The Zacks Consumer Loans industry is bearing the brunt of low interest rates, economic slowdown and muted consumer sentiments. While the economy is gradually reopening, rise in coronavirus cases might hamper business activities again, leading to less demand for consumer loans. Also, credit costs and delinquency rates are likely to rise.
Nevertheless, easing lending standards, which have increased the number of clients eligible for consumer loans, are likely to provide support. Digitization of operations will boost operating efficiency. Ally Financial Inc. (ALLY - Free Report) , Credit Acceptance Corporation (CACC - Free Report) , SLM Corporation (SLM - Free Report) and Navient Corporation (NAVI - Free Report) are set to benefit from these developments.
About the Industry
The Zacks Consumer Loans industry comprises firms that offer mortgages, refinancing, home equity lines of credit, credit cards, auto loans, student loans and personal loans, among others. Prospects of these companies are sensitive to the nation’s overall economic health.
In addition to offering the above-mentioned products and services that help generate interest income, which is an important part of revenues, many consumer loan providers are involved in businesses like commercial lending, insurance, loan servicing and asset recovery for generating fee revenues.
3 Consumer Loan Industry Trends to Watch Out For
Low Rates and Consumer Sentiment Weigh on Performance: The Federal Reserve cut interest rates to near zero in March with an aim to support the U.S. economy from coronavirus-induced slowdown. Now, in the September FOMC meeting, the central bank signaled no change in rates till 2023. Also, muted consumer sentiments owing to fears of rising coronavirus cases are likely to hurt loan demand. Thus, growth in net interest margin and net interest income for consumer loan companies is expected to be hampered in the near term.
Worsening Asset Quality a Headwind: The March 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act provided significant relief to individuals in the form of tax rebates and deductions, mortgage forbearance and additional unemployment benefits, among others. With Act having expired in July, there has been a series of piecemeal executive actions to offer some relief. However, as individuals start facing cash crunch amid economic slowdown, there is a high a chance of a rise in delinquency rates. Further, though increased lending to subprime borrowers has resulted in a rise in revenues for consumer loan providers, this is leading to higher provision for credit losses. Thus, industry players are likely to witness deterioration in asset quality, going forward.
Easing Lending Standards Offer Some Support: With the nation’s big credit reporting agencies removing all tax liens from consumer credit reports since 2018, credit scores of several consumers have moved higher. This has increased the number of consumers for the industry participants. Further, easing credit lending standards are helping consumer loan providers to meet increased demand for loans.
Zacks Industry Rank Reflects Bleak Prospects
The Zacks Consumer Loans industry is a 19-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #181, 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 outperforms 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 weak 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 the current year have plunged 76.9%.
Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Underperforms Sector and S&P 500
The Zacks Consumer Loans industry has underperformed both the Zacks S&P 500 composite and its own sector over the past three years.
While the stocks in this industry have collectively lost 23.3% over this period, the Zacks S&P 500 composite rallied 33.1% and the Zacks Finance sector has declined 12.4%.
Three-Year Price Performance
Industry’s Current Valuation
On the basis of price-to-tangible book ratio (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 0.87X. The highest level of 1.49X 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 14.81X, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
As finance stocks typically have a lower P/TBV ratio, 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 3.22X for the same period is way above the Zacks Consumer Loan industry’s ratio, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
4 Consumer Loan Providers to Keep an Eye on
Navient Corporation: This Zacks Rank #1 (Strong Buy) 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 and inorganic expansion strategy will continue supporting Navient in the quarters ahead.
Its shares have rallied 11% over the past six months. The Zacks Consensus Estimate for the current-year earnings has been revised 14.9% upward to $2.86 over the past 60 days. The same for 2021 has been revised 4.3% upward to $2.40 over the past 60 days.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: NAVI
Ally Financial Inc.: The company provides a broad array of financial products and services, primarily to automotive dealers and their customers. Further, this Detroit, MI-based company has been diversifying in to banking and wealth management services, and is making efforts to enhance digital offerings.
Strong origination volumes, retail loan growth, rise in deposit balances and inorganic growth efforts with an aim to improve product offerings will continue to support Ally Financials. Also, the company has a strong balance sheet, and its capital deployments remain solid.
The Zacks Consensus Estimate for 2020 earnings has moved 28.2% north to 91 cents in two months’ time. Likewise, the consensus estimate for 2021 earnings has been revised 2.7% upward over the same time frame.
Moreover, the stock carries a Zacks Rank #2 (Buy), presently. Shares of the company have surged 69.6% over the past six months.
Price and Consensus: ALLY
Credit Acceptance Corporation: Headquartered in Southfield, MI, the company offers financing programs, and related products and services to automobile dealers in the United States, enabling them to sell vehicles to consumers irrespective of their credit history. Also, it is engaged in the business of reinsuring coverage under vehicle service contracts sold to consumers by dealers on vehicles financed by the company.
Despite the current economic slowdown, the company’s finance charges are likely to continue improving supported by rise in demand for auto loans. Further, a decent rise in dealer enrollments and active dealers is expected to support top-line growth.
The Zacks Consensus Estimate for current-year earnings has been revised 23.1% upward to $10.86 over the past two months. Additionally, the same for 2021 has moved 18.3% north to $22.72. Nonetheless, shares of this Zacks Rank #2 stock have rallied 17.7% over the past six months.
Price and Consensus: CACC
SLM Corporation: The company (also known as Sallie Mae) is the dominant player in every phase of the student loan life cycle. It is focused on catering to private education loans, and providing saving and insurance products for higher education to students and families.
Rising private education loan originations bode well for Sallie Mae. Also, expectation of modest growth in enrollment will lead to higher demand for education loans. This, along with increasing tuition costs, is likely to enhance the company’s prospects.
Shares of this Zacks Rank #2 company have gained 13.1% over the past six months. The Zacks Consensus Estimate for the current-year earnings has remained unchanged at $1.11 over the past 60 days. The same for 2021 has been revised 2.3% upward to $1.33 over the past two months.
Price and Consensus: SLM