Monday, July 21, 2008

AmEx: "Super Prime" Problems

by Calculated Risk on 7/21/2008 08:11:00 PM

A few comments from the American Express conference call: (hat tip Brian)

“Over the past month or so, we have seen clear signs that the US economy is weakening. Unemployment rates, as we know, took the largest jump in over 20 years. Home prices declined at the fastest rate in decades, and consumer confidence is at one of its all-time low points. Card member spending particularly among consumers slowed sharply during the latter part of the quarter. Credit indicators as we signaled a few weeks ago deteriorated beyond our expectations, and by almost any measure the US economy and business environment are much weaker than the assumptions we first spoke to you about back in January and the conditions that existed in early June. Now this fallout was evident across all consumer segments, even our longer-term super prime card members.
We are all subprime now!

Here are the AmEx slides. Several are interesting and show the credit deterioration.

Orange County See Through Office Building Click on graph for larger image in new window.
“Affluent customers in some situations are cutting back on discretionary spending…we’re seeing a slowdown in spend across the board”
U.S. Card Services billing only increased 2% year-over-year in June - less than inflation.

And AmEx expects the economy to worsen:
The severe decline in home prices and the marked rise in oil prices have had a fundamental impact on consumer budgets and behavior. Not just as it relates to mortgages and home-related spending, but also across the full spectrum of the consumer economy. We saw the first signs of weakness in our credit indicators at the end of last year and communicated this to you in January when we reported our fourth-quarter results. At that time we took a credit-related charge in order to recognize the deterioration by strengthening our lending and charge card reserves, coverage ratios and levels. In the first quarter, US lending write-off rates rose further, and at that time we indicated that the second-quarter loan-loss rate would be higher than the first quarter, which has proven to be the case. In April and May US lending write-off rates were generally consistent with the 4% to 6% EPS growth plan that we discussed with you in early June. However, as I showed you on the slide package, we saw our credit deteriorate in June beyond our expectations as the write-off rates rose and roll rates within the portfolio deteriorated versus prior months. In other words, more and more consumers who are falling behind in their payments are remaining delinquent. This causes us to assume that a greater percentage of past-due loans will not be repaid. In light of the magnitude of the negative economic trends and our experience, we now believe the economic weakness in the US will likely worsen throughout the remainder of the year and negatively impact credit and business trend ... we now expect that our lending write-off rate in the third and fourth quarter will be higher than June levels.”