Vitaliy N. Katsenelson: AmEx becoming a bank holding company (BHC) is not just net positive for the company it is simply positive. When a highly leveraged investment bank like Goldman Sachs turns into a BHC, its future profitability suffers as its leverage drops to commensurate level of the bank. Lower leverage leads to lower profitability. AmEx on another hand, though not regulated by the Fed, maintained a capital structure very similar to a bank – it securitized its credit card portfolios and market participants demanded bank-like leverage ratios. AmEx’s profitability will not be altered by becoming a BHC – so no negative here.
But here is a very significant positive – it will be able to borrow from the Fed, paying a puny 1-1.5% to fund its credit card portfolio. AmEx becoming a BHC removed a liquidity risk – a risk that AmEx will not be able to fund float and provide credit in its credit portfolio. Fed funds and discount rates will not stay at these levels forever but an increase in the rate will coincide with an improved economy and stabilized credit markets and thus AmEx will not need the Fed anymore.
I did a fairly in-depth analysis of AmEx in March 2008, though many things have changed since the thesis has not changed that much.
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Vitaliy N. Katsenelson, CFA, is director of research at Investment Management Associates in Denver, Colo., and he teaches a graduate investment class at the University of Colorado at Denver. He is the author of “Active Value Investing: Making Money in Range-Bound Markets” (Wiley 2007).
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