American Express granted Fed approval to become bank holding company - Update2

(RTTNews) - Credit card company American Express Co. (AXP | Quote | Chart | News | PowerRating) said Monday evening that the U.S. Federal Reserve has approved its application to become a bank holding company. The move comes even as the company grapples with a slowdown in consumer spending amid a global credit crunch. The company noted that the approval, which will not require it to make any significant divestitures, would enable it to diversify its funding sources as well as access to capital and diversify its deposit-taking capabilities. American Express thus becomes the third financial company to convert to a bank holding company after the global credit crunch escalated in September.

Expediting the action, the Federal Reserve waived the normal 30-day waiting period on the application. The company submitted its application on November 5.

The move also allows the New York-based company's American Express Travel Related Services unit to convert to a bank holding company. The approval puts the nation's largest credit card company in terms of purchases on the same footing as former stand-alone investment banks Goldman Sachs Group Inc. (GS | Quote | Chart | News | PowerRating) and Morgan Stanley (MS | Quote | Chart | News | PowerRating), which had earlier received Fed approval to become commercial banks after their peer Lehman Brothers filed for bankruptcy.

It makes American Express eligible for capital infusion from the federal government as part of the $700 billion bailout plan for the U.S. banking system and gives the company access to the Fed's discount lending window.

American Express currently operates two U.S. bank subsidiaries, namely, American Express Centurion Bank, an industrial bank chartered in Utah, and American Express Bank FSB, a federal savings bank. Through these subsidiaries, which together have over $50 billion in assets and $14.4 billion in deposits, the company issues proprietary credit and charge cards, funds cardmember loans and offers certificates of deposit.

Kenneth Chenault, Chairman and Chief Executive Officer of American Express Company said, "Given the continued volatility in the financial markets, we want to be best positioned to take advantage of the various programs the federal government has introduced or may introduce to support U.S. financial institutions. We will continue to build a larger deposit base to broaden our funding sources."

Chenault added, "With Federal Reserve oversight we should gain greater access to the capital on offer under the current and any future government-sponsored programs."

The credit crisis has made it extremely difficult for financial service providers to package and sell the loans they make, thereby blocking an important source of funding for a company like American Express, which was not connected to a large bank like rival credit-card issuers Capital One Financial Corp.(COF | Quote | Chart | News | PowerRating) and Bank of America Corp.(BAC | Quote | Chart | News | PowerRating). American Express was heavily reliant on bundling its credit card loans into securities and selling them to investors. However, this securitization market dried up following the credit crunch.

Though American Express was often seen as catering to higher-end consumers, delinquencies on its cards went up as the U.S. mortgage crisis weighed on the ability of some wealthy consumers to pay their bills. The company reported its fourth straight quarter of profit declines in the recent third quarter. The company's net income from credit card services dropped 58.7% in the third quarter to $244 million from a year ago, while net income from international card services fell 52% to $67 million.

American Express set aside $1.4 billion for losses in the third quarter, up 51% from $905 million a year ago. Consequently, the company reported a 24% decline in profit for the third quarter to $815 million, from $1.1 billion reported in the prior-year quarter. On a per share basis, earnings fell 22% to $0.70 from $0.90 in the year-ago quarter. At that time, the company warned that cardmember spending was likely to remain soft ahead and that loan growth would be restrained.

In October, American Express said it would cut about 7,000 jobs, lower compensations, reduce operating costs and scale back investments in what it termed as a reengineering plan that is expected to save it about $1.8 billion in 2009. Related to these actions, the company said it expects to take an after tax restructuring charge of $240 million-$290 million in the fourth quarter of 2008.

In a filing with the U.S. Securities and Exchange Commission in October, American Express said that its bank units have access to the Fed's discount window and added that it has enough cash to last more than a year. The company also used the Fed's commercial paper facility for the first time in October.

AXP closed Monday's regular trading session at $23.98, down $1.33 or 5.25% on a volume of 12.08 million shares. The stock has been trading in a range of $20.50-$60.00 in the past 52 weeks.

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