Analysts Upgrade AmEx, Capital One and Discover

Analysts at Bank of America/Merrill Lynch today upgraded three credit card companies – American Express (AXP), Capital One (COF) and Discover (DFS) – to neutral from underperform, bolstored in part by the better-than-expected jobs report on Friday.

The upgrades are a result of the improving economic landscape, according to the analysts. They said investors are poised to view the credit card sector more optimistically. The credit card issuers are likely to benefit in the coming year from positive trends – possibly continuing declines in charge-off rates – and higher buying demand.

Online holiday spending, much of it using credit cards, has recorded healthy increases over last year since the Thanksgiving holiday.

“We think Friday’s release of falling unemployment rate and better than expected payrolls could serve as the fundamental inflection point that we have been waiting for,” the analysts said in a note.

The unemployment rate fell to 10 percent for November, after seeing a 26-year high in October of 10.2 perent. That was encouraging news for the major credit card issuers, who have been seeing steady increases in late payments – a signal of higher charge-off rates ahead.

Charge-offs – card loans deemed as uncollectible – normally track the trend of the national unemployment rate.

For October, Fitch Ratings reported that credit card charge-offs declined 66 basis points to 10.09 percent, marking the third consecutive improvement. Despite that, charge-offs remain 55 percent above year-earlier levels.

However, Fitch’s latest credit card delinquencies report for October showed that payments overdue by 60 days rose to their highest levels in five months. Fitch said that late payments in October rose 19 basis points to 4.41 percent, following a similar increase last month.

The BofA/Merrill analysts were cautious in their note: “We remain firmly in the camp that this will be a slow recovery for consumers and employment, so we suspect there will be heightened share price volatility, as the economic data is noisy coming off the bottom of such a deep recession.”

See today’s Featured Credit Card Offers