments.
In addition to offering the above-mentioned products and services, many consumer loan providers are involved in other businesses like commercial lending, insurance, loan servicing and asset recovery. These support the companies in generating fee revenues. Furthermore, this helps the firms diversify revenue sources and be less dependent on the vagaries of the economy.
Subdued Consumer Sentiments: The ongoing Russia-Ukraine conflict, supply-chain disruptions and inflation (though now somewhat moderating) continue to weigh heavily on consumer sentiments. Despite this, the Conference Board Consumer Confidence Index and the Expectations Index (which shows a six-month outlook) increased in December. But this seems to be largely supported by “jobs, wages, and declining gas prices.”
Lynn Franco, senior director of economic indicators at The Conference Board, said, “The Present Situation and Expectations Indexes improved due to consumers’ more favorable view regarding the economy and jobs. Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus. Vacation intentions improved but plans to purchase homes and big-ticket appliances cooled further. This shift in consumers’ preference from big-ticket items to services will continue in 2023, as will headwinds from inflation and interest rate hikes.”
Consumer spending will face headwinds from inflation and higher interest rates in the coming months. This will thereby result in lower demand for consumer loans. Thus, growth in net interest margin (NIM) and NII for consumer loan companies is likely to be hampered.
Credit Quality May Worsen: Since March 2020, the U.S. administration has provided substantial financial assistance to individuals through various packages to overcome pandemic-related challenges. However, with the stimulus packages gradually stopping and the Federal Reserve signaling continued monetary policy tightening to tame inflation, there is a strong likelihood that the U.S. economy might be slipping into a “mild” recession in the near term.
Also, going by the central bank’s latest Summary of Economic Projections, the U.S. economy will grow 0.5% in 2023 and 1.6% in 2024, lower than the prior projection of 1.2% for this year and 1.7% for the next. These factors may severely curtail the consumers’ ability to pay back loans. Thus, consumer loan providers will have to build additional reserves to tide over unexpected defaults and payment delays owing to the economic slowdown. This will, thereby, lead to a deterioration in industry players’ asset quality.
Easing Lending Standards: With the nation’s big credit reporting agencies removing all tax liens from consumer credit reports since 2018, several consumers' credit scores have improved. This has raised the number of consumers for the industry participants. Further, easing credit lending standards are helping consumer loan providers to meet loan demand.
Zacks Industry Rank Reflects Gloomy Picture
The Zacks Consumer Loans industry is a 17-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #198, which places it at the bottom 28% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a disappointing earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for 2022 have moved 7.6% lower.
Before we present a few stocks that you may want to keep on your radar despite industry headwinds, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry vs. Broader Market
The Zacks Consumer Loans industry has underperformed both the Zacks S&P 500 composite and its own sector over the past year.
The stocks in this industry have collectively lost 32.5% over this period while the Zacks S&P 500 composite and Zacks Finance sector have declined 17.3% and 14.7%, respectively.
Industry's Current Valuation
On the basis of price-to-tangible book (P/TBV), which is commonly used for valuing consumer loan providers because of large variations in their results from one quarter to the next, the industry currently trades at 1.06. The highest level of 1.54X and a median of 1.18X are recorded over the past five years.
This compares with the S&P 500’s trailing 12-month P/TBV of 9.99X.
As finance stocks typically have a lower P/TBV, comparing consumer loan providers with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV of 4.70X for the same period is way above the Zacks Consumer Loan industry’s ratio.
2 Consumer Loan Stocks to Keep an Eye On
Capital One: Headquartered in McLean, VA, the company is primarily focused on consumer and commercial lending as well as deposit origination. Strength in credit card and online banking operations, decent loan growth, robust balance sheet position and strategic inorganic expansion initiatives will keep supporting Capital One’s financials.
With the Federal Reserve raising interest rates to control inflation, this Zacks Rank #3 (Hold) company’s NII and NIM are expected to witness improvements. Also, its Credit Card segment is likely to continue showing strength. Strong growth opportunities in card loans and purchase volumes are expected despite an intensely competitive environment.
