2 Consumer Loan Stocks Showing Promise Despite Industry Headwinds

The Zacks Consumer Loans industry faces growing pressure from prolonged high rates, which are straining borrowers' repayment capacity. So, industry players are increasing reserves to guard against rising defaults, leading to deteriorating asset quality.

While steady rates and easing inflation have supported modest loan demand, tariff-related uncertainties and declining consumer confidence remain headwinds. Although relaxed lending standards and improved credit scores have expanded the borrower pool, overall growth in net interest income (NII) is expected to be limited. Yet, Capital One Financial Corporation COF and Enova International, Inc. ENVA are worth betting on.

About the Industry

The Zacks Consumer Loans industry comprises companies that provide mortgages, refinancing, home equity lines of credit, credit card loans, automobile loans, education/student loans and personal loans, among others. These help the industry players generate net interest income (NII), which forms the most important part of total revenues. The prospects of the companies in this industry are highly sensitive to the nation’s overall economic condition and consumer sentiments. In addition to offering the above-mentioned products and services, many consumer loan providers are involved in businesses like commercial lending, insurance, loan servicing and asset recovery. These support the companies in generating fee revenues. Furthermore, this helps the firms diversify revenue sources and be less dependent on the vagaries of the economy.

3 Major Factors Influencing the Consumer Loan Industry

Asset Quality: With interest rates expected to remain higher for an extended period, this will take a toll on the consumers’ ability to repay loans. Thus, consumer loan providers are building additional reserves to counter any fallout from unexpected defaults and payment delays. This is leading to a deterioration in industry players’ asset quality, and several credit quality metrics have crept up above pre-pandemic levels.

Interest Rates & Loan Demand: As interest rates have remained steady this year, demand for consumer loans slightly improved. In 2024, the Federal Reserve lowered the rates by 100 basis points, with a few cuts expected later this year once there is some clarity on the impact of Trump’s tariffs on the economy. Though easing inflation is likely to drive consumer loan demand, consumer confidence declined in June as tariff-related concerns remained in the spotlight. Thus, industry players are expected to witness marginal growth in net interest margin (NIM) and NII going forward.

Lending Standards: With the nation’s big credit reporting agencies removing all tax liens from consumer credit reports since 2018, several consumers' credit scores have improved. This has raised the number of consumers for the industry participants. Further, easing credit lending standards are helping consumer loan providers meet loan demand.

Zacks Industry Rank Reflects a Bleak Picture

The Zacks Consumer Loans industry is a 16-stock group within the broader Zacks Finance sector. The industry currently carries a Zacks Industry Rank #155, which places it in the bottom 37% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1. 

Looking at the aggregate earnings estimate revisions, it appears that analysts are losing confidence in this group’s earnings growth potential. Over the past year, the industry’s earnings estimates for the current year have been revised 7.9% lower.

Before we present a couple of stocks that you may want to add to your portfolio despite industry-wide challenges, let's take a look at the industry’s recent stock market performance and valuation picture.

Industry vs. Broader Market

The Zacks Consumer Loans industry has outperformed the Zacks S&P 500 composite and its sector over the past two years.

The stocks in this industry have collectively soared 68.3% over this period, while the Zacks S&P 500 composite and the Zacks Finance sector have jumped 39.5% and 42%, respectively.

Two-Year Price Performance

 

Industry Valuation

One might get a good sense of the industry’s relative valuation by looking at its price-to-tangible book ratio (P/TBV), commonly used for valuing consumer loan stocks because of significant variations in their earnings results from one quarter to the next.

The industry currently has a trailing 12-month P/TBV of 1.33X, above the median level of 1.03X over the past five years. This compares with the highest level of 1.40X and the lowest level of 0.70X over this period. The industry is trading at a considerable discount compared with the market at large, as the trailing 12-month P/TBV ratio for the S&P 500 is 13.33X and the median level is 13.92X.

Price-to-Tangible Book Ratio

As finance stocks typically have a lower P/TBV, comparing consumer loan providers with the S&P 500 may not make sense to many investors. However, comparing the group’s P/ TBV ratio with that of its broader sector ensures that the group is trading at a decent discount. The Zacks Finance sector’s trailing 12-month P/TBV of 5.45X for the same period is way above the Zacks Consumer Loan industry’s ratio, as the chart below shows.

Price-to-Tangible Book Ratio (TTM)

 

2 Consumer Loan Stocks to Buy

Capital One: Headquartered in McLean, VA, the company is primarily focused on consumer and commercial lending and deposit origination. It acquired Discover Financial in May, which reshaped the landscape of the credit card industry and led to the formation of a behemoth in the industry. Now, the company is well-positioned to capture a bigger share of spending on cards. 

Further, strength in credit card and online banking operations, decent loan growth, robust balance sheet position and strategic expansion initiatives will support Capital One’s financials.

With the Federal Reserve likely to keep interest rates unchanged in the near term, this Zacks Rank #2 (Buy) company’s NII and NIM are expected to witness modest improvements despite elevated funding costs weighing on both. Strong growth opportunities are expected in card loans and purchase volumes, despite an intensely competitive environment. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for earnings for 2025 and 2026 suggests growth of 10.7% and 20%, respectively. Also, COF’s shares have soared 23.8% this year. It has a market cap of $141.3 billion.

Price and Consensus: COF

Enova International: Based in Chicago, IL, Enova is a leading financial technology company focused on providing online financial services. The company caters to small businesses and capitalizes on its proprietary technology, analytics and customer service capabilities to underwrite and fund loans. 

Being an early entrant into online lending, the company has completed almost 64 million customer transactions and collected more than 65 terabytes of consumer behavior data since its launch in 2004. This has enabled Enova to better analyze its specific customer base. 

Moreover, the company has been diversifying its operations. Some of ENVA’s financing products and services are installment loans, line of credit accounts and receivables purchase agreements. Also, the company has undertaken acquisitions to bolster its market share. This Zacks Rank #2 company’s proprietary underwriting systems leverage advanced risk analytics, including machine learning and artificial intelligence. 

Shares of ENVA have gained 20.7% this year. The Zacks Consensus Estimate for the company’s earnings for 2025 and 2026 implies growth of 28.9% and 17.6%, respectively. The company has a market cap of $2.94 billion.

Price and Consensus: ENVA

 

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Capital One Financial Corporation (COF): Free Stock Analysis Report
 
Enova International, Inc. (ENVA): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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