Investing.com – Morgan Stanley upgraded its rating on consumer finance stocks to “attractive” on positive fundamentals and a friendlier regulatory environment.
Key drivers include easing inflation, lower unemployment and stable lending standards. Defaults, which slowed significantly in 2024, are expected to continue to decline in 2025. EPS growth for the sector is expected to be 15%, which is the fastest pace in four years.
The brokerage noted that regulatory pressure is lower under a government controlled by the Republican Party. Morgan Stanley (NYSE:) expects the CFPB’s proposed late fee rule may not pass, which will boost profits for companies like Synchrony Financial (NYSE:) and Bread Financial.
Morgan Stanley upgraded the stock to Overweight from Underweight, increasing the stock’s price target to $82 from $40.
While Bread Financial was upgraded to Overweight from Underweight, it increased its target to $76 from $35, adding that late fees account for about 20-25% of BFH revenue.
Imposing an $8 late fee cap would have meant a significant reduction in revenue without compensation. However, the lower probability of the rule surviving at this point offsets the bull-bear bias for 2025 and beyond.
MS analysts said they now expect the late fee rule to either be rolled back or not make it through the courts. The rule has been stuck in the courts for nine months now, and the hurdle to clearing the conservative-dominated courts, including the Fifth Circuit and the Supreme Court, is high.
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 highlighted potential risks, including higher valuations and uncertainty about improvements in credit quality. Still, analysts remain optimistic about deregulation beneficiaries and companies with EPS catalysts next year.
