Monday, October 20, 2008

AMERICAN EXPRESS IN TROUBLE?

Michael sez: It looks like American Express, the creme de la creme of credit cards, has maybe stepped over the line. Note the items about AMEX's two banking companies and thee other thing about 'securitizing' their cash borrowing. Looks like someone got caught with their hand in the cookie jar. Did AMEX's banking facilities purchase some funny mortgages? Do they own some interest in credit default swaps? Stay tuned, as Mayberry would say.


Delinquencies Mount for American Express
Push Into Credit Cards Proves Costly; Mr. Bell Is Slapped With a Spending Limit
By ROBIN SIDEL

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.

Write to Robin Sidel at robin.sidel@wsj.com

7 comments:

vance said...

Desperate companies do desperate things. We have found out lately that certain financial institutions are not to be trusted. AMX made a lot of balance transfer money available to customers earlier this year, and now they are trying to take it back soon by cutting credit lines of some of their best customers.
You can now list AMX as a predatory lender.

erika's place, inc. said...

Yes, Amex is a predatory lender. I have had them reduce my limit twice since August. The first time I found out on a business trip and went to use the card and was declined. Luckily I had another card with me on the trip. Stay away from Amex. I have been a member for the last 20 years and they are ruining my credit score by making it look like I am maxing out my card by constantly reducing my limit to within dollars of the limit.

thomas said...

true Amex is gone nuts

My credit balance was cut 50% even though i had less overall liabilties

by doing so i was at close to 100% of available credit and therefore my FICO dropped> Thanks solely to Amex. 20 years 1 1.5 million in business. IN the new year i will dump them and their stock.

They must be desperate and perhaps their maybe some dirty secret that has created cash chaos for them

Marie said...

We have a fico score of 830 and Amex just slashed our credit limit by 50%. My husband found out when he was in London and went to pay his hotel bill and the card was declined. Then we found out that they lowered our limit to below our balance and then charged us an over the limit fee of $49. We have the black card and have not missed a payment in 27 years. I think Amex is going down the tubes fast if they are doing this to their best customers.

Hillz said...

I have spent over 2.3 million with Amex (three cards) in the past four years - NEVER late!
This December, my new bookkeeper was late on one of the cards (total balance $83). AMEX reduced my credit limit to $1,000 on the late card and from $58,000 to $5,800 on my other card. I am DONE with Amex and will tear up the two cards tomorrow if they do not reinstate my credit limits.

Doug R said...

I have a Black American Express card, today they declined a $230!! charge (no I'm not missing zeros) because they have reduced my credit limit without telling me first of course. Obviously I discussed this with their representative on the phone, and after making me pay $30,000 on the spot to bring the card down to their "new credit limit" I made a decision to get rid of all my American Express cards and use my Visa and Mastercard instead. American Express obviously doesn't care about the millions I spend on the card, or the fact I was never late paying "the entire balance" every month. Now they want several payments "during the month" to keep me below their new credit limit that is too low for my lifestyle. So, they will lose the $4500 annual fee for the Black cards, annual fees for my Platinum cards, and several million dollars in charges I made annually while my merchants were paying them (reluctantly) 4% of my purchases. Go figure, is it any wonder their stock has tanked?? They need new leadership - desperately!!

TechInvestor99 said...

First, personally, I've been a cardholder for more than twenty years. Never late and rarely didn't payoff the entire balance. Our personal charges were anywhere from $2,000 to $10,000 a month. So, we're on vacation and the front desk calls to say that our card, the one that was completely acceptable when we check in three days before was now declined. AMEX reduced our credit limit from $35,000, without warning or notice, to $1,000. Actually the notice came in the mail a few days after we returned from vacation. An appeal to the various agents, representatives and supervisors yielded nothing except that I could re-apply for a higher limit in 180 days. They did suggest that we could pre-pay a few thousand dollars each month so that we could continue to charge at the same rate each month. Ugh!

Second, two weeks after returning from vacation, I'm at lunch with a prospective client. I put down my Corporate AMEX card. The waiter returns with a declined slip. This is the very thing that AMEX advertises won't happen, right? Luckily the waiter was good, he suggested that the strip on the card might be broken and said they'd been having trouble with their machines. Luckily my VISA card worked just fine. I also happen to be the @Work administrator for my company; so, I get back to the office and call AMEX. Not only was my card turned off but my entire company of 25 consultants had been. We have people all over the country and spend about $600,000 on our AMEX Corporate Cards per year. Just 6 months ago we sent our financials to AMEX so that they could raise our credit limit and they did to $110,000 (about 2 times our monthly spend). That makes sense; by the time the employees pay the balances from the previous month it could get that high. Not a single Corporate Card holder associated with our account had a balance that was overdue. We are the perfect Corporate Card client - traveling consultants. What they did, was 30 days before reduced our credit limit from $110,000 to $51,000 and then, that morning before my visit to the restaurant, reduced our company-wide credit limit to $23,000, half what we spend in a month, half. Each time, reducing our credit limit to only $1,000 more than the balances owed. The reply from AMEX was that their risk department would get back to me sometime next week but that their decision was final and that we could re-apply to have our credit limit changed in 180 days (sound familiar?).

Lastly, we're also an AMEX Merchant. We accept the card so that our clients can pay and get the points. Our clients are all small and medium-size businesses. We pay the higher fee, but it keeps the clients happy. So, a few days ago, we received a letter from our processing agent, the AMEX fee is being raised 0.5%. The AMEX fee is already considerably higher than the VISA/MC/Discover fee and now it's just too much.

Oh, and, in our consulting role we are often asked by our clients for recommendations on bankers, banks, credit card processors. I’ve shared this story with the two business development folks I know at AMEX. Although both we sympatric, neither could do anything about any of it.

Apparently I am not alone. Employees and clients are all having similar experiences and the details are oddly familiar.

So, I ask you all, are these the actions of company that is in trouble or just plain stupid? Do they not understand that these actions will have long term effects on the very thing that brings them revenue?

I would consider me and my company to be model AMEX customers. If I do the math correctly, we account for almost $100,000 in fees annually from the three sources.

This once respected brand is becoming quickly tarnished. Why, oh, why AMEX do you aim to do so much damage to your relationships with your best of clients? I can't image what you are doing to the folks who aren't paying timely or who don't have stable balance sheets.

Good bye AMEX. We should be rid of you by years end. Unless of course you complete fail before then.