The financial sector witnessed a free fall last year as the COVID-19 hit the world fast and hard. Their decline was due primarily to the potential loan losses these firms were facing when unemployment skyrocketed and gross domestic product cratered making it difficult for borrowers to service their outstanding debt. In addition to the pandemic, the Federal Reserve's dovish monetary policy, promising to keep interest rates low for the foreseeable future, hurt the sector badly.
While the sector is not yet out of the woods, optimism among investors has been rising that a quick economic recovery is in the offing based on the uptick in long-term interest rates, the strengthening U.S. dollar and an effective mass coronavirus vaccination drive. Further, President Biden’s proposed recovery package would provide a large percentage of the population with $1,400 checks in addition to an extension of $400 in federal unemployment benefits.
These moves should increase consumer spending. As the economy moves toward a return normalcy, the loan repayment capacity of customers is expected to improve. Banks have already set aside massive provisions for loan losses, which should serve as a safety cushion. Hence, financial service companies' revenues are now trending higher and their loss provisioning is falling.
Against this favorable backdrop, we believe Discover Financial Services (DFS), OneMain Holdings, Inc. (OMF) and Enova International, Inc. (ENVA) should garner much investor attention because of their sound fundamentals and compelling growth drivers.
Discover Financial Services (DFS)
DFS is a digital banking and payment services company with one of the most recognized brands in U.S. financial services. Since its inception in 1986, the company has become one of the largest card issuers in the United States. The company issues the Discover card, America's cash rewards pioneer, and offers private student loans, personal loans, home loans, checking and savings accounts and certificates of deposit through its banking business.
DFS recently entered an agreement with Sezzle, Inc., an installment payment platform, that will allow SZL to work with selected merchants on the Discover Global Network in offering consumers additional payment options, including a ‘buy now, pay later’ service. In addition, DFS’s Board of Directors has approved a new $1.1 billion share repurchase program, having suspended share repurchases since March 2020 in response to the recession.
In its fiscal fourth quarter (ended December 31, 2020), the company’s total net revenues increased 4% sequentially to $2.82 billion. Direct Banking pretax income of $991 million for the quarter was $108 million higher than pretax income for the prior year period. Its total loans ended the quarter at $90.4 billion, down 6% year-over-year. Its credit card loans ended the quarter at $71.5 billion, down 7% year-over-year. In fact, its provisioning for credit losses also declined 36.5% year-over-year to $531 million. And its EPS came in at $2.59, rising 15% from the year-ago value of $2.25.
DFS has gained 36.7%% in the past year. According to the management, “he strength of our digital banking business model and the benefits of our investment in core capabilities have positioned us well heading into 2021.” Wall Street analysts expect DFS’s current year revenue and EPS to rise 3.5% and 150.3%, respectively.
DFS’s POWR Ratings reflect this promising outlook. DFS has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
DFS has a B grade for Growth and a C for Momentum. In the C-rated Consumer Financial Services industry, it is ranked #6 of 35 stocks.
In total, we rate DFS on eight different levels. Click here to check additional POWR Ratings for DFS (Value, Stability, Sentiment and Quality).
OneMain Holdings, Inc. (OMF)
OMF is a financial service holding company that participates in the consumer finance and credit insurance businesses. The company originates, underwrites, and services personal loans secured by automobiles, other titled collateral, and even unsecured loans. It operates through a network of approximately 1,500 branch offices in 44 states in the United States and has been offering responsible and transparent loans for more than 100 years.
AM Best has accorded the Financial Strength Rating of B++ (Good) and the Long-Term Issuer Credit Rating of “bbb” of American Health and Life Insurance Company (AHLIC) and Triton Insurance Company, two wholly owned subsidiaries of OMF. The outlook of these credit ratings is stable. Moreover, OMF recently proposed a follow-on public offering of eight million shares of the company’s common stock at $53.00 per share. The number of shares in the offering represents approximately 6% of the company’s outstanding common stock as of February 1, 2021. In fact, the size of the offering has been increased from a previous proposal of seven million shares.
In its fiscal fourth quarter that ended December 31, 2020, OMF reported pretax income of $476 million, increasing 38.4% year-over-year. Its loan originations totaled $3.2 billion in the fourth quarter of 2020, down 13% year-over-year. Its provision for finance receivable losses was $130 million, down from $289 million in the prior year quarter. And its EPS came in at $2.67, rising nearly 40% compared to the year-ago value of $1.91.
AM Best’s ratings reflect OMF’s healthy balance sheet, strong operating performance, neutral business profile and appropriate enterprise risk management (ERM). OMF continued to gain customers across its core business areas and advanced key strategic initiatives over the past year. As a result, the stock has returned 16.7% over this period. Furthermore, analysts expect OMF’s current year EPS to rise 20.3% compared to its year-ago value.
OMF’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of A, which equates to Strong Buy in our proprietary rating system. OMF has an A grade for Sentiment and B grade for Growth. It is ranked #1 in the Consumer Financial Services industry.
Beyond what we’ve stated above, we have also given OMF grades for Value, Momentum, Stability and Quality. Get all OMF’s ratings here.
Enova International, Inc. (ENVA)
ENVA is a leading financial technology company that provides online financial services through its artificial intelligence (AI) and machine learning powered lending platform. The company serves the needs of non-prime consumers and small businesses, who are frequently underserved by traditional banks. ENVA offers loans to consumers under CashNetUSA and NetCredit in the United States, and Simplic in Brazil, and has provided more than seven million customers with more than $40 billion in loans and financing.
ENVA entered a definitive agreement yesterday to combine its ODX business with Fundation, an origination solutions provider focused on the business banking market. The combined company will be named Linear Financial Technologies and will be the market leader in AI-based software-as-a-service small business lending solutions, digital account origination technology and insights for financial institutions, B2B vendors and SMB service providers.
For the fiscal fourth quarter ended December 31, 2020, ENVA’s reported revenue of $264 million, improving 28.8% sequentially. Its net revenue margin for the quarter came in at 92.3%. Total company originations more than tripled from the prior quarter to $536 million. Its ratio of consolidated portfolio net charge-offs as a percentage of average combined loan and finance receivables was 4.7%, unchanged from the preceding quarter. ENVA reported an adjusted EPS of $2.39, surging nearly 160% compared to the year-ago value of $0.92.
ENVA has gained 48.5% in the past year. Its sophisticated analytics has successfully helped the company navigate shifting market conditions. ENVA’s balance sheet flexibility positions it well to leverage its machine learning driven analytics to continue to capture increased demand at attractive unit economics as market conditions improve. Wall Street analysts expect the company’s current year revenue to improve 18.2% year-over-year.
It is no surprise that ENVA has an overall rating of A, which equates to Strong Buy in our POWR Ratings system. ENVA has an A grade for Value and B for Sentiment. It is ranked #2 in the Consumer Financial Services industry.
Click here to see the additional POWR Ratings for ENVA (Growth, Momentum, Stability and Quality).
he POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.
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DFS shares were trading at $94.07 per share on Friday afternoon, down $0.93 (-0.98%). Year-to-date, DFS has gained 4.39%, versus a 1.64% rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.
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