Learning from Amex

It's very long (8,500 words!) but if you have some time I'd recommend reading the transcript of yesterday's American Express earnings call. American Express is a very interesting company to watch at times like this: It's a borrower, and a lender, and has a better idea of exactly how consumers are spending and defaulting than just about anybody else.

The big-picture result was positive. Revenues were up by 11%, and while earnings were down that was largely because of one-time profits taken this time last year. But it's the smaller things which stood out for me:

• You know how the securitization market has ground to a halt? Turns out, not so much. "Liquidity has been there for us and also there's plenty of liquidity in the securitization market," said CFO Dan Henry. "The credit spreads above LIBOR in the first quarter were higher than we've seen historically. But, there's plenty of liquidity, you have to pay up a little bit."
• Amex was however hit by Libor gapping out. It borrows floating-rate funds at a spread over Libor, but it lends floating-rate funds at a spread over Prime - and while Libor has widened out against Fed funds, Prime hasn't.
• While the slowdown in spending is happening across the country, delinquencies seem to be entirely a product of the mortgage meltdown. Meanwhile, small businesses are actually doing better than you might expect.
  Here's Henry:

On the spending side we've really seen in the US the slowdown really across all products, all vintages, and all geographies. On the credit side it's been different, where we've seen the greatest impact are in geographies where the housing market has really dropped more than 5% or more than 10%. So, when we look at our data and we look at geographies that really have not had a drop in housing there really hasn't been that much deterioration and where there's been a greater drop, the greater the drop in housing prices the greater the change or deterioration in credit metrics.

The other key thing that we've looked at is look at where people stand in terms of their mortgage. So, if you look at folks that are either renters or people who have had a mortgage that is older than 2003 again, it's been relatively modest change in terms of credit behavior. On the other hand, if you look at folks who have a mortgage that is more recent than that or people where we don't have mortgage information that's where we're seeing the greatest increase in delinquencies. That's to give you an idea of how it's different but it's really different on the credit side as opposed to on the spend side...

In some prior periods we've said small business was a leading indicator that credit was going to deteriorate. That wasn't the case this time.

I've also had the idea in the back of my mind that as people stop being able to borrow against their houses, they'll borrow more against their credit cards. But for people with Amex cards, at least, that doesn't seem to be happening:

Utilization rates are curious. Customers self-regulate themselves. Customers generally only like to take their line to 50%, 60%, and 70% of their total line. I think they always like to keep some for a rainy day...

I don't know that we've seen a marked change in the utilization percentage.

Finally, Henry weighed in on the issue of those airline holdbacks:

We evaluate all airlines on an individual basis. They are very big customers of ours. We have exposure because to the extent a card member buys a ticket that card member pays us, we pay the airline and to the extent they're not going to fly for a week or two months during that time we basically have frankly a receivable from that airline but if they were to liquidate we wouldn't collect it.

Over the years we've been very focused on this. When appropriate we do hold back to mitigate whatever exposure we have. Over the years, from time to time, we've had small losses, but we've never had any large significant losses in the airline industry. We don't have a blanket policy, it's airline by airline.

The general impression I got from the call was one of a company which was a very long way from panic. Commentators such as Mohamed El-Erian are very worried that the slowdown in the real economy is going to make the recent financial crisis seem like just the first shoe dropping. But if American Express is anything to go by, the slowdown might well be more gradual than that, and the economy could have a bit of time to adjust.

Comments

[BlueDog]

Thanks for providing the executive summary. It's always refreshing to hear company feedback like this to get a pulse on the market.

[Jake Blues]

This bodes well for V and MA, IMO.

[locke]

Great work, Felix. This is very helpful for all the "retail" investors who don't have the time to follow things as closely as you guys have.

[Chief DebtOfficer]

Objects are closer than they appear.