Investing.com — Morgan Stanley has upgraded its opinion on stocks in the consumer finance sector to “attractive”, given positive fundamentals and a more favorable regulatory environment.
The main driving factors are decreasing inflation, falling unemployment and stable lending standards. Delinquencies, which slowed significantly in 2024, are expected to decline further in 2025. EPS growth for the sector is expected to reach 15%, the fastest pace in four years.
The brokerage pointed to lighter regulatory pressure under a GOP-controlled government. 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,” increasing the stock’s target price from $40 to $82.
While Bread Financial moved from “overweight” to “underweight,” with its target increasing from $35 to $76, adding that late fees represent approximately 20-25% of BFH’s revenue.
Implementing a late fee cap of $8 would have represented a significant drop in projected profits without compensation. However, the rule’s low probability of survival at this point rebalances the bull-bear trend for 2025 and beyond.
The MS analyst said they now expect the late fee rule to be overturned or fail to make it through the courts. The rule has been stuck in the courts for 9 months now and the bar is high for passing conservative-dominated courts, including the Fifth Circuit and the Supreme Court.
However, loan growth remains a concern. Consumer lending is slowing, with card loan growth expected to stabilize at between 3% and 4% by mid-2025.
The rating flags potential risks, including higher valuations and uncertainty about improving credit quality. Still, analysts remain optimistic about who will benefit from deregulation and which companies will have EPS enablers over the next year.
