The Zacks Analyst Blog Highlights: MasterCard, HSBC Holdings, Bank of Scotland Group, Wal-Mart Stores and Visa

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Sep 15, 2014, 09:30 ET

CHICAGO, Sept. 15, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the MasterCard Inc. (NYSE:MA-Free Report), HSBC Holdings Plc (NYSE:HSBC-Free Report), Bank of Scotland Group Plc (NYSE:RBS-Free Report), Wal-Mart Stores Inc. (NYSE:WMT-Free Report) and Visa Inc. (NYSE:V-Free Report).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

Here are highlights from Friday's Analyst Blog:

Will MasterCard Financials Suffer on EU Card Fee Ban?

The 28 nations comprising the European Union (EU) has proved its muscle by rejecting MasterCard Inc.'s (NYSE:MA-Free Report) plea to uphold the cross border card fee policy. The seven-year tussle ended as EU's highest court (Court of Justice) agreed with the lower court's decision (taken in 2012) to abandon this multifaceted interchange fees charged by the company. Following this announcement, MasterCard's shares dipped 1.3% and closed at $75.62.

The EU investigation followed from the objection raised on MasterCard's practices by European retailers' group EuroCommerce in 1997. A lawsuit was filed against MasterCard in 2007. The company also lowered its interbank rates.

In 2012, the lower court proposed to cap interchange fees at 0.2% for debit card payments and 0.3% for credit cards, warranting higher concessions from MasterCard. This prompted the company to appeal to the Court of Justice, which has now passed an irrevocable verdict on the matter. EuroCommerce had then estimated that European retailers were charged about €25 billion ($32.3 billion) annually in interchange fee costs.

Per the previous process, the interchange or cross border card fees were booked by the card-issuing bank and charged to merchants. The EU policymakers consider this to be an unfair transaction cost that unnecessarily inflates card pricing for retailers and consumers. These costs also raise unhealthy competition among card players, according to the legislators.

Financial Effect of the Verdict

Interchange fees have been a lucrative source of revenue for the financial industry; despite the efforts to curb such costs, it will be difficult for global lawmakers to flush it out of the system completely. One way or another, consumers are likely to be burdened with higher card costs.

The ban of the latest card fee cost will also likely raise banking fees for consumers, which also justifies the support of banks like HSBC Holdings Plc (NYSE:HSBC-Free Report) and The Royal Bank of Scotland Group Plc (NYSE:RBS-Free Report) to MasterCard. The card fee cut is likely to reduce revenues for the banks, which in turn will affect the card companies as banks will now seek to trim the fee that they used to pay to the card networks.

MasterCard management stated that any adverse impact of the ruling has already been absorbed in the past seven years. However, higher incentives and additional consumer costs may limit the company's margin growth going forward.

A more potential threat can arise if other global jurisdictions begin to follow suit. MasterCard remains at risk from significant domestic retailers like Wal-Mart Stores Inc. (NYSE:WMT-Free Report), Next, Debenhams and Target, among others, who now demand reduction in domestic interbank rates to be at par with the new cross-border card fees. This is based on the fact that the latest EU ruling has resurfaced Britain's Competition and Markets Authority's scrutiny for the domestic card payment fees charged by MasterCard and Visa Europe of Visa Inc. (NYSE:V-Free Report). A final decision is expected by the end of October and may slap MasterCard with as much as £1.0 billion ($1.63 billion) worth of damages.

Litigation Charges

In late 2010, MasterCard had settled an antitrust suit with the Department of Justice (DoJ) in the U.S. that accused the company, among other card companies, of restricting merchants from promoting the use of competing credit or charge cards with lower acceptance fees. Any substantial payment of damages would not only have an adverse effect on the financials, but generating less expensive cards is also projected to trim the top line in the future.

The company also incurred a sizeable litigation pre-tax charge of $770 million in fourth-quarter 2011, reducing margins significantly. MasterCard settled this multi-state merchant class litigation by incurring another $20 million in second-quarter 2012. The company also recorded a provision of litigation settlement charge of $20 million in second-quarter 2012, while another $95 million was incurred in fourth-quarter 2013.

Impact of Past Litigations

As a globally operating organization, MasterCard has been subject to increasing global regulatory focus in the payments industry. Increased public scrutiny has led to the company being embroiled in several state and federal lawsuits related to violation of interchange rates, currency conversion practices and pricing structure.

In Jun 2011, the Federal Reserve of the U.S. capped the interchange fees card networks that charge merchants on their debit card transactions at 21 cents, substantially down from average of 44 cents charged in 2009, under the provisions of the Dodd-Frank Act. This was implemented across the card industry effective Oct 2011. Concurrently, a part of these costs has been shifted to the consumers, which tends to entail cautious consumer spending and risks a decline of transaction and payments volumes through its systems.

The Act also granted merchants the choice of processing transactions through unrelated networks. This may hamper the number of transactions processed and increase the cost of such transactions, thereby affecting growth. While some ripple effects of the regulations are already being observed, going forward these regulations could limit the company's growth potential in the upcoming quarters.

MasterCard is facing multiple lawsuits in the UK as well. There are more cases outstanding that signal a financial burden in the future.

Bottom Line

The gradually rising inspection on card policy and fee structure has prompted MasterCard and other card networks to direct their resources toward digital payment products through e-commerce and m-commerce. MasterCard also launched its next generation compact digital wallet – MasterPass -- in Feb 2013 in order to tap the latest technology and meet the market demand, while offering a wider, consumer-friendly and secure fund transfer platform through near field communication (NFC)-enabled mobile devices.

We believe such long-term growth strategies are also crucial for withstanding competitive pressures and generate optimism over management's expectation of delivering earnings growth of over 20% in the next two to three years.

Currently, MasterCard has a Zacks Rank #3 (Hold).

Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.

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