Credit Suisse's Top 5 Specialty Finance Stocks

In a report published Tuesday, Credit Suisse analysts gave their earnings preview for the first quarter for the Specialty Finance sector, while mentioning the top picks in their coverage universe. The highlights of the 1Q15 earnings preview were: • Credit quality, rewards and cobrands continue to be hot topic for 2015: "Credit quality at the issuers will likely remain relatively strong, however we anticipate modest charge off increases and building of reserves could be a drag on earnings…FX will also likely continue to be a drag for the networks," the analysts wrote. • Exchange rates will be a focus for the payments networks: We believe investors will be interested in the impact of depreciation of foreign currencies relative to the U.S. dollar…Investors are likely to focus on whether the depreciation in other currencies relative to the U.S. dollar has an effect on cross-border volume," the report said. • Regulation and rates in focus at student lenders • Investor interest in the auto lenders continues to increase given credit trends and regulatory concerns Top Picks in the Coverage Universe 1.

- Rated Outperform, with a price target of $71. The EPS estimate for 1Q is $1.30, which is 2 cents above consensus. "Our modeled revenues of $2.2Bn are up 8% q/q and 6% y/y. NIM in 1Q15 is 9.91%, up 14 bps from last quarter. We expect growth of net discount and interchange revenue to be up 7% y/y. Exclusive of the one-time item for the extinguishment of the forfeiture reserves, rewards costs are expected to be down 5 bps q/q to 105 bps of volume and sales volumes are expected to be up 7% y/y," the analysts said. The EPS estimate for 2015 has been reduced from $5.40 to $5.35. 2.

- Rated Outperform, with a price target of $35. The EPS estimate for 1Q is $0.67, which is 1 cent above consensus. "We are anticipating $3.2Bn of interest income and $283MM of interest expense. Our RSAs are modeled at $640MM for 1Q15, and our provision for loan losses is $686MM, which is down 10% q/q due to seasonality in the allowance for credit losses," the report mentioned. The EPS estimates for 2015 and 2016 have been reduced from $2.60 to $2.59 and from $2.75 to $2.70, respectively. 3.

- Rated Outperform, with the price target being raised from $97 to $100. The EPS estimate for 1Q is $0.77, which is 3 cent below consensus. "We forecast 1Q net revenue of $2.3Bn, up 5% y/y and down 5% q/q, and gross revenue of $3.1Bn, up 7% y/y and down 7% q/q. We expect R&I will represent 26.2% of gross revenues, compared to 27.9% in 4Q14 and 25.2% in 1Q14. We forecast revenue from domestic assessments of $0.95Bn (+1% y/y and -7% q/q), cross border volume fees of $0.72Bn (+4% q/q and -7%), and transaction processing fees of $1.01Bn (+8% y/y and -5% q/q). Most of the volume corrosion from loss of the Chase contract is expected to occur in 1Q15," the analysts wrote. The EPS estimates for 2015 and 2016 have been reduced from $3.50 to $3.47 and from $4.28 to $4.24, respectively, to reflect strengthening of the US dollar. 4.

- Rated Outperform, with a price target of $77.50. The EPS estimate for F2Q is $0.62, in line with consensus. "We forecast net revenues of $3.35Bn, representing 6% y/y growth, led by growth in international transaction fees of +12% y/y to $0.98Bn. Data processing fees are forecasted to increase 9% y/y to $1.34Bn, based on +11% processed transaction growth. We expect +7% y/y growth in card service fees to $1.6Bn. We anticipate incentives to total 17.7% of gross revenues compared to 17.4% in the December quarter and 15.7% in 2F14," the analysts commented. The EPS estimate for 2015 has been raised from $2.55 to $2.57, while that for 2016 has been cut from $3.01 to $3.00 to reflect marginally lower card service fees and a slightly higher stock price impacting share repurchases. 5.

- Rated Outperform, with a price target of $10.50. The EPS estimate for 1Q is $0.06, one penny short of consensus. "Our model assumes an 8.06% yield on private student loans (vs. 8.07% in 4Q14) as well as 1.20% cost of deposits (versus 1.14% in 4Q14). In 1Q15 we estimate $198MM of interest income compared to $179MM in 4Q, up 11% q/q; $31MM of interest expense compared to $28MM in 4Q; no gain-on-sale income as there are no planned loan sales; and $5MM of other income compared to $11MM in 4Q," the report mentioned. While maintaining the EPS estimate for FY15 at $0.50, that for 2016 has been reduced from $0.66 to $0.65 to reflect marginally higher funding costs due to ABS liability issuance at rates higher than SLM's deposit costs.