American Express’ Strong Capital Impress, Expenses a Drag

On Jun 26, 2015, we issued an updated research report on American Express Company AXP.

American Express’ risk of below-average long-term growth in 2015 due to rise in expenses, loan loss provisions, foreign currency fluctuation, loss of Costco client and regulatory compliance has raised concerns.

As a result of the ongoing business building and re-pricing initiatives along with higher card member reward and service costs, total expenses of American Express surged higher than expected over the past years.

Moreover, American Express has been slapped with several lawsuits in the past. Lawsuits and lawsuit-related charges not only have a negative impact on the company’s financials but also affect its goodwill.

Despite gradual global economic recovery, the company’s net interest yields continue to remain sluggish. This is mainly because the company has lower revolving levels and lower balances at penalty rates due to improved credit performance. Furthermore, a low interest rate environment continues to weaken the company’s total interest income.

American Express maintains substantial operations outside the U.S., while consistently growing through acquisitions. However, currency fluctuations relative to the U.S. dollar, varied tax rates and foreign exchange controls may affect commercial lending activities and decrease revenue from international operations. These also expose the company to interest rate volatility, economic headwinds and regulatory stringencies across borders. Additionally, these factors have hit the asset and capital returns of the company over the past years.

However, American Express enjoys a strong capital position with Tier 1 risk-based common ratio gradually improving. Excess cash and investment securities as well as strong operating cash flows have helped the company remain sufficiently liquid to finance its maturities.

American Express benefits from its creditworthy customers, less reliance on revolving credit and back-end fees. All these factors have been helping the company gain competitive advantage and improve its overall risk profile.

The company’s ongoing EGG program is successfully focusing on diversifying its revenue mix in the areas of e-commerce, mobile payments and fee-based businesses in emerging markets through B2B initiatives.

American Express has potential for increased market penetration, merchant acceptance, and brand recognition as it expands the list of network partners. Its U.S. Card Services and Global Network & Merchant Services businesses have also been performing well, helping billed business or spending on cards to grow manifold.

Apart from cost-cutting initiatives, American Express has implemented a major re-engineering program to increase efficiency and reduce activities that digress from its core business. Moreover, the company is tightening its expenses to enhance both margins and bottom line.

Currently, American Express carries a Zacks Rank #4 (Sell). Better-ranked stocks from the financial miscellaneous services sector are Euronet Worldwide, Inc. EEFT, Qiwi plc QIWI and Blackhawk Network Holdings, Inc. HAWK. While Euronet Worldwide and Qiwi plc sport a Zacks Rank #1 (Strong Buy), Blackhawk Network Holdings holds a Zacks Rank #2 (Buy).

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