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

By Steve Gelsi

JPMorgan downgrades three big financial names to neutral as it weighs the repercussions of expected rate hikes by the Fed

JPMorgan Chase analysts on Tuesday cut their ratings on three consumer finance companies after Federal Reserve Chairman Jerome Powell signaled the central bank's determination to continue hiking interest rates.

JPMorgan analysts said Powell's hawkish comments at Jackson Hole prompted them to update their valuations and ratings across the consumer finance space.

"While we continue to believe that a downturn 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 'overshooting' its quantitative tightening (QT) has increased."

JPMorgan said it's not "materially" changing its earnings outlook for most names in the sector. Rather, it sees increased risk through lower stock price multiples for credit cards, companies serving the underbanked, auto finance providers, student lending and private mortgage insurance.

Mortgage originators, however, may face more stress on profits.

"Expectation that mortgage rates will be 'higher for longer' further dampens origination outlook and may exacerbate competitive pressures," JPMorgan analysts said.

Against this backdrop, JPMorgan kept its overweight rating on Guild Holdings Co. (GHLD) and its underweight view on Home Point Capital Inc. (HMPT), but reduced its rating on Rocket Companies Inc. (RKT) to neutral from overweight.

"While we continue to view RKT as a long-term winner in the mortgage sector, we believe the company's size and scale, along with a higher contribution from refinance volume, create incremental challenges in a scenario where mortgage rates remain higher for longer," analysts said.

Shares of Rocket Mortgage fell 0.7% in premarket trades on Tuesday. The stock is down 45.6% in 2022 compared with a 17.7% drop by the S&P 500 .

JPMorgan cut its rating on Discover Financial Services (DFS) to neutral from overweight partly because a pullback across the space creates more attractive relative opportunities such as overweight-rated Capital One Financial Corp. (COF).

While Discover Financial's credit quality and loan growth are in stable shape, an internal compliance matters investigation it disclosed in July around its student loan servicing business "may limit opportunity for meaningful multiple expansion and relative outperformance," analysts said.

Shares of Discover Financial dipped 0.1% in premarket trades. The stock is down nearly 14% in 2022, outperforming the 17.7% loss by the S&P 500.

Also on the credit card front, JPMorgan reiterated neutral ratings on American Express Co. (AXP) and Synchrony Financial (SYF).

Among private mortgage insurers, JPMorgan cut its rating on Enact Holdings Inc. (ACT) to neutral from overweight. Analysts said other companies in the space such as overweight-rated Essent Group Ltd. (ESNT) and (NMIH) remain more attractive.

"Thematically, we remain constructive [on Enact Holdings]," analysts said. "However, relative multiple to peers (and broader sector) likely limits relative return opportunity. Would look for entry point at lower levels."

Shares of Enact Holdings are up 20% so far in 2022, compared with a loss of 17.7% by the S&P 500 and a drop of 25.7% by the Nasdaq .

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

It continues to rate as overweight OneMain Holdings (OMF), Oportun Financial Corp. (OPRT), Essent Group Ltd. (ESNT) and NMI Holdings Inc. (NMIH). It's underweight on Navient Corp. (NAVI).

Also Read:The U.S. is on track for a soft landing, Goldman Sachs chief economist says

-Steve Gelsi


(END) Dow Jones Newswires

09-06-22 0752ET

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