Stung by the loss of the Costco co-branded credit card program, the recent loss of a recent DOJ lawsuit, and the potential of rising consumer interest rates, American Express’ Asset-Backed Securities (ABS) credit card program should strong in 2015 given its liquidity profile.
Fitch Ratings says credit performance is expected to remain among the strongest of other top credit card issuers in 2015, although charge-offs and delinquencies will likely start to normalize. Fitch expects provision expenses to increase in 2015 driven primarily by portfolio seasoning and growth, as well as some modest deterioration in credit metrics. Net charge-offs on the lending portfolio improved 30 basis points (bps) to 1.5% in 2014 and remained well below other top credit card issuers and the industry average. Reserve coverage remained strong at 1.7% of loans and 167% of loans past due at Dec. 31, 2014.
The impact from rising interest rates is expected to be manageable for AXP. At Dec. 31, 2014, assuming an immediate 100 basis point increase in interest rates, AXP estimates that net interest income (NII) over the following 12-month period would decrease by approximately $212 million. This estimated decline in NII primarily relates to non-interest bearing charge card receivables and fixed rate credit card loans that are funded with variable rate debt. As of Dec. 31, 2014, fixed rate worldwide charge card receivables and credit card loans accounted for approximately 67% of AXP’s total portfolio.
On Feb. 12, 2015 AXP announced that it would not renew its U.S. co-brand relationship with Costco. AXP expects the loss of the Costco U.S. contract to have a negative impact on earnings and revenue growth after the contract expires in March 2016. However, the company reiterated its long-term earnings per share growth target of between 12% and 15% beginning in 2017.
Fitch believes AXP will pursue other investment opportunities including within consumer and small business payments, prepaid products, global network services (GNS) bank partnerships, and new co-brand relationships in an effort to offset the long-term loss of earnings from the Costco relationship. For example, on March 19, 2015 AXP announced a new exclusive multi-year partnership with Charles Schwab & Co., Inc. (‘A’, Outlook Stable) to create two new premium co-branded cards.
Fitch views AXP’s decision not to renew such an important relationship as an understandable outcome when seeking to balance long term economic value and short-term results. Although near term earnings will be pressured, Fitch believes AXP’s strong franchise, spend-centric business model and leading market position in the payments industry position it well to achieve its long term operating performance targets.
On Feb. 19, 2015, the United States District Court in the Eastern District of New York ruled in favor of the U.S. Justice Department (DOJ) in its anti-steering case against AXP. AXP has moved to bring its case to the appellate court and believes it will prevail on appeal.
Fitch believes losing the DOJ lawsuit (for now) is a credit negative and adds to AXP’s near term challenges. That said, in a scenario where the ruling is upheld Fitch believes the longer term impact on AXP’s business model and operating performance could be modest. While Fitch believes allowing merchant steering could negatively impact AXP’s billed business volumes, it is unclear how many merchants would actually steer customers at the point of sale. In Fitch’s opinion, merchants will need to prudently manage the trade-offs between customer satisfaction, sales volume and transaction pricing when making the decision to steer customers to lower cost forms of payment. That said, if merchant steering becomes widespread, Fitch would need to evaluate the impact on AXP’s market share and merchant discount revenue, which accounted for 57% of net operating revenue in 2014.
Overall, Fitch expects AXP’s operating performance to remain under a degree of pressure over the near term reflecting a number of headwinds including lackluster modest global economic growth, normalizing credit performance, the loss of the Costco relationship, a stronger U.S. dollar and continued heightened regulatory, legislative and litigation risk.
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