By Telis Demos

Donald Trump was elected at least in part because of voter unhappiness with living costs, and their hope he might do something about it. Among those high prices have been what it costs to borrow on a credit card. Trump during the campaign even floated the idea of a temporary 10% cap on credit-card interest rates, less than half of what the typical rate is today.

So why are card lenders some of the best-performing stocks after his win?

Synchrony Financial, a major credit-card issuer and lender, is the S&P 500's top-performing financial-sector stock so far this week, up 17%, followed by Discover Financial Services and Capital One Financial, up nearly 16% and 13%, respectively. Bread Financial, another large card and consumer lender, is up over 18%. S&P 500 banks overall have gained about 7%.

There may be many drivers of this buying, including a belief that the economy will be better, meaning more spending and fewer defaults. But one reason highlighted by analysts is the market's anticipation of regulatory changes in the new administration.

For Capital One and Discover, the former's deal to acquire the latter may be more likely to be approved by a merger-friendly Trump administration. But more broadly, across card lenders, there seems to be an expectation that a Biden administration Consumer Financial Protection Bureau rule reducing the typical credit-card late fee to $8 won't go into effect, or at least not in its current form.

That fee would be substantially below the $32 average charged by major lenders in 2022, according to the CFPB's analysis. The CFPB's rule, finalized in March, is being litigated and a judge has halted its implementation. So given this delay, plus an anticipated switch in leadership at the CFPB by the new president -- a legal possibility confirmed by a Supreme Court decision in 2020 -- the market seems primed to expect late fees to get a reprieve.

Investors and analysts have been focused on this issue, since such fees can be a substantial income source for lenders. Even though the rule is still being litigated, in preparation for it some issuers have started introducing offsets to the potential revenue impact. Those have included higher interest rates on future borrowing, other kinds of fees (like charges for paper statements) and changes to economic agreements with issuing partners like retailers.

Card interest rates have already been running at historically high levels. A Federal Reserve measure of rates on cards being assessed interest was at a fresh high as of August going back to 1994 data, north of 23%. That isn't all about higher general rates in the economy. The CFPB has noted that the margin on card loan rates -- or the difference between the average card rates charged and the benchmark prime loan rate -- has also been at historically high levels. The margin was approaching 15 percentage points as of August, based on Fed figures for the prime rate and the rates charged on cards being assessed interest. In August 2019, it was about 12 points.

Until there is regulatory clarity on the late fee rule's fate, lenders may be reluctant to roll-back those measures -- even if the rule hasn't gone into effect.

"It's a competitive enough market, where the excess economics get competed away," KBW analyst Sanjay Sakhrani said. "But for a period, there may be some excess revenue."

Regulatory clarity could be elusive, at least for a while. For one, as it was a final rule, a new CFPB head may have to go through a formal process of showing why the rule must be undone. It is also not yet clear what will happen with the litigation. And given the populist streak evident in Trump's rate cap comment -- not to mention JD Vance, who as a senator was a co-sponsor of a bill to regulate credit-card swipe fees -- it would be wise to wait on more certainty about who might lead the agency next.

An alternative to rolling back offsets, according to KBW's Sakhrani, might be to instead reverse some of the tightening of access to credit lenders have recently done. Higher rates and fees can make up for some of the resulting higher defaults.

Risks still lurk. Higher market rates will mean consumers who are struggling with card debt payments will have a harder time getting relief from cheaper loan alternatives, like refinancing a home to tap equity. Any hiccups in the job market along the way could also hit card loans, which historically are quite sensitive to employment.

In a game of cards, there is always the danger of overplaying your hand.

Write to Telis Demos at Telis.Demos@wsj.com

(END) Dow Jones Newswires

November 08, 2024 08:54 ET (13:54 GMT)

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