Consumer Finance Outlook: Deutsche Bank Upgrades Discover, Downgrades Capital One, Synchrony Top Pick

On Thursday, David Ho at Deutsche Bank gave his Consumer Finance Outlook highlighting Discover Financial Services DFS, Capital One Financial Corp. COF and Synchrony Financial SYF.

Deutsche Bank upgraded Discover to Buy with a $64 price target, downgraded Capital One to Hold with an $81 price target and rated Synchrony Financial as top pick heading into 4Q Earnings.

Discover

"We believe DFS offers more upside to top-line growth and operating leverage versus consensus expectations. And given where we are in the cycle, we believe DFS is less at-risk from credit concerns over-powering any improvement in top-line growth and margins. In our view, this will allow DFS to outperform through a combination of moderate multiple expansion and upward EPS revisions," the report stated.

Related Link: Guess What? It's Time For Bank ETFs

Deutsche Bank noted key catalysts for Discover heading into 2016, which include strong proprietary branded card relationships, increasing rewards spending by consumers and upside from new account acquisition. The combination of these three catalysts should help Discover drive top-line growth while gaining strength in the competitive credit card industry.

Capital One

"[W]e believe COF's top-line growth expectations are already high, which limits upside. And we believe top-line growth won't be enough to re-rate the stock given more uncertainties ahead, in particular: as 2014-2016 vintage credit card growth becomes a more noticeable EPS drag and commercial/auto growth slows. We expect COF to under-perform," according to Deutsche Bank.

Deutsche Bank said that one of the biggest risks to Capital One is that their loan growth has come from new account origination. While the company has offered a zero-balance transfer fee, this could prove to be costly particularly as interest rates rise. Furthermore, the report noted the growth of Capital One's portfolio has not translated to a corresponding acceleration in interchange fees, which could call into question Capital One's near-term profitability.

Synchrony

"We expect mgmt to up its loan growth guidance for 2016 when SYF announces 4Q15 results on 1/22: we expect at least 10 percent vs. its 6-8 percent loan growth outlook in 2015," the note commented, "SYF will likely exceed mgmt's 2015 NIM guidance of 15-15.5 percent. The potential for margin expansion in 2016 is underappreciated."

Deutsche Bank pointed to Synchrony's improving profitability and expected loan growth as key drivers, making the firm the top pick in the Consumer Finance Space. Going forward into 2016, Synchrony plans to enact a capital distribution program to shareholders, which – while likely to be conservative in the beginning of the year – may be increased by the end of 2016.

Recently Seen

At the time of this writing, Discover traded at $50.79, down 1.47 percent; Capital One traded down 4.19 percent at $65.68; Synchrony traded down 1.24 percent at $29.53.