Investing.com — Morgan Stanley has upgraded its view on consumer finance stocks to “attractive” given positive fundamentals and a friendlier regulatory environment.
Key factors include declining inflation, lower unemployment and stable credit conditions. Delinquencies, which declined significantly in 2024, are expected to decline further in 2025. Earnings growth for the sector is estimated at 15%, the fastest pace in four years.
The brokerage emphasized a lighter regulatory burden under a Republican Party-controlled administration. Morgan Stanley (NYSE:) predicts that the CFPB’s proposed late fee rule may not pass, boosting profits for companies like Synchrony Financial (NYSE:) and Bread Financial.
Morgan Stanley moved Synchrony from “overweight” to “underweight” and raised its price target on the stock from $40 to $82.
While Bread Financial was upgraded from ‘underweight’ to ‘overweight’, raising its target from $35 to $76, with late fees being around 20-25% of BFH’s revenue.
An implementation of an $8 late fee cap would have meant a significant decrease in profits without compensation. However, the lower probability that the rules will survive at this point rebalances the bull-bear skew for 2025 and beyond.
MS analysts said they now expect the late fee rule to either be reversed or not make it through the courts. The rule has been stuck in the courts for nine months now, setting a high bar to get past conservative-dominated courts, including the Fifth Circuit and the Supreme Court.
However, credit growth remains a concern. Consumer lending is slowing, with card loan growth expected to stabilize at 3%-4% by mid-2025.
The note flagged potential risks, including higher valuations and uncertainty about credit quality improvements. Still, analysts remain optimistic about the beneficiaries of deregulation and companies with earnings per share in the coming year.
