maz

Why is the Market Ignoring American Express's Bad Report?

Rohan & Ramani,

How are your $24.50 short positions doing today :-)

Why is the Market Ignoring American Express's Bad Report?

Looking at charge-off trends is somewhat misleading - it works reasonably well in a slowly increasing or decreasing managed loan portfolio but when the portfolio is rapidly increasing or decreasing the charge-off percentage is either under or over stated.

Right now Amex has a rapidly declining managed portfolio (owned + securitized loans) partly due to an intentional credit tightening by AXP and also due to a large reduction in spending - both of which are good in the short term imo as they will lead to first a stabilizing & then a reduction in charge-offs as underwriting is improved.

The reduction in total loans outstanding obviously affect the net interest income adversely but we also need to plug in the interest margin (which increased) and the charge-offs. Achieving a balance is important for the long term. But overall net interest income is usually no more than one-third of Amex business.

Of course transaction volume affects fee income but the discount % remains pretty steady. Fees for other banks issuing Amex cards are still increasing & of course here they don't take the credit risk.

The shares may not be worth what many thought they were last year but I would be far more concerned if the company's liquidity position were challenged than a few quarters of extremely high charge-offs. I don't think the liquidity position is in danger & in the current low short term interest environment both AXP & DFS are raking in low cost (to the companies) deposits which should further improve interest margins. Talk of paying back the government shows pretty much what AXP thinks of their liquidity position.

You certainly may be right that the share price could fall back -may be into the teens - and therefore you could make money shorting in the short term but this is no Citi or BAC and I think you are focusing too narrowly on the charge-off rates

Credit Card Issuers and Processors - How They're Faring in the Crisis

DFS & AXP access to TARP funds has less to do with debts piling up - managed loans outstanding at both companies has been roughly static over the last year & you can expect them to come down over the next year or so imo - certainly not "pile-up". The bigger problem for both companies has been liquidity as the ABS market for credit card loans virtually shut-down or became prohibitively expensive. DFS is doing a good job financing maturing ABS out of increased customer deposits but that has a big negative to earnings - first the IO strip associated with the ABS has to get written down and reserves have to be increased as the loans are now on the balance sheet. Combined with rising defaults we can see earnings depressed (negative) for the next year.

If FAS 140 eventually (2010) makes credit card companies take ABS on the balance sheet that will be a big event - $20 billion for DFS and $29b for AXP - the write-downs and additional reserving required will make both companies look poor and challenge Tier 1 capital adequacy - that's why you see lot's of cash on the books as both companies are in defensive mode & quite rightly so. If it doesn't happen then both companies will look really good on a Tier 1 capital basis - currently 17.1% for DFS. If the ABS were on the balance sheet that figure would be around 8.5 to 9%

2009's House of Pain: Consumer Loans and Credit Card Debt

I can sympathize with any card holder that has their rate raised from a flat single digit interest to prime + 10.99%, especially if they have relatively high FICO and always pay on time.

However, most of these low rates came about in times of a) really low funding rates for cc companies; b) really charge-off rates by consumers; and c) some insanely low rates to attract new business.

With average charge off rates heading for 10% and funding costs increasing it is not surprising that single digit interest and teaser rates will be a thing of the past.

These companies have to survive & their barely doing it at present

Here Comes a Consumer Killer

I don't see what your beef is. I too pay off my credit cards every month by automatic debit so there is no chance that I will be affected by any interest rate charge. Anyone who uses a credit card to get cash needs their head seen to!!

Citi's action is rational as no credit card company should be charging 7.2% unless it is a short term teaser rate. With long term charge-offs averaging 5% and current ones set to top 7% why on earth would they stay at 7.2%?