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American Express


may be eyeing



credit card operations as it seeks to grow its already thriving card business, analysts say.

People familiar with the situation say Wachovia's high-quality, low-rate portfolio, which has about $8 billion in receivables, could fit well with American Express' plan to aggressively acquire other card portfolios. Last week, Wachovia said it hired investment bank

Credit Suisse First Boston

to advise it on the business, including a possible sale or partnership.

American Express spokeswoman Susan Korchak says while the company can't comment on market speculation, "We have been growing our lending portfolio organically, and we're looking at purchasing credit card portfolios that might make sense." For instance, Korchak says the company is looking at three additions to its international portfolio. A Wachovia spokesman says talks for the sale of its portfolio are still in the early stages. Around midday Wednesday, American Express was off $1.26 to $44.72 and Wachovia was off 4 cents at $66.03.


At the end of last year, American Express announced a deal to buy the $226 million card portfolio of

Pacific Century Financial's



Bank of Hawaii

, marking the first time American Express bought up

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accounts and issued its cards directly to customers of a U.S. bank. Visa and MasterCard together control about 75% of the credit card market.

Not surprisingly, Visa sprang into action, issuing a press release estimating that only 27% of Bank of Hawaii cardmembers would keep the new American Express card. In a research note last week,

Deutsche Banc Alex. Brown

analyst Mark Alpert said American Express needs close to 80% conversion to claim success. Though the deal is relatively small, with 148,000 business and consumer accounts, it will be an early test of whether American Express can smoothly convert Visa/MasterCard holders to its own cards.

Unlike Visa and MasterCard, American Express has historically focused on charge cards, where there are no interest fees but the user pays a set annual fee (about $55 for a standard-issue green card). In contrast, Visa and MasterCard charge interest that can vary from rock-bottom (but usually introductory) rates such as 2.9% to upward of 20%. Cards also vary on whether there's an annual fee.

In recent years Amex has branched out into more interest-based lending, including

Sign & Travel

, which is a flexible payment account linked to the charge card, and its


card, both of which allow customers to carry a balance while charging interest. The expansion could make it easier to convert customers who prefer the option of a longer repayment time. American Express has also forged partnerships with


supermarkets and



to issue co-branded credit cards that operate with flexible repayment schedules as well.

The Bank of Hawaii deal took place amid a government antitrust suit against Visa and MasterCard. Brought by the

Justice Department

in 1998, it alleges unfair competition and seeks to do away with a Visa and MasterCard rule that blocks the roughly 6,000 banks in their distribution network from issuing American Express or


cards. American Express spokeswoman Korchak says the company is pursuing its growth strategy regardless of the outcome of the Visa/MasterCard antitrust trial.

Wheeling and Dealing

"American Express has been pretty blunt about the fact that they want to do growth by acquisitions," says Michael Hughes, a

Merrill Lynch

analyst, adding that Amex is a "logical suspect" to buy Wachovia's card portfolio, along with



and the ever-acquisitive



, among others. Hughes says these companies are good candidates as potential acquirers go, but adds that "bank sellers often don't like to sell to other banks," which could boost chances for American Express or credit card company MBNA. (Hughes rates American Express a buy, and his firm hasn't done underwriting for the company.)

American Express' heavy focus on growing its card unit stems from its strong performance in the past year, one which contrasts sharply with some of its other business units. The

American Express Financial Advisors

unit has been a noticeable drag on earnings. AEFA, which represents about a third of the company's business, reported less than 1% revenue growth and less than 2% net income growth in the fourth quarter compared with the prior year.

AEFA's "fortunes are somewhat tied to the equity markets," says Robert Napoli, analyst at

ABN Amro

in Chicago. (He rates the stock an add with a $60 price target, and his firm hasn't done underwriting for American Express.) In the fourth quarter, American Express met expectations, posting a 12% increase in earnings largely on the strength of its card businesses. But the stock tumbled on jitters about weakness in other business units and cautious guidance for 2001 and is off about 14% year to date.

American Express certainly wasn't alone on that front. A number of brokers and financial companies with a focus on fees from market activity such as underwriting struggled with a slowdown in the fourth quarter that

showed up very clearly on the bottom line. AEFA also felt the brunt of its exposure to high-yield bonds, taking a fourth-quarter writedown of $49 million, losses that could continue in future quarters, analysts say. "In our view, the greatest risk is at AEFA, where persistent weakness in the equity market throughout the year could threaten the management's outlook," said

UBS Warburg

analyst John McDonald in a research note last week.

On the upside, "the card operation is continuing to perform at a very high level," says Hughes. In 2000, Amex saw worldwide cards in force grow to 52 million, up 12% from a year ago.

At an investor conference last week, the company reiterated guidance that 2001 earnings per share growth will be in the low end of its 12% to 15% target. It also plans to implement $500 million in cost savings, which it says is a key to its guidance. And it warned earnings growth could be uneven, kicking in during the latter half of the year as lower interest rates and cost-saving benefits are realized. For now, analysts and investors have confidence in the stock but are keeping a cautious eye on the performance of the financial advisers unit as the possible wild card.