The vaccine news has given financial services stocks a shot in the arm. Institutions that are exposed to consumer debt are set to benefit from the reduced likelihood of further lockdowns and job losses, as well as increased consumer and corporate confidence in borrowing and buying.
Visa’s [V] share price is up 11.3% for the year to 7 December, and has risen 58.8% from its 52-week low of $133.93, recorded during the March market sell-off. Visa’s share price reached an all-time intraday high of $217.65 on Monday 9 November as Joe Biden’s presidential win and news of Pfizer’s vaccine candidate drove gains throughout the wider market.
Visa's share price rise since its 52-week low
Year-to-date, Mastercard’s [MA] share price is up 12.4%. It closed at $340.96 on 7 December, and has climbed 70.5% from its 52-week intraday low of $199.99, also recorded back in March. The stock reached an all-time high of $367.25 in late August, right before the market correction in early September, and on 9 November Mastercard’s share price opened circa 10% higher than Friday 6 November’s close.
BlackRock’s [BLK] share price has recorded a 39.4% year-to-date rise and is up 119.4% since bottoming out at a 52-week low of $323.31 in March. BlackRock’s share price has kept climbing since 9 November, gaining 6.5% in the weeks since.
BlackRock's share price rise since its 52-week low
The financial services industry has been climbing the ETF Database Industry Power Rankings in the last couple of weeks, along with clean energy, regional banks and airlines. Financial services currently sits seventh on the list, with an average three-month return of 24.1%. The best-performing exchange-traded fund (ETF) supporting the ranking, the iShares US Financials ETF, had top 10 holdings in Visa (accounting for 6.48%), Mastercard (4.05%) and BlackRock (1.90%) as of 2 December.
The iShares ETF currently has 232 holdings, with total assets worth $1.16bn. Although it has lost 3.4% for the year to date, the ETF has gained 68.7% since its March low.
So, what are the factors currently shaping the financial services landscape?
What are the new spending patterns?
With the pandemic limiting consumer spending for most of 2020, major credit card companies have experienced sharp declines in revenue and net profit.
Visa reported revenue of $5.1bn for the three months to the end of September, down 16.9% year-over-year from Q4 2019 revenue of $6.137bn, but up 5.4% from the $4.837bn reported in Q3. Its net income was $2.137bn, down 29% year-over-year and 9% below the three months to the end of June.
For its third quarter, Mastercard reported revenue of $3.8bn, a decline of 15.5% from Q3 2019 revenue of $4.5bn, but up 15.2% from the $3.3bn reported for the three months to the end of June. Its net income declined 28% year-over-year from $2.1bn to $1.5bn; it rose 7.1% quarter-over-quarter.
Mastercard's Q3 revenue - a 15.5% YoY decline
Both Visa and Mastercard displayed similar themes in their recent quarterly report. Most notably, that travel restrictions and reduced travel have had a significant impact on cross-border payment volumes. For the three months to the end of September, Visa’s cross-border payment volume tumbled 47% year-over-year, while Mastercard saw a 36% decline from the year-ago quarter.
Confidence has, however, begun to return to domestic spending. Both Visa and Mastercard reported total payment volumes for the recent quarter that were a slight improvement on the three months to the end of June — Visa showed increases of around 4% year-over-year.
The credit card companies recognise that, in order for total payment volume and revenue to continue rebounding, the pressures on international spending activity need to be relieved. A global vaccine roll out should help here by lifting border restrictions and encouraging people to travel again, but it won’t be straightforward.
Sachin Mehra, Mastercard CFO, said: “While we believe that cross-border will ultimately recover, it will take time to build their confidence in the safety of travel. We believe that this is tied to the broad availability of vaccines and therapeutics, likely towards the latter part of next year.”
“While we believe that cross-border will ultimately recover, it will take time to build their confidence in the safety of travel. We believe that this is tied to the broad availability of vaccines and therapeutics, likely towards the latter part of next year” - Sachin Mehra, Mastercard CFO
The cryptocurrency landscape
Amid the shift towards remote working and reliance on digital and cloud services, an acceleration towards a broad adoption of cryptocurrency is one way in which the payment landscape is likely to be altered.
Visa and Mastercard have both made bullish statements on cryptocurrency this year.
For Visa, this is in stark contrast to policy from just two years ago, when CEO Alfred Kelly did not view bitcoin as a threat because it was not a payment system. In May this year, Visa filed a patent to create digital fiat currencies, potentially on the Ethereum blockchain, which could replace cash in years to come.
Recent research by S&P Global highlights that 20% of central banks plan to launch a digital currency in the future. The motivation for companies to embrace cryptocurrency, according to the research, is that it could boost revenue, as it has done for Square [SQ]. In the three months to the end of September, Square brought in $1.63bn in bitcoin revenue, accounting for 53.8% of the company’s $3.03bn total revenue and up more than 1,000% on bitcoin revenue reported in Q3 2019.
Square's revenue brought in by bitcoin
But it’s not just transactions that cryptocurrency is set to transform. Rick Rieder, CIO of BlackRock, told CNBC in November that bitcoin could “replace gold to a large extent” because it’s “so much more functional than passing a bar of gold around”. Rieder described bitcoin as “a durable mechanism for means of trade”.
While investors typically look to secure holdings in non-volatile assets during economic crises, the nature of the pandemic has underlined the drawback of passing gold bars around. The likes of bitcoin could become digital gold for financial services. They could also be set to become the payment method of choice for consumers.