JPMorgan downgrades Discover Financial, Rocket Mortgage and Enact Holdings as it considers interest rate hikes

JPMorgan Chase analysts downgraded the ratings of three consumer finance companies on Tuesday after Federal Reserve Chairman Jerome Powell signaled the central bank’s determination to continue raising interest rates.

JPMorgan analysts said Powell’s hawkish comments in Jackson Hole prompted them to update their valuations and ratings in the consumer credit space.

“While we continue to believe a slowdown will be mild, it is clear that the Fed will require a ‘higher burden of proof’ before reversing policy,” JPMorgan analysts said. “As a result, the risk of ‘exceeding’ its quantitative tightening (QT) has increased.”

JPMorgan said it was not “materially” changing its earnings outlook for most names in the sector. Rather, he sees increased risk thanks to lower stock price multiples for credit cards, companies serving the underbanked, auto finance providers, student loans and private mortgage insurance.

Mortgage originators, however, may face greater earnings pressure.

“The expectation that mortgage rates will be ‘higher for longer’ further dampens origination prospects and may exacerbate competitive pressures,” JPMorgan analysts said.

In this context, JPMorgan maintained its overweight rating on Guild Holdings Co. GHLD,
+2.01%
and its underweight in Home Point Capital Inc. HMPT,
+0.92%,
but reduced its rating on Rocket Companies Inc. RKT,
+4.69%
to neutral overweight.

“While we continue to see RKT as a long-term winner in the mortgage business, we believe the size and scale of the business, along with a higher contribution from refinance volume, creates additional challenges in a scenario where mortgage rates stay higher for longer,” the analysts said.

Shares of Rocket Mortgage fell 0.7% in premarket trading on Tuesday. The stock is down 45.6% in 2022 against a 17.7% drop in the S&P 500 SPX,
+1.53%.

JPMorgan downgraded its rating on Discover Financial Services DFS,
+1.45%
to neutral from overweight in part because a pullback in the space creates more attractive relative opportunities such as Capital One Financial Corp. COF, overweight,
+1.77%.

While Discover Financial’s credit quality and loan growth are steady, an internal investigation into compliance issues it disclosed in July regarding its student loan servicing business “may limit opportunities for multiple expansion.” significant and relative outperformance,” the analysts said.

Shares of Discover Financial fell 0.1% in premarket trading. The stock is down nearly 14% in 2022, surpassing the S&P 500’s 17.7% loss.

Also on the credit card front, JPMorgan reiterated neutral ratings on American Express Co. AXP,
+3.20%
and Synchrony Financial SYF,
+2.52%.

Among private mortgage insurers, JPMorgan downgraded its rating on Enact Holdings Inc. ACT,
+1.01%
to neutral overweight. Analysts said other companies in the space such as Essent Group Ltd. ESNT, rated overweight,
+2.73%
and NMIH,
+2.01%
remain more attractive.

“Thematically, we remain constructive [on Enact Holdings]“, the analysts said. “However, the relative multiple against peers (and the broader sector) likely limits relative return opportunities. I would look for an entry point at lower levels.

Enact Holdings shares are up 20% so far in 2022, compared to a 17.7% loss by the S&P 500 and a 25.7% decline by the Nasdaq COMP,
+2.11%.

JPMorgan reiterated its ratings on several consumer finance companies in its stock universe. It maintained neutral ratings on Synchrony Financial SYF,
+2.52%,
Ally Financial Inc. ALLY,
+1.26%
and SLM Corp. (Sallie Mae) SLM,
+2.13%.

He continues to overweight OneMain Holdings OMF,
+3.19%,
Opportun Financial Corp. OPT,
+12.72%,
Essent Group Ltd. ESNT,
+2.73%
and NMI Holdings Inc. NMIH,
+2.01%.
He is underweight Navient Corp. NAVI,
-3.20%.

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