American Express Feeling Good?

At the Merrill Lynch conference on November 13, 2007, American Express (AXP) CEO Kenneth Chenault discussed the third quarter results (which included the Visa settlement of $2.25 billion) and an outlook of how poor economic conditions would likely impact AXP's results.

As a shareowner and card user, I am not one to contend with AXP's powerful business positioning. AXP is global, vertically integrated and has a "spend-centric" model with a rewards program that is difficult to match. AXP reports that now over 90% of cardholders are in a rewards program. This is in itself a powerful incentive for cardholders to stay current on payments, as these rewards are forfeited if payments do not meet certain standards.

All that said, I was still disturbed by the following graph:










This graph depicts the Billed Business as a function of a change in Cards In Force and change in Basic Cardmember Spending. The increase of 16% is an excellent rate of growth and compares favorably to other credit card companies. My concern is the higher growth rate of loans. It seems unlikely that higher income individuals would be accumulating debt on credit cards simply out of convenience; credit card interest rates are not low.

Later in the presentation, CEO Chenault focused more specifically on these rapid rates of debt growth in comparison to competitors, reviewing a slide titled "U.S. Managed Loan Growth vs. Competitors: Q3’07 vs. Q3’06." His comment, comparing AXP's 24% rate to the low single digits of others, was "Now, I know that when I look at this slide, I feel good about it." To me, it seems like the wrong time to increase debt levels. If the default rates hit 1991 levels of nearly 10%, AXP would not be crippled, but it would be "easy come, easy go" on those Visa monies.