Why AmEx Becoming a Bank Holding Company is a Positive Move

American Express (AXP) 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 (GS) turns into a BHC, its future profitability suffers as its leverage drops to the 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 there 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.

Comments

[Steven Hansen:]

thank you - good info.

2008 Nov 13 05:19 AM

[car_guy:]

So you support Amex getting a bailout for providing credit to uncreditworthy individuals and getting hurt by the credit crunch, but you are against loaning money to the auto companies who are hurting from the same crisis.

This is the type of hypocrisy and regionalism that is a big problem in our country right now. If you work out of New York or California you can take all of the risk you want and the government will cover your downside. If you work in the "rust belt" of the midwest then you are on your own.

It is not the government's place to pick winners and losers. Once they started bailing out Wall Street for making fortunes selling bundles of liar loans to investors, they opened the door to help other companies that are "too big to fail".

2008 Nov 22 09:37 AM