MasterCard Shows Strong Growth Despite Waning Dodd-Frank Benefit
MasterCard (NYSE:MA) continued to benefit from improving consumer spending trends and increased card adoption across the world as it reported a 15% year-over-year increase in net revenues for the second quarter of 2013. Gross revenue, excluding contra-revenues, rebates and incentives, increased by 12% over the prior year. Domestic assessment fees grew by 8%, helped by a 13% increase in gross dollar volume (GDV) of transactions while a 14% jump in cross border GDV and an 8% increment in prices led to a 20% surge in cross-border fees.
Transaction fees, which are charged based on the number of transactions processed for a client, increased 9%. Like Visa (NYSE:V), MasterCard’s results showed signs of the market adaption of the Dodd-Frank bill as transaction volume growth slowed down from 22% in the second quarter of 2012 to 10% for Q2 2013.
The company has reported double digit revenue growth in each of the last four years and remains confident of delivering net revenue growth of 11% to 14% in the coming years. Based on the current trends, we are updating our price estimate for MasterCard to $660, implying a 10% premium to the current market price.
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Strong Consumer Spending Trends In The U.S.
Around 30% of MasterCard’s GDV comes from the U.S. The company reported a 6% growth in volume in the country, largely helped by 4% growth in retail sales (excluding auto sales) in the U.S. Credit volume grew by 3% while its debit counterpart increased 9.5%. According to our analysis, MasterCard has maintained a market share of 10% of personal consumption expenditures (PCE) in the U.S. [1] With improving economic conditions and a recovering job market, we expect higher expenditures in the U.S. in the coming years. MasterCard is in a good position to capitalize on this growth in the coming years. For a detailed analysis of the company’s prospects in the U.S., see The Big Trends Behind MasterCard’s U.S. Business Outlook.
Emerging Markets Will Also Drive Growth
MasterCard reported volume growth of 21% in Asia with exceptional growth in Korea and Japan as well as a 17% growth rate in Latin America. Asia accounts for close to 30% of MasterCard’s GDV while Latin America accounts for just around 8%. Emerging markets like India, China, Mexico, Brazil, Russia, Indonesia, South Africa and the UAE generate combined PCE of around $10 trillion and have relatively low electronic payment penetration, with paper based transactions accounting for 62% of the PCE. [2] (China is the exception, with 62% electronic payment penetration).
High growth is expected from these markets in the coming years and MasterCard is looking to establish merchant and customer relationships to capitalize on the expected trends. The company established agreements with two of the largest banks in Korea in the last quarter, for an increased share of their debit portfolio and also launched a pre-paid re-loadable prepaid travel multi-currency (up to four currencies can be loaded on the card) card in South Africa and a gold-plated World Elite card in collaboration with Riyadh Bank in Saudi Arabia in the last quarter.
European Worries
MasterCard reported a 14% increase in European GDV for the second quarter and also signed an agreement Danske Bank, the largest bank in Denmark, for the later to issue MasterCard branded debit, credit, and commercial cards in 10 countries. However, the European Commission’s proposed legislation to limit interchange fees charged from merchants by banks has raised some concerns for the company. The fees currently vary from around 0.2% of the value of transactions in the Netherlands to 1.5% in Poland but the commission has recommended that interchange fees be limited to 0.2% for debit card transactions and to 0.3% for credit card transactions. [3]
Although MasterCard does not directly charge merchants or consumers, it charges assessment and transaction fees from its banking clients. Nearly 30% of MasterCard’s second quarter GDV came from the continent and the company is likely to be adversely affected by the regulations, should they come to pass. The company currently charges an average assessment fee of around 0.1% of the GDV of the transactions processed for a banking client. We will keep a close eye on developments and update our model if and when the regulations and implanted. You can modify the interactive chart below to gauge the effect a change in forecast would have on our price estimate.
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Notes:- Personal Consumption Expenditures, U.S. Department of Commerce: Bureau of Economic Analysis [↩]
- Visa investor meeting for 2013 [↩]
- EU Plans Limit on Credit-Card Fees, Wall Street Journal, July 17, 2013 [↩]