) is the third largest card issuer in the US behind Visa (
) and MasterCard (
). It offers credit and charge card products along with
travel-related services to consumers and businesses across the
American Express attracts more affluent card-holders on average
than its peers due to its ability to cater to these customers
better with benefits and rewards packages. Its other distinguishing
factor is that it charges no fees on balances that are paid off
within a certain grace period. As a result, American Express enjoys
some of the lowest charge off rates in the industry.
Given its low charge off rates of around 4.4%,American Express
could issue cards more aggressively as the economy recovers in
order to take advantage of an uptick in consumer spending. Even if
we take into account higher charge-off rates, this could still lead
to upside to the
$47 Trefis price estimate for American Express
, which stands roughly 10% above market price.
Lower Charge-Offs Give More Flexibility
American Express's card transactions and payments processing
business accounts for about 3/4ths of our price estimate. The
company earns revenue in the form a fee charged to the merchant as
a percentage of the transaction size.
The company does not charge interest on balances paid within a
certain grace period. If these balances are not paid within 180
days past the due date, it is considered defaulted and classified
as a charge-off. Hence, the charge-off rates determine the overall
profits for any credit card issuer.
American Express, which has a more affluent customer base and
has been conservative in issuing cards, has historically had the
lowest charge-off rates, which might have helped American Express
to limit losses during the recessionary 2008-09, when the credit
card industry as a whole witnessed peak charge-off rates in excess
of 10.6%, compared to the pre-recession average of close to
As the US economy gradually recovers from economic downturn, the
industry is witnessing a decline in charge-off rates. While this
trend might have a significant positive impact to other credit card
issuers, American Express has little to gain since its charge-off
rates have always been the lowest.
This leaves American Express in the enviable position of being
able to more aggressively issue cards than its competitors given
its low charge off rates.
We currently forecast American Express-Issued Cards-in-Use in
US to grow from 30 million in 2010 to 34 million by 2012, and to
trend to 43 million over the forecast period. If however,
American Express were to increase the number of its own
Cards-in-Use in US to 35 million by 2012, eventually reaching 48
million by the end of our forecast, we expect a 6% potential
upside to our current Trefis price estimate of its stock.
You can see our detailed
$47 Trefis price estimate of American Express stock