Tuesday, February 24, 2009

American Express (AXP) to its Customers: Please Go Away. Here's $300 to Spur You to Leave!

You know it's bad in credit card land when the companies are paying customers to "go away" - American Express (AXP) is out with a pilot program to pay customers $300 to close their account. Why would they do that? Because they fear what is coming down the road in terms of defaults - hence they can limit their exposure to losses if people simply close their accounts today - when they still "can".

Implications? For corporations it shows risk taking is OUT, and self preservation is IN (that's a multiple shrinking phenomenon in terms of stock prices). For consumers its just another arrow to the heart to their overspending ways; another brick taken away from the credit laden society.

Via Bloomberg
  • American Express Co., the largest U.S. credit-card company by purchases, is paying some cardholders $300 each to close accounts so the lender can reduce the risk of defaults as the recession deepens.
  • People who got the offer to “simplify” their finances must pay off their entire credit-card balance by April 30, according to New York-based American Express. Enrolling in the program cancels a customer’s account and may lead to forfeiture of reward points or rebates, the company said on its Web site.
  • What AmEx is trying to do is move to the front of the line in terms of getting paid back” by customers who owe debts to multiple lenders, said Michael Taiano, an analyst at Sandler O’Neill & Partners with a “hold” rating on the company. “They clearly grew loans faster than their competitors in the years leading up to this financial crisis.”
  • Chief Executive Officer Kenneth Chenault is shedding customers as rivals reduce credit lines, raise interest rates and cut back on mail solicitations to brace for future losses. The industry’s defaults are set to break records and may reach as high as 11 percent by year-end in a stress scenario
  • The offer is also a stark contrast to previous incentives, like frequent-flyer miles and cash-back deals, offered by card issuers to encourage consumers to open an account or spend more.
As we reported last week in [Feb 18, 2009: Trio of Consumer Death in Credit Card Market Marches On]
  • Charge-offs, or loans that American Express deemed uncollectible, rose to 8.29 percent in January from 7 percent the month earlier, while payments at least 30 days overdue climbed to 5.28 percent from 4.86 percent, the company said last week in a filing for debt packaged into securities.
  • The company blamed the charge-offs on faster loan growth than competitors in the past two years and a larger customer base in California and Florida, states hard hit by the housing bust, Chief Financial Officer Dan Henry said last month.
We've been huge bears of the 3 companies that are heavily focused on credit cards but at this point I would step away from the short side since they are extremely oversold and prone for huge bounces along the way when shorts get squeezed... the risk reward is not the same as 20, 30, 40 percent higher.

Strange that an intrepid blogger relying on nothing but macro views of the economy could see the risk long ago, while risk managers who live, breathe, and work inside the company were drinking the Kool Aid.

No position

[Sep 15 '07: Consumer Spending Continues, Where is the Money Coming From? Credit Cards]
[Dec 10, 07 - Consumers Increasingly Turning to Credit Cards]
[Dec 23, 07 - Unpaid Credit Cards Bedevil Americans]
[Jan 10, '08: Credit Card Warnings Here, Credit Card Warnings There]
[Apr 10, '08: Americans Keep Piling on Debt]
[Apr 4, '08: Late Payments on Consumer Loans at 16 Year Highs]
[Jun 3, '08: Credit Card Usage is Surging, Risking Another Debt Crisis]
[Jun 22, '08: Americans Running Out of Places to Hide Debt - Now Credit Cards Go]
[Sep 23, '08: Loan Delinquencies Continue their Path Upward]
[Oct 21, '08: Moody's - Credit Card Chargeoffs Rising Rapidly]
[Dec 15, 2008: Capital One (COF) Updated us on Delinquency Rates]

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