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2 Consumer Loan Stocks to Gain Despite Grim Industry Prospects
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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 Corporation (COF - Free Report) and Navient Corporation (NAVI - Free Report) 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.
One-Year Price Performance
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 the chart below shows.
Price-to-Tangible Book Ratio (TTM)
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, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
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.
Price and Consensus: COF
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.
Price and Consensus: NAVI
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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 Corporation (COF - Free Report) and Navient Corporation (NAVI - Free Report) 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.
One-Year Price Performance
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 the chart below shows.
Price-to-Tangible Book Ratio (TTM)
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, as the chart below shows.
Price-to-Tangible Book Ratio (TTM)
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.
Price and Consensus: COF
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.
Price and Consensus: NAVI
