The latest news from American Express, that its customers are increasingly falling behind in payments, is a negative indicator for two reasons. First, the deterioration exceeded Amex’s forecasts, and comes even though the company has been aggressive in cutting credit limits to customers that look at risk of getting into difficulty. Second, the card issuer targets affluent customers, so the slide confirms that consumers at all income levels are feeling the effects of the slowdown.
From Bloomberg:
American Express Co., the biggest U.S. credit-card company by purchases and cash advances, said customers are falling further behind on their debt, signaling the economy is worsening.
“Business conditions continue to weaken in the U.S. and so far this month we have seen credit indicators deteriorate beyond our expectations,” Chief Executive Officer Kenneth Chenault said in a statement today announcing the company would receive as much as $1.8 billion in a settlement with competitor MasterCard Inc…
“If you look at the employment situation, clearly that’s deteriorated, and consumer confidence is down as well,” said Sanjay Sakhrani, an analyst with KBW Inc. in New York who has a “market perform” rating on the stock. “Both play a key role in the credit-card industry.”…
American Express declined 20 cents to $41.90 at 11:30 a.m. in New York Stock Exchange composite trading.
First-quarter loss provisions in the company’s U.S. card business rose 52 percent to $881 million as net income declined 11 percent to $974 million. The company will probably post adjusted earnings per share of 83 cents in the second quarter, compared with 88 cents a year earlier, according to 15 analysts surveyed by Bloomberg.
American Express’s affluent customers help shelter the company from problems of borrowers with the riskiest credit histories, Chenault said June 4.
Today’s statement didn’t specify the types of customers having the most trouble repaying loans, and spokesman Michael O’Neill declined to discuss who had the worst payment rates.
Defaults by cardholders worsened most in areas where U.S. home prices dropped by more than 5 to 10 percent, Chief Financial Officer Daniel Henry said in April in a conference call.
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It’s funny how that “you’ll ruin your credit score” threat becomes emptier by the day.
Conversely (to the above statement), a “good” credit score is no longer valuable, since banks are cutting back so severely on extending credit. This stop on credit is “throwing the baby out with the bathwater” in that perfectly good credit risks are being denied, but the banks still have their bad risks on their books. That is a great way to extend your earnings slump if you’re a bank/cc company.
Of course, draconian interest rates, “Universal Protection Clauses” and other acts of cruelty have precipitated defaults. Once the value of good credit was diminished, the value of paying off unsecured debt at criminally usurious rate became nearly worthless. And with so many defaults, the cc companies don’t have the admin infrastructure to chase up all of the defaults to pay up. They will have to accept partial payoffs to get bad debt off the books, or there will end up being a further scandal of the cc companies misreporting their “current” vs “delinquent” accounts to keep up the share prices. Any bets on when that will happen?
“Once the value of good credit was diminished, the value of paying off unsecured debt at criminally usurious rate became nearly worthless. And with so many defaults, the cc companies don’t have the admin infrastructure to chase up all of the defaults to pay up.”
First guy from above again. That’s exactly it. I haven’t used my cards in over a year but was still paying on them at usuous rate which the refused to change. I stopped on one smaller balance to see what would happen and after ignoring them for 5 months they eventually settled for 56% of the balance. I’m sure others have figured this out as well.
Yves and all, yet another great post. I like the gentle digs about lack of oversight and regulation of interest rates….or rather profiteering w/o productive endeavors by the financial sector. Hopefully we can return ‘creativity’ to engineering and the arts and bring back a quaint ‘responsibility’ to the financial sector. I am in neither sector and sadly have to fly out west to see my dying father and Delta wouldn’t change our tickets to a new date w/o a 200 percent increase in price (twice the cost of just buying a new ticket…) so this gouging is pretty much a general trend. I bought another ticket from another airlines and we’ll keep the other date for another visit.
Also, I did comment a couple days back on your appearance on that WBUR show w/ tom Ashcroft and you mentioned that you thought it was one-sided but remembering I thought the main participant did write a semi-famous article “Dan Quayle was right..” so perhaps she was ‘conservative’, (Ms. Whitehead). In general, the show is very balanced as NPR requires, but a more recent show was pretty damning yet again of the anti-regulatory crowd esp. after the artificial buildup in oil futures which are driving up costs of living relative to the era of “moderation”, in his recent show Tom seems to be finding more human interest coinciding with less conservative commentators it seems as there were some excellent guests this week esp. two young Republicans demanding a repackageing of the brand for ‘working class’ folks (like myself in the middle of the ‘squeeze’). Even that was like comedy more than ‘balance’. Truth can be ‘one-sided’ at times. The general drift of things is that the house of cards built by the anti-regulatory conservative power elite is falling. Trouble is, we in the middle class are seeing as a result lifetime of toil never ending: I’ll be working ’til I drop. (but one good thing, we’re going to lose weight and probably be healthier as a result..ignoring the stress!)
Some encouragement our way is appreciated and I enjoy your creative choice of links and photos of pets which make me smile. Thx!
I myself use only my debit card…but now some retailers are stopping the use of that perhaps due to overcharges by the same credit companies. For the first time I was limited to only 35 dollars for gas at a station on a debit card. I had to pay the balance in cash. Never had that happen before. And American Express is being dropped by small retailers for the same overcharges too.