Updated from Tuesday, Nov. 11
has now joined
Capital One Financial
as a bank holding company, but don't expect the iconic charge-card issuer to mimic the same strategies pursued by its newer rival.
The change, approved by the
late Monday, provides
and a related company, American Express Travel Related Services Co., increased access to capital, while decreasing their reliance on the frozen credit markets.
But unlike Capital One, which has used the bank holding company status it gained four years ago and a series of acquisitions to build up a formidable branch network, American Express is not really interested in the business of banking, analysts say.
"I don't think American Express wants to be a full-service bank. There are parts of being a full-service bank that they just have no interest in," says Craig Maurer, an analyst at Calyon Securities, a unit of Credit Agricole, citing mortgage lending as one such area.
As a bank holding company, American Express will be regulated by the Fed and will have access to the Treasury's Troubled Asset Relief Program, or TARP, along with liquidity measures and the ability to "roll over corporate debt at lower rates than otherwise would have been possible," according to Friedman Billings Ramsey analyst Scott Valentin.
The company is considering a capital investment from the Treasury, according to analysts. American Express can also potentially borrow from other banks and other federal agencies if needed, Valentin adds.
American Express is seeking roughly $3.5 billion in taxpayer-funded capital from the federal government, the
Wall Street Journal
reports Wednesday, citing people familiar with the situation. It isn't clear if the application under the TARP came before or after American Express got approval to become a bank-holding company.
Even though it has some branches through its travel offices, American Express does not have a large physical branch infrastructure either, nor does it have interest in investing in one right now, Maurer says.
"I don't necessarily believe that every financial institution needs to be a branch-driven bank," he says. "This is really about deposits."
American Express said in a statement that there would be no fundamental changes to its strategy.
"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," CEO Ken Chenault said in a statement. "We will continue to build a larger deposit base to broaden our funding sources.
The company already has two bank subsidiaries: American Express Centurion Bank, an industrial loan company chartered in Utah, and American Express Bank FSB, a federal savings bank. The company issues proprietary credit and charge cards, funds card member loans and offers certificates of deposit.
Maurer says it's possible that American Express may purchase a bank if there is "an opportunity to buy a modest size deposit franchise." But he doesn't expect the company to do any large acquisitions.
FBR's Valentin says that competition for deposits among banks remains intense and that because American Express lacks the branch presence to be competitive it "will remain reliant upon high-cost CDs and, potentially, money market accounts," he writes.
"While in past conversations, American Express has downplayed its intentions of becoming a depository institution,
Monday's surprising announcement likely is a reflection of the state of the
asset-backed securities market. American Express is disadvantaged more than its peers, in our opinion, given its larger reliance on capital markets for funding," Valentin writes.
Capital One, headquartered in McLean, Va., expanded beyond its credit card roots into banking and mortgages beginning in 2005 when it bought
North Fork Bancorp
the following year. Along with North Fork came its large Alt-A lender,
, which Capital One ended up shutting down last summer as the credit crisis intensified and took a big charge for it.
Valentin rates Capital One at underperform, the equivalent of a sell, based on a pessimistic outlook for consumer credit, larger loan loss provisioning and its own funding issues over LIBOR/prime rate spreads.
Yet on a positive note, Capital One's "strong capital levels and liquidity imply that the company will muscle its way through," he wrote in an Oct. 17 note. "The presence of a deposit franchise alleviates funding pressures faced by many peers and serves as a platform for distressed and opportunistic acquisitions."
Discover Financial Services
also has a "vibrant deposit business," Maurer says. "They're in a very different situation. At the core this was about long-term funding stability, which is something that Discover has."
Indeed, CEO David Nelms said, during a Merrill Lynch financial services conference on Tuesday that the firm was "unlikely" to seek bank holding company status since most of the firm's activities, including 75% of its assets and securitizations already take place, in its regulated bank subsidiary.
According to its Web site, Discover has two banking affiliates in the U.S. -- Discover Bank and Bank of New Castle.
Discover Bank offers a variety of products, including credit card loans, home loans, personal loans and student loans as well as checking accounts, certificates of deposit and money market accounts, the Web site says.
According to presentation materials for the Merrill Lynch financial services conference, at which Discover executives presented on Tuesday, deposits represent 47% of the company's funding mix as of Aug. 31. Term asset-backed securities represented 41% of their funding needs at the end of August, the slides said.
American Express, Capital One and Discover are different than
, which are simply payment networks and do not hold loans on their books. Therefore Visa and MasterCard are not susceptible to loan losses nor are they concerned with funding sources.
The Fed's approval for American Express was similar to the decision it made in September to transform the country's two biggest investment banks,
, into bank holding companies.
American Express has seen the value of its primary assets decline as more consumers have had trouble paying their bills. That's made it harder for the company to borrow to pay for daily operations.
The company revealed severe financial troubles late last month, when it laid off about 7,000 people, or 10% of its global workforce, and said it did not expect to meet its targets until the economic climate improved.
American Express last month reported that its profit fell 24% in the third quarter as cardholders restrained their spending and had more trouble paying off debt.
In its quarterly filing with the
Securities and Exchange Commission
on Oct. 31, the company said it expected write-offs in its credit card portfolio to continue to increase in the fourth quarter and into next year.
"Funding however was not our primary concern with American Express, consumer credit losses have been," writes Oppenheimer analyst Meredith Whitney. "Our concerns for American Express and other consumer lending-related stocks continue to be worse than expected credit losses."
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