An analyst upgraded Bread Financial Holdings Inc (NYSE:BFH) and Synchrony Financial (NYSE:SYF) following improving credit conditions and the delay of a Consumer Financial Protection Bureau (CFPB) late fee rule.

The Bread and Synchrony Analyst: Bank of America analyst Mihir Bhatia released a Friday note on the consumer finance industry.

• Bhatia upgraded Bread Financial to a Buy rating with a price target of $54.
• Bhatia upgraded Synchrony Financial to a Buy rating with a price target of $54.

Main Takeaways: Bread and Synchrony are two of the largest private-label credit card issuers.

Bhatia is optimistic as the current credit cycle peaks and delinquencies look poised to fall.

"We believe we are in the later stages of the current credit cycle and our analysis points to credit losses being stable to improving over the next few quarters," the analyst said. "Delinquencies, which precede credit losses, peaked in 1H24 setting the stage for credit losses to improve in 2H. Credit trends will also benefit from tighter lending standards that have been implemented over the last two years."

Bhatia also cited a year-over-year delinquency deceleration that points to a future fall in credit losses. Meanwhile, the analyst believes that the income statements of Bread and Synchrony will face less pressure.

"We think credit pressures on the income statement are likely to moderate prospectively. Credit losses impact the income statement through the provision expense line item. When companies expect future losses to be higher, they build reserves by increasing provision expense, which lowers EPS. However, both SYF and BFH are expecting lower loss rates in 2H24."

The CFPB's new rule banning excessive late fees would strain the companies' financial statements. However, the implementation of the rule is tied up in litigation. This delay could help Bread and Synchrony over-earn in the near-term.

"While we cannot rule it out, our conversations with industry participants suggest it is unlikely the rule is implemented in 2024," Bhatia said. "BFH has already updated its guidance to reflect this and no longer includes late fee impact in its 2024 outlook. Synchrony's 2024 outlook still assumes an October 1, 2024 implementation date for lower late fees."

Price Action: Bread traded at $50.82, up 6.94% at the time of writing. Synchrony traded at $46.24, up 1.05%.

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