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Morgan Stanley analysts, led by Betsy Graseck, downgraded American Express (NYSE:AXP) and Capital One Financial (NYSE:COF) to Equalweight on Tuesday with the expectation that higher inflation will slow consumer spending. In addition, SEI Investments (NASDAQ:SEIC) was cut to Underweight on lack of positive catalysts, exposure to weaker capital markets, pretax margin compression, and valuations, the analysts wrote in a note to clients.
American Express (AXP) stock is dropping 2.8% in Tuesday premarket trading, Capital One Financial (COF) is sliding 3.0%, and SEI Investments (SEIC) is off 1.3%.
With recession risk rising, the Morgan Stanley analysts are trimming consumer finance price targets a median 15% and 2023 EPS estimates a median 7%, “as we bake in greater NIB deposit outflows, higher expenses, weaker capital markets related revenue and higher provision expense,” Graseck and colleagues said.
Their base case calls for slowing economic growth, while their bear case bakes in a recession with trough multiples.
Inflation is making credit losses challenging to estimate for three reasons: investors and bank management teams haven’t seen this level of inflation in 40 years; it’s unclear how it will affect individual bank corporate loan portfolios currently still at historically low net charge-off ratios; while consumer subprime losses are expected to increase, the trajectory of higher end consumer credit quality is not as clear.
The SA Quant system puts American Express (AXP), Capital One (COF), and SEI Investments (SEIC) all at Hold. SA Authors’ average rating on AXPis Buy.
SA contributor Librarian Capital explains why AXP stock, though down 30% from its peak, still isn’t cheap
Source: seekingalpha.com
