We recently compiled a list of the 10 Best Credit Card Stocks to Buy Now. In this article, we are going to take a look at where Wells Fargo & Company (NYSE:WFC) stands against the other credit card stocks.
The market for credit card issuance services has expanded significantly over the last several years. At a CAGR of 9.2%, it will grow from $478.09 billion in 2023 to $522.22 billion in 2024, according to the Business Research Company. Over the coming years, a significant expansion in the market size for credit card issuance services is anticipated. At a CAGR of 8.3%, it will increase to $717.7 billion in 2028, as per the research. Contactless payment usage, data security concerns, cryptocurrency emergence, embedded finance, customization, and personalization are all factors contributing to the growth in the projection period.
The credit card market is still changing, mirroring changes in customer preferences and general economic conditions. According to the Q4 2023 Quarterly Credit Industry Insights Report (CIIR), the average credit card debt per borrower at the end of 2023 was $6,360, a 10% rise YoY. This resulted in a total of $1.13 trillion in credit card debt in the United States the same year. Moreover, the average amount owed by households in the 90th percentile is $11,210, with higher-income households often having larger loads.
According to TransUnion, credit card usage continues to rise, with 167.2 million users expected by mid-2023, representing a substantial rise over the last three years. Furthermore, according to the Federal Reserve Bank of San Francisco, credit cards accounted for 31% of all payments in 2022, although less than 10% of Americans typically utilized cash, according to a December 2023 Forbes Advisor survey.
As per the Federal Reserve Board, credit card delinquency rates have been rising gradually and will reach 3.1% by the end of 2023, the highest level since 2011. Additionally, charge-offs rose in Q2 2024 from 4.16% to 4.38%, a record high of 12.5 years that hasn’t been seen since Q4 2011. Meanwhile, according to Forbes Advisor, the average credit card interest rate in March 2024 was 27.89%, putting financial strain on people with balances.
In the future, digital payment methods are expected to gain popularity; according to a survey conducted in August 2023, more than half of customers preferred digital wallets over traditional cards. This change shows that credit card companies will continue to innovate, even as concerns about interest rates and debt levels persist.
Overall, as we have also mentioned in our article, “7 Best American Bank Stocks To Buy According to Hedge Funds,” the U.S. market for digital banking platforms was estimated at $1.04 billion in 2024 and is projected to grow at a CAGR of 9.63% to reach $2.04 billion by 2031.
Looking forward, according to a report, credit card spending is predicted to increase in the mid-single digits by 2024, while balances will fall to the mid-to-high single digits after a substantial rise since 2022. If labor markets are steady, credit performance measures are expected to decline during 2024 and stabilize by early 2025. Despite lower inflation, key problems include resumed student debt payments, high interest rates, and growing living costs.
Yanni Koulouriotis, CFA, Vice President – Global FIG stated:
“Overall, DBRS Morningstar expects a less favorable operating environment for credit card issuers in 2024 as consumer dynamics shift and are less of tailwind to credit card issuer performance. While we expect weaker financial performance in 2024 compared to 2023, we still expect performance to be supportive of current credit ratings.”
Methodology:
We sifted through holdings of credit card ETFs and online rankings to form an initial list of 20 credit card stocks. Then we selected the 10 stocks that were the most popular among institutional investors. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024. We have used the stock’s market cap as a tie-breaker in case two or more stocks have the same number of hedge funds invested.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A team of bankers in suits, discussing the success of the company’s banking products.
Wells Fargo & Company (NYSE:WFC)
Number of Hedge Fund Investors: 83
Wells Fargo & Company (NYSE:WFC) is one of the biggest card issuers and is currently the fourth-largest bank in the US. It offers a comprehensive range of financial services and products and is present in 35 countries worldwide. The US-based financial company provides a wealth of financial education resources in addition to individualized assistance from financial consultants.
A significant component of the company’s consumer banking segment is its credit card operation. A variety of credit cards are available, such as travel, cashback, and rewards cards. Wells Fargo has concentrated on growing its credit card portfolio while strengthening its consumer relations in recent years. One such feature is the Active Cash Credit Card, which provides competitive cashback returns. The bank has been using its sizable client base and digital banking systems to develop its credit card portfolio and regain customers’ trust, even if it has faced some difficulties in the past.
In its second-quarter 2024 earnings report, Wells Fargo & Company (NYSE:WFC) exceeded both the top and bottom-line consensus estimates. Its net interest income, a key performance indicator for banks, did not meet expectations and has been falling since Q4 2022. The difference between interest revenue from loans and interest expenses is the bank’s net interest income, which fell by 9% last year and is presently predicted to fall by 8-9% this year.
Analysts forecast higher net interest income as part of the investor “bull thesis” heading into the quarter; therefore, management’s revised view for NII is expected to put pressure on the stock, according to Citigroup analyst Keith Horowitz in a note.
The American multinational financial services company intends to stick to its multi-year restructuring plan, focusing on cost-cutting initiatives to increase its efficiency ratio and imposing an asset cap through 2024. In addition, the bank is rebuilding its wealth division, middle-market investment banking, and card business.
Natixis Global Asset Management’s Harris Associates is the largest shareholder in the company, with 21,386,721 shares worth $1.27 billion.
Overall WFC ranks 6th on our list of the best credit card stocks to buy. While we acknowledge the potential of WFC as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than WFC but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.