AmEx as a Bank Holding Company (BHC)
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.
~~~
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).
November 12th, 2008 at 2:30 pm
whatever. they don’t deserve a penny of taxpayer money.
November 12th, 2008 at 2:49 pm
If they have a viable business model giving out cards to world+dog, they should have no problem finding funding. Let the free market work.
Of course, Capitol One is getting a fed injection which I expect will be used to counterbalance it’s uncollectable credit card accounts. They are only too happy to offer cards to deadbeats (some of whom I’m related to.).
November 13th, 2008 at 10:05 pm
Vitaliy — I have a few questions about American Express and the credit card industry in general and was hoping you could help answer them.
1. If becoming a BHC was only a positive thing for AXP, why has it not tried to do this in the past and why did the market react negatively toward this news?
2. I briefly read your March 2008 outlook and wanted to see if you had any updates on how you believe AXP will perform relative to others in the credit card industry. I do not understand how AXP’s price can fall 60% YTD vs COF’s 30% and even if you look at the price decline from 1/1/2007 to today, it is 66% vs 56%. Capital One has a much greater percentage of subprime exposure, but is it more the general lack of spending volume that will cause AXP’s revenues to decrease?
3. Do you have a view on credit card losses in 2009 and 2010 and what the main drivers will be?