American Express ( AXP) placed a lot of blame on the weakening economy when it posted its big earnings miss Monday evening. But one factor that also bears mentioning is the credit card company's rapid growth in consumer lending over the past few years. Shares of American Express fell 7% Tuesday, as Wall Street worried that high gas prices and falling housing prices are causing high-end consumers to cut spending or miss payments on their credit cards. "Fallout from a weaker U.S. economy accelerated during June with consumer confidence dropping, unemployment rates moving sharply higher and home prices declining at the fastest rate in decades," said Kenneth Chenault, the credit card company's chairman and chief executive. "Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations." In turn, American Express added $600 million to its U.S. lending credit reserves; this caused American Express' earnings to fall 37% from a year ago to $655 million, worse than analysts had expected. Chenault told investors the fallout was evident across all of the company's consumer segments, even the "longer-term super prime" card members. Plummeting housing prices and record gas prices were among the factors American Express blamed for its weak results. Missing from the earnings call, however, was discussion about how American Express' rapid lending growth over the past few years is now coming back to haunt its business.
Risks of Rapid GrowthOver the past two years, American Express grew its U.S. card portfolio 17% and 23% respectively, which was 11 and 14 percentage points faster than its industry peers, according to a research note from Credit Suisse analyst Moshe Orenbuch. A good piece of this growth came from the American Express Blue and Stargazer cards, which allow borrowers to roll over their balances each month. American Express also has extended similar rollover plans to its classic gold-card members. American Express made the moves to become more competitive, since most credit card companies -- like Capital One ( COF) and Discover Financial ( DFS) -- already allowed their members to roll over balances each month. The evidence that portfolio growth is coming back to haunt American Express can be found in the American Express Credit Account Master Trust filings with the Securities and Exchange Commission. The trust manages the $38 billion of credit card receivables that American Express has securitized in off-balance-sheet financing. According to last week's trust filing, delinquent accounts -- those where borrowers have missed a payment -- totaled 0.59% of all accounts in the trust for the first six months of this year. That's down from 0.61% at year-end 2007 and 0.74% at year-end 2006. The latest number shows that a smaller percentage of the accounts are becoming delinquent. If the economy's so weak, shouldn't that number be rising? Meanwhile, according to the trust data, so far there has only been a minor uptick in the major problem category: those who are delinquent for 151 days or more.
This category -- which is generally considered to be people who have defaulted and are no longer delinquent -- stood at 0.06% of all accounts in the first half of this year, up slightly from 0.05% at year-ends 2007 and 2006. The more interesting piece of the trust data is the average loan balance of the people who are delinquent for 151 days or more. For the first six months of this year, that amount equaled $9,800. That's up from $6,767 at year-end 2007 and $4,062 at year-end 2006. With the balances higher, American Express now faces higher charge-offs in the event of default. These higher balances directly relate back to the growth in American Express' decision to let more and more of its consumers roll over their balances each month over the past few years. American Express' overall portfolio growth was "way above the rest of the industry," says Michael Taiano, an analyst with Sandler O'Neill & Partners. "One can question whether some of that growth was prudent now in retrospect," he says. While the weak economy is surely to blame for some of American Express' problems today, it's also obvious the company needs to look at its own growth iniatives for some of its problems.