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Visa, MasterCard Falling Behind Financials in 2012

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Visa (V) and MasterCard (MA) were among the few standouts in the financial sector in 2011, but have trailed the broad sector rally so far in 2012 as investors worry about legal and regulatory issues that could hurt the card companies.

MasterCard shares gained a whopping 70.78% in 2011 while Visa gained 47.71% compared to a loss of 18.07% for Financial Select Sector SPDR (XLF), a popular exchange traded fund that tracks the financial sector. Year to date through Wednesday, however, MasterCard shares were up 13.03%, Visa was up by 14.99%, and the XLF was up by 18.69%.

Analysts at Janney Capital Markets downgraded both stocks at the start of 2012 to "neutral" from "buy" arguing that the shift to credit and debit cards from cash has slowed.

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"During the 1990s, spending on cards exceeded overall consumer spending by about 9%. During the most recent decade, this slowed to about 6%," the report states. It also argues the Durbin amendment, which caps fees on debit cards, will drive banks to push customers toward using credit cards instead.

Investors also appear increasingly focused on an antitrust lawsuit that could result in billions worth of penalties for Visa and MasterCard. While it appears much of those costs would be borne by banks including Citigroup (C), Bank of America (BAC), and JPMorgan Chase (JPM), the legal agreements between the banks and the "payment networks" -- as Visa and MasterCard are called -- are, by Visa's own admission complex, critical to the company's financial health and subject to failure.

There is also the possibility that so-called credit card "interchange fees," which retailers pay to banks and credit card companies, will be reduced as a result of the lawsuit.

A Citigroup report last week stated in regard to the suit that "views and scenarios are all over the map, with most expecting a settlement this summer, including some type of temporary interchange reduction as the base case, though some believe a settlement is not a sure thing."

The same report contended that "concerns... seem to be building among management teams and investors," over the Consumer Financial Protection Bureau, the controversial new regulatory agency mandated by the 2010 Dodd Frank financial services reform bill.

The Citigroup report followed a financial services industry conference hosted by the bank last week. Visa and MasterCard did not present at the conference, though the report noted that American Express (AXP) Vice Chairman Ed Gilligan "seemed somewhat cautious on the regulatory environment in part due to the CFPB. Already the agency has popped up in a few card enforcement actions alongside other regulators. While the scope of the agency's mandate is ambiguous, our regulatory contacts believe at a minimum it could be a back door vehicle for things like studies," the report states.

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