Visa Results Said To Ride On U.S. Credit Cards

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Visa ( V ) may want to pay special thanks to affluent consumers for spending more on their credit cards when the card giant reports its June-ended quarter late Wednesday.

U.S. credit card spending has been one of Visa's bright spots the last several quarters. And its most recent quarter, its third fiscal, may get an even bigger lift, analysts say.

As evidence, they point to higher spending on credit cards issued by Visa's biggest U.S. bank partners, such asJPMorgan Chase ( JPM ),Bank of America ( BAC ) andCapital One Financial ( COF ).


"Visa dominates U.S. consumer credit card payment volume. Strength in U.S. credit payment volume will likely be the biggest driver of earnings outperformance in the June quarter," said Evercore Partners analyst David Togut.

Like its smaller rivalMasterCard ( MA ), Visa makes money from servicing fees and processing cards for card issuers. It's highly dependent on card volumes to fuel revenue and profit growth.

Largest Share

Visa has the largest share of the U.S. credit-card processing market by far "and with the most successful card issuers in the U.S.," says Togut.

Purchase volume at JPMorgan Chase, Visa's No. 1 credit card issuer, jumped 9.6% in the June quarter vs. the quarter ended in March, for example. BofA's rose more than 5%. Capital One's jumped 9%.

Togut expects earnings to come in above consensus. However, some analysts note that service fees may be pressured given Visa's pricing concession to JPMorgan in February as it forged a new 10-year contract with its big card partner.

That may contribute to slower profit growth in the June-ended quarter since service revenue is recognized a quarter later. In the March-ended quarter, service revenue grew 10% vs. a year earlier to $1.4 billion.

Analysts surveyed by Thomson Reuters forecast Visa's earnings in the June quarter, its third-fiscal quarter, will rise 15% on average over last year to $1.80 a share. If Visa meets views, it would be the slowest pace of earnings growth in several quarters.

Nomura analyst Bill Carcache also thinks Visa will beat views, due to "higher revenue," he wrote in a research note Monday.

Visa's revenue is seen rising 13% to $2.9 billion, according to the Thomson Reuters poll. Carcache's revenue estimate is above consensus, given his expectations for lower incentives and high data processing and international transaction fees.

Since processing costs are largely fixed, processors can leverage volume growth to push margins and profits incrementally higher.

"The U.S. macro data we've seen this quarter points to mid-single to low-double-digit volume growth for Visa," Carcache wrote, "better than the prior quarter."

He expects MasterCard, which reports next week, to post "high-single-digit growth."

MasterCard's biggest card issuer in the U.S.,Citigroup (C), has been hobbled by weak volume growth. Citigroup's improved 2.7% in the second quarter from zero growth in the first quarter, however.

On the U.S. debit-card front, where Visa has long been the leader, losses to MasterCard in the wake of financial-reform legislation are largely past.

As part of new regulations that took effect in April of 2012 prohibiting network exclusivity, banks were required to provide merchants with more than one card network to route transactions. It was Visa's business to lose.

"Impacts of the Durbin regulations are starting to anniversary," said analyst Gil Luria of Wedbush Securities. "Visa's debit growth rates are now recovering in the U.S."

Even so, credit will likely outshine debit in the U.S., driven by what Carcache calls "resilience in affluent spend(ing)." Credit card spending increased 7.2%, 7.5% and 8.8% in April, May and June, respectively.

Carcache notes that pin-debit spending in those months rose 0.7%, 2.4% and 4.4%, respectively, for an average growth rate of 2.5% vs. 2.3% in the previous quarter. Signature-debit spending volumes rose 6.3% on average vs. 3.8% in the prior quarter.

Growth on the international front has been fueled mostly by emerging markets, where consumers continue to shift from cash to electronic payments.

That secular shift will fuel high teens to low 20s percent earnings growth through fiscal 2015, Togut notes.

He says the regions including Central and Eastern Europe, the Middle East and Africa will probably continue to be the fastest-growing, followed by Latin America.

Most of China's domestic business is handled by China UnionPay, the dominant bank-card payment processor in China.

Chinese Travelers

China UnionPay is trying to get more cross-border volume when its citizens travel outside the country, cutting into Visa's share of cross-border volume from Chinese travelers.

China aside, Visa aims to grow its share in domestic processing around the world. Carcache says Visa is growing domestic processing share in many large markets.

In Brazil, for example, domestic processing market share has gone from 53% in 2008 to 81% in 2013.

Japan and South Africa have "significant runway" with just 25% and 52% share, respectively, he notes, up from 15% and 21% in 2008.

Luria said that international "is still going well," but with little change over the last few quarters.

"Growth has been fairly steady, no big change there," he said.

Since Visa Europe is still a separate operating unit, Visa isn't impacted as much as MasterCard by European Union spending and regulatory issues.

Visa is close to reaching its goal of raising international revenue to at least 50% of its total. MasterCard has long generated more revenue overseas.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: BAC , COF , JPM , MA , V

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