American Express (Amex) has become the
latest financial institution to convert to a US bank holding
company, in a sign that the card network and issuer is under
mounting pressure amid rising credit losses and a worsening
economic outlook (see CI410).

The US Federal Reserve took the unusual step of fast-tracking
Amex’s application for a bank license, waiving a 30-day waiting

Amex now joins the ranks of Goldman Sachs and Morgan Stanley in
becoming licensed as a bank holding company, thereby gaining access
to Federal Reserve funds under the Troubled Assets Relief Program
(TARP) at a time when credit losses are mounting and there is
growing pressure on sales of asset-backed securities.

Bank holding companies gain access to lower cost Federal Reserve
lending facilities than can be found in the international credit
funding markets, but are obliged to agree to stricter regulatory
oversight and more stringent capital requirements.

However, Amex insists that it is merely taking advantage of all
available options to buffer itself should economic conditions
worsen, and that its capital strength is not in doubt.

Challenging economic outlook

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The Federal Reserve waived the usual waiting period “in light of
the unusual and exigent circumstances affecting the financial
markets”, according to a statement issued by the Fed on 10
November, just days after Amex reported a fourth consecutive
quarter of profit declines.

In the third quarter, Amex noted that credit cardholders were
failing to repay loans at almost twice the rate in the year-ago
period, and recently warned that it expected delinquencies and
credit losses to rise over the coming months amid rising
unemployment and inflationary pressures.

The Fed’s statement said: “The Board has determined that
emergency conditions exist that justify expeditious action on this

Amex used the Fed’s commercial paper facility for the first time
on 29 October, becoming one of a growing number of institutions
that have sold short-term debt to the Fed as the credit markets
seize up.

In a statement, Amex CEO Kenneth Chenault said: “Given the
continued volatility in the financial markets, we want to be best
positioned to take advantage of the various programmes the federal
government has introduced or may introduce to support US financial
institutions. We will continue to build a larger deposit base to
broaden our funding sources.

“With Federal Reserve oversight we should gain greater access to
the capital on offer under the current and any future
government-sponsored programmes.”

Bank status ‘positive’

Although Amex’s move has heightened concern about its capital
strength, Sanjay Sakhrani, an analyst at Keefe, Bruyette &
Woods, told CI that its conversion to a bank holding
company should be viewed as a positive, although challenging times
lay ahead.

“It does not appear that Amex is in imminent need of a capital
injection, unless the company is looking to reach regulatory
capital ratio levels that are at the high end of the range of being
well capitalised [relative to the industry post-TARP] immediately
and it does not apply for TARP capital,” Sakhrani said.

“We generally believe the company’s move toward becoming a bank
holding company was related to having all options to current and
potential federal programmes available. And while the move is a
positive from a liquidity standpoint, we believe it is probably
somewhat dilutive to overall profitability ratios.

“Still, we believe the company’s return profile will be higher
than most other banks out there given the processing business’s
prevalence to overall firm profitability.”

Moshe Orenbuch, an analyst at Credit Suisse First Boston, told
CI: “For the full -year 2009, Amex has $15.3 billion of
long-term debt maturities and $4.8 billion of asset-backed
securities maturities [and about $4 billion combined in the fourth
quarter of 2008]. This represents approximately 20 percent of total
managed funding.

“The transition to a bank holding company now allows Amex to
participate in the Federal Deposit Insurance Corporation’s
Temporary Liquidity Guarantee Program (TLGP). This should reduce
the cost to issue new debt.

“Amex will also likely be eligible for several billion dollars
of capital under the TARP. We would expect the company will take
full advantage of this programme as well.”