Credit analyst likes American Express, but would not be aggressive buyer

By Ronda Fears

Nashville, Tenn., July 23 - Kathy Shanley, senior bond analyst at Gimme Credit, said she views American Express as a strong credit, but wouldn't be an aggressive buyer despite good earnings and the hit to the stock.

American Express (A1/A+) reported Monday its second quarter earnings soared from $178 million a year ago to $683 million.

"No matter. A market more bearish than a Gimme Credit analyst drove American Express stock down 8.5% on the day," Shanley said in a report Tuesday.

"Admittedly, last year's second quarter was a disaster, remember those losses on collateralized debt, so it would be hard to find an easier earnings comparison."

American Express didn't help matters by talking down Wall Street expectations for the rest of the year, saying it would be unlikely to exceed the current consensus estimates, the analyst noted.

Also, she pointed out, there was the new draft guidance put out by federal bank regulators proposing revised standards for credit card account management and loss allowance guidance, which apparently also contributed to a sharp decline in the share price of MBNA Corp.

American Express's results were muddied by some special items, Shanley added, including a $50 million after-tax loss on WorldCom debt securities and $30 million in after-tax writedowns on other investments.

Mitigating these losses, it released $8 million in after-tax restructuring and disaster recovery charges taken last year.

"Aside from the one-time items, there were signs American Express is starting to see the benefits of last year's restructuring efforts," Shanley said.

Net income for the travel-related services business increased 9%, 4% net of goodwill amortization and the reserve release.

Although net revenues were flat, she said lower expenses helped contribute to a stronger bottom line.

At American Express Financial Advisors, assets owned, managed and administered fell 9% to $238 billion, but management and distribution fees dropped only 2%.

High yield investments totaled $2.1 billion, or 6% of the portfolio, at quarter end, with American Express targeting a 7% range going forward.

"The credit quality picture for the charge card and lending businesses was mixed, but there were no alarming trends in the quarter," Shanley said.

American Express increased the loss provision for its lending business to $572 million, up 1% over last year, but cut the charge card provision by $40 million, or 12%, to $280 million.

In the charge card business, reserves as a percentage of receivables were 4.2%, down from 4.3% at the end of the first quarter but up from 4.0% a year ago.

In contrast, coverage of past due loans improved to 164% from 138% in both the prior quarter and the year earlier period.

"Despite the generally favorable, or at least neutral, trends, American Express sounded a cautious note for the balance of the year, saying weaker equity markets, less favorable interest rate comparisons and a plan to reinvest in growth initiatives would constrain the bottom line in the second half," the analyst said.

"Following recent developments at Capital One, regulatory risk is a new concern."

American Express says it has little sub-prime debt and it has not been "alerted" to any issues by the regulators.

"But it isn't disclosing how much of its portfolio might fall below the regulatory sub-prime cutoff and it seemed a bit vague in its conference call about when its regulators had last reviewed the books," she said.

Monday federal bank regulators published a new statement on account management and loss allowance guidance for credit card lending.

The guidance covers credit line management, overlimit practices, workout and forbearance practices, income recognition and loss allowance practices, and policy exceptions.

"Although many of the practices outlined in the guidance appear more likely to apply to sub-prime specialists, we can't be sure there won't be an impact on lenders that have so far been unaffected by the regulatory crackdowns," Shanley said.

"We view American Express as strong single-A but would not be an aggressive buyer of this name."

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