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AmEx Sees Credit Crisis Getting Worse

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The Associated Press

The Tampa Tribune

Published: June 26, 2008

NEW YORK - American Express Co. has ended another round of litigation with a rival card company, but still faces serious headwinds from its customers.

After announcing Wednesday that it will get $1.8 billion from MasterCard in settlement of an antitrust lawsuit, the credit card lender, known for catering to jet-setters and the well-heeled, revealed it has again underestimated how quickly its cardholders are falling behind on their debt.

"Business conditions continue to weaken in the U.S. and so far this month we have seen credit indicators deteriorate beyond our expectations," AmEx chief executive Kenneth Chenault said in a statement.

The rocky consumer climate comes amid a tough legal period for credit card companies, which are battling among themselves and with federal authorities around the world about various rules and fees.

Wednesday's settlement was seen by industry experts as positive for both companies, mainly because the $1.8 billion figure was close to expectations, and because the two companies can now put the litigation behind them.

MasterCard shares rose $8.60, or 3.06 percent, to close at $288.97 in Wednesday's trading.
American Express had accused the Purchase, N.Y.-based credit and debit card processor of conspiring to discourage some banks from issuing its credit cards.

MasterCard said it agreed to make 12 quarterly payments of $150 million to American Express, and plans to book a $1 billion charge related to the settlement in the current fiscal quarter.

"We are pleased to have reached a settlement that will enable us to keep our strong balance sheet intact," MasterCard chief executive Robert Selander said in a statement. The settlement, he said, was in the best interest of shareholders because it removed "the uncertainty, time commitment and expense of a prolonged court case."

Craig Maurer, an analyst with Calyon Securities agreed, adding that MasterCard was able to structure its settlement more favorably than Visa did when it reached a similar lawsuit settlement last year for $2.7 billion. Visa agreed to pay $1.15 billion upfront.
American Express shares, however, had slipped $1.16, or 2.75 percent, to $40.94 by the end of trading Wednesday. The company will receive about $800 million a year for three years from the two settlements, which total more than $4 billion, but many investors remain worried about consumer debt trends.

MasterCard and Visa process cards for banks. They do not issue credit, as American Express Co. and Discover Financial Services do.

In January, AmEx Chief Financial Officer Daniel Henry predicted the write-off rate in the company's U.S. segment would peak at 5.1 percent to 5.3 percent in 2008. But the write-off rate in U.S. card services, including on-balance sheet card-member loans and off-balance sheet securitized card-member loans, had already reached the 5.3 percent level by March. Now it's almost July, and delinquencies and defaults are still rising.

The big catalysts are falling home prices, rising commodities costs and the shaky job outlook. Economic data has been coming in weak. On Tuesday, one report showed consumer confidence at its lowest level since 1992 and another showed the average U.S. home price at its lowest level since 2004. Next week, economists expect that the Labor Department will report the sixth straight month of job losses in June.

Keefe, Bruyette & Woods analyst Sanjay Sakhrani said AmEx will probably have to lower its prediction of earnings-per-share growth of 4 percent to 6 percent for 2008, which would amount to $3.51 to $3.61.

If AmEx meets its earnings guidance, it will be mostly due to the MasterCard settlement, Citigroup analyst Bradley Ball said.

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