Out With The Plastic

Long the darling of the credit-card industry, American Express Co. is looking awfully beaten-up lately.

The New York company's stock price is down 55% so far this year, including a 34% slide in October. The percentage of loans deemed uncollectible in a pool on which American Express reports monthly performance data reached 6.7% in September, up from 3.6% a year earlier. Earnings due after the closing bell Monday are expected to show a decline of more than 30% from last year's third quarter, according to Thomson Reuters.

Known for pitching cards to affluent customers who were required to pay off their purchases every month, AmEx made a big push in the past couple of years to let many of its customers keep a balance and pay the interest that accumulates. While the company, run since 2001 by Chief Executive Kenneth Chenault, has insisted it didn't lower credit standards, those loans are coming back to haunt AmEx now, analysts say.

Figures released last week show that about 4.1% of AmEx loans were at least 30 days late as of last month, up from 2.5% a year earlier. That's still fewer delinquencies than at other large card issuers, including Bank of America Corp.'s rate of 5.9% in the third quarter.

But as the economy weakens, delinquencies and charge-offs are expected by analysts to climb even higher.

Seeing trouble on the horizon, American Express earlier this year tightened lending on cards that let people carry a balance from month to month. Now the company is getting even tougher on users of its traditional "charge cards," which must be paid off every month.

For example, AmEx recently slapped a $1,100-a-month spending limit on John and Monica Bell's platinum AmEx charge card. The reason: AmEx customers who pay with plastic at the same places where Mrs. Bell shops and have the same mortgage lender have poor repayment histories, according to a letter sent by AmEx.

"They're holding me accountable for someone else's credit," fumes Mr. Bell, a real-estate agent in Chadds Ford, Pa. His mortgage loan came from Countrywide Financial Corp., now part of Bank of America, and his wife uses the AmEx card at retailers Wal-Mart Stores Inc. and the Marshalls unit of TJX Cos. and to fill up her tank at Sunoco Inc. gas stations.

The couple runs up about $5,000 a month on the card, which previously had no limit, and always pays on time, Mr. Bell says.

Michael O'Neill, a spokesman for American Express, confirms card users can be affected by the credit troubles of people with common behavior patterns "If they're spending in a way that looks like a pattern of other people who had credit trouble before them, it gets added into the mix," he says, though that one factor isn't enough to trigger tightened charge limits.

In addition, AmEx is reining in programs and perks that don't pay off for the company. Last week, AmEx notified holders of platinum and super-exclusive Centurion cards that it is canceling a program that provided a free ticket on U.S. airlines for each full-fare ticket purchased.

A company spokeswoman says only a small number of customers had used the program, launched last year.

Since American Express also operates a network that processes card transactions, it is feeling a double whammy from the weakening U.S. economy. Retail sales declined 1.2% in September, according to the Commerce Department, a sharper drop than reported in July and August. Consumer spending, which accounts for more than 70% of the U.S. economy, is expected to shrink even further in the fourth quarter, many economists predict.

Every other card issuer, from J.P. Morgan Chase & Co. to Capital One Financial Corp., is grappling with the same problems as more consumers shut their wallets and fall behind on their bills. American Express is especially vulnerable, though, because it is one of the few remaining stand-alone card companies. The company relies less on corporate travel and entertainment, and has lopped off the rest of its non-core businesses, including financial-advisory operations.

But the business model dubbed "spend-centric" by American Express for its focus on rewarding customers who use cards for everyday purchases will continue to be hammered as long as the economy is suffering.

"If people aren't spending, it's not a positive for AmEx," says John Williams, an analyst at Macquarie Research in New York. Although he expects the company's stock to trade near current levels for the next few months, Mr. Williams raised his rating to "neutral" from "sell" on Friday due to the stock's steep sell-off.

In New York Stock Exchange composite trading Friday at 4 p.m., American Express was down 1.3%, or 31 cents, to $23.33.

AmEx also is likely to face questions Monday from analysts and investors about the tumultuous capital markets, which the company relies on to securitize its loans.

The company has said its funding sources are stable and secure, partly because its two bank units can borrow through the Federal Reserve's discount window. Even if the company were shut out of the credit markets, it has enough liquidity to keep itself going for at least a year, American Express said in a securities filing earlier this month.

Source - Wall Street Journal