The Zacks Consensus Estimate for earnings has moved marginally higher for 2022 over the past 30 days. Also, COF’s shares have lost 3.5% over the past six months.
Navient: This Zacks Rank #3 stock is a leading provider of education loan management and business processing solutions. Headquartered in Wilmington, DE, the company is one of the leading servicers to the U.S. Department of Education under its Direct Student Loan Program.
Focus on introducing new products leveraged with technology, cost control efforts and inorganic expansion strategy will continue supporting Navient in the quarters ahead. Further, the improving economy and declining unemployment rate should provide support to the company.
Strengthening its asset recovery and business process outsourcing capabilities, NAVI has entered into several acquisition deals since 2015. Additionally, the company focuses on delivering operating efficiency and improving customer experience by building technology-enabled solutions.
Its shares have rallied 17.1% over the past six months. Over the past month, the Zacks Consensus Estimate for earnings has remained unchanged for both 2022 and 2023.
Why Haven’t You Looked at Zacks' Top Stocks?
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Zacks Industry Outlook Highlights Capital One Financial and Navient
For Immediate Release
Chicago, IL – January 13, 2023 – Today, Zacks Equity Research discusses Capital One Financial Corp. (COF - Free Report) and Navient Corp. (NAVI - Free Report) .
Industry: Consumer Loans
Link: https://www.zacks.com/commentary/2038317/2-consumer-loan-stocks-to-gain-despite-grim-industry-prospects
The Zacks Consumer Loans industry continues to bear the brunt of muted consumer sentiments, mainly attributable to sky-high inflation, geopolitical matters and recessionary fears. This will, therefore, gradually dampen the demand for consumer loans and hamper top-line growth. Weakening asset quality as economic growth continues to slow down is a major headwind.
Nonetheless, easing lending standards, which have increased the number of clients eligible for consumer loans, and digitization of operations will keep benefiting industry players. Hence, companies like Capital One Financial Corp. and Navient Corp. are worth considering despite industry challenges.
About the Industry
The Zacks Consumer Loans industry comprises companies that provide mortgages, refinancing, home equity lines of credit, credit card loans, automobile loans, education/student loans and personal loans, among others. These help the industry players generate net interest income (NII), which forms the most important part of total revenues. Prospects of the companies in this industry are highly sensitive to the nation’s overall economic condition and consumer sentiments.
In addition to offering the above-mentioned products and services, many consumer loan providers are involved in other businesses like commercial lending, insurance, loan servicing and asset recovery. These support the companies in generating fee revenues. Furthermore, this helps the firms diversify revenue sources and be less dependent on the vagaries of the economy.
3 Themes Shaping Consumer Loan Industry's Prospects
Subdued Consumer Sentiments: The ongoing Russia-Ukraine conflict, supply-chain disruptions and inflation (though now somewhat moderating) continue to weigh heavily on consumer sentiments. Despite this, the Conference Board Consumer Confidence Index and the Expectations Index (which shows a six-month outlook) increased in December. But this seems to be largely supported by “jobs, wages, and declining gas prices.”
Lynn Franco, senior director of economic indicators at The Conference Board, said, “The Present Situation and Expectations Indexes improved due to consumers’ more favorable view regarding the economy and jobs. Inflation expectations retreated in December to their lowest level since September 2021, with recent declines in gas prices a major impetus. Vacation intentions improved but plans to purchase homes and big-ticket appliances cooled further. This shift in consumers’ preference from big-ticket items to services will continue in 2023, as will headwinds from inflation and interest rate hikes.”
Consumer spending will face headwinds from inflation and higher interest rates in the coming months. This will thereby result in lower demand for consumer loans. Thus, growth in net interest margin (NIM) and NII for consumer loan companies is likely to be hampered.
Credit Quality May Worsen: Since March 2020, the U.S. administration has provided substantial financial assistance to individuals through various packages to overcome pandemic-related challenges. However, with the stimulus packages gradually stopping and the Federal Reserve signaling continued monetary policy tightening to tame inflation, there is a strong likelihood that the U.S. economy might be slipping into a “mild” recession in the near term.
