Despite rising inflation, U.S. card companies are expected to benefit as pandemic-weary consumers continue to fuel demand for travel, one of the biggest contributors to revenue.
Analysts predict that as more businesses resume business travel and people plan vacations, Visa Inc, Mastercard, and American Express will see an increase in cross-border volume.
“So far, despite the macro, you continue to see a somewhat stable consumer,” Wedbush Securities analyst Moshe Katri said, adding that monthly data from Visa and Mastercard showed no hit to payments or cross-border volumes.
“Bottom line, the sky isn’t falling, at least yet.”
Cross-border volumes are a measure of travel demand that reflects spending on cards issued in countries other than the one in which they were issued.
According to a report from travel insurance aggregator Squaremouth.com, pent-up demand for travel, combined with inflation, was causing US travelers to spend 35% more in the fall this year compared to 2021.
American Airlines, United Airlines Holdings, and Delta Air Lines have all forecast strong profits for the rest of the year, indicating that rising travel demand is outweighing concerns about high air fares.
Card companies typically profit more when prices rise because they charge a percentage of the dollar value of transactions.
However, if high inflation is accompanied by rising interest rates, as in the United States, it can weigh on consumer spending and tip the economy into recession.
According to U.S. banking giants that reported earnings earlier this month, a bleak economic outlook has not yet dampened consumer spending by those in good financial health.
American Express, which is more sensitive to interest rate increases due to the importance of credit cards in the company’s business, remains well-positioned.
“AmEx’s (credit) loss rates have stayed firmly in check. Its core customers are likely to have higher incomes, who are expected to be less impacted by inflation,” BofA Securities analyst Mihir Bhatia said.
On Friday, American Express will report its quarterly earnings, followed by Visa and Mastercard the following week.
AmEx shares are down 12 per cent this year, while Mastercard and Visa are down 17 per cent and 14 per cent, respectively.
(Adapted from Latestly.com)