S&P cuts AmEx ratings on credit, funding concerns (AP)
Thu, 30 Apr 2009 18:56:29 Etc/GM
The ratings service expects the New York company to face an increasing amount of loan losses as unemployment continues to rise, adding that results could even be pressured to the point of a loss for the year.
Last week, American Express reported a 63 percent drop in first-quarter earnings, marking the sixth straight quarter in which its profit has declined. The results, however, were better than Wall Street had expected.
S&P lowered its counterparty credit rating on AmEx to "BBB+" from "A." A rating of "BBB+" is considered investment grade. The company's preferred stock rating was sent to junk status, or a rating of "BB" from "BBB." The outlook on the ratings is negative.
The ratings action comes on the heels of a downgrade by Moody's Investors Service last week. Moody's cut its senior long-term debt on American Express one level to "A3" from "A2." The downgrade tipped American Express closer to junk status.
S&P said it believes AmEx has adequate liquidity, but that there is risk associated with its focus on funding from deposits, which are rate sensitive.
During the first quarter, AmEx generated $3.5 billion of new deposits and ended the quarter with $25 billion of excess cash and securities. The company said it plans to continue to fund 2009 operations primarily through deposits.
S&P also expects industry loss levels to increase to 10 percent from a first-quarter average of 8.4 percent.
Nearly all lenders, including Bank of America Corp., JPMorgan Chase & Co. and Discover Financial Services, are seeing more customers stop making monthly payments. At the same time, consumers are cutting back sharply on their spending.
Funding daily operations had become more difficult and more costly for AmEx amid the credit crisis and as card holders struggled to pay their balances. The securitization market, which AmEx uses to raise operating capital, dried up as investors shied away from purchasing all but the safest forms of debt. While the credit markets have improved since the fall, they are still challenging.
This forced the company to explore other funding options. Late last year, AmEx received approval to become a bank holding company, which allows it to accept deposits and permanently access financing from the Federal Reserve.
The status change also enabled it to tap into the government's capital purchase program designed to boost lending and stimulate the economy. AmEx received a government investment of $3.4 billion in January in the form of a preferred stock purchase.
The downgrade comes as the House moved toward passage of a consumer protection bill to put a stop to sudden interest rate hikes and late-payment fees that have hampered millions of consumers. Similar legislation is also before the Senate.
The changes in credit card practices could cost the banking industry more than $10 billion a year in interest payments, according to a study by the law firm Morrison & Foerster.
AmEx shares were up 83 cents, or 3.3 percent, to $25.78 in afternoon trading.
source: http://biz.yahoo.com/ap/090430/us_american_express_s_p_ratings.html?.v=1