Also, going by the central bank’s latest Summary of Economic Projections, the U.S. economy will grow 0.5% in 2023 and 1.6% in 2024, lower than the prior projection of 1.2% for this year and 1.7% for the next. These factors may severely curtail the consumers’ ability to pay back loans. Thus, consumer loan providers will have to build additional reserves to tide over unexpected defaults and payment delays owing to the economic slowdown. This will, thereby, lead to a deterioration in industry players’ asset quality.
Easing Lending Standards: With the nation’s big credit reporting agencies removing all tax liens from consumer credit reports since 2018, several consumers' credit scores have improved. This has raised the number of consumers for the industry participants. Further, easing credit lending standards are helping consumer loan providers to meet loan demand.
Zacks Industry Rank Reflects Gloomy Picture
The Zacks Consumer Loans industry is a 17-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #198, which places it at the bottom 28% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the bottom 50% of the Zacks-ranked industries is a result of a disappointing earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for 2022 have moved 7.6% lower.
Before we present a few stocks that you may want to keep on your radar despite industry headwinds, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry vs. Broader Market
The Zacks Consumer Loans industry has underperformed both the Zacks S&P 500 composite and its own sector over the past year.
The stocks in this industry have collectively lost 32.5% over this period while the Zacks S&P 500 composite and Zacks Finance sector have declined 17.3% and 14.7%, respectively.
Industry's Current Valuation
On the basis of price-to-tangible book (P/TBV), which is commonly used for valuing consumer loan providers because of large variations in their results from one quarter to the next, the industry currently trades at 1.06. The highest level of 1.54X and a median of 1.18X are recorded over the past five years.
This compares with the S&P 500’s trailing 12-month P/TBV of 9.99X.
As finance stocks typically have a lower P/TBV, comparing consumer loan providers with the S&P 500 may not make sense to many investors. But a comparison of the group’s P/TBV ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV of 4.70X for the same period is way above the Zacks Consumer Loan industry’s ratio.
2 Consumer Loan Stocks to Keep an Eye On
Capital One: Headquartered in McLean, VA, the company is primarily focused on consumer and commercial lending as well as deposit origination. Strength in credit card and online banking operations, decent loan growth, robust balance sheet position and strategic inorganic expansion initiatives will keep supporting Capital One’s financials.
With the Federal Reserve raising interest rates to control inflation, this Zacks Rank #3 (Hold) company’s NII and NIM are expected to witness improvements. Also, its Credit Card segment is likely to continue showing strength. Strong growth opportunities in card loans and purchase volumes are expected despite an intensely competitive environment.
The Zacks Consensus Estimate for earnings has moved marginally higher for 2022 over the past 30 days. Also, COF’s shares have lost 3.5% over the past six months.
Navient: This Zacks Rank #3 stock is a leading provider of education loan management and business processing solutions. Headquartered in Wilmington, DE, the company is one of the leading servicers to the U.S. Department of Education under its Direct Student Loan Program.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Focus on introducing new products leveraged with technology, cost control efforts and inorganic expansion strategy will continue supporting Navient in the quarters ahead. Further, the improving economy and declining unemployment rate should provide support to the company.
Strengthening its asset recovery and business process outsourcing capabilities, NAVI has entered into several acquisition deals since 2015. Additionally, the company focuses on delivering operating efficiency and improving customer experience by building technology-enabled solutions.
Its shares have rallied 17.1% over the past six months. Over the past month, the Zacks Consensus Estimate for earnings has remained unchanged for both 2022 and 2023.
Why Haven’t You Looked at Zacks' Top Stocks?
Our 5 best-performing strategies have blown away the S&P's impressive +28.8% gain in 2021. Amazingly, they soared +40.3%, +48.2%, +67.6%, +94.4%, and +95.3%. Today you can access their live picks without cost or obligation.
See Stocks Free >>
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch/
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Media Contact
Zacks Investment Research
800-767-3771 ext. 9339
support@zacks.com
https://www.zacks.com
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.