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1 Way American Express Is Preparing for Life After Costco

While a full percentage point of interest may seem expensive, it pales in comparison with the company's long-term borrowings. When American Express taps the debt markets, it pays 2.25% per year, on average. (Its "long-term" debt isn't really that long in duration.)

Recent growth in the bank isn't accidental. Since the end of 2014, the fastest-growing deposits are "third-party" deposits, another phrase for brokered deposits. Costlier than savings accounts, brokered deposits are still less expensive than debt, thanks to FDIC insurance. Take notice that deposit growth kicked into overdrive in the first quarter of 2015, when news broke of Costco's decision.

Deposits now make up 37.1% of the company's liabilities, up from 31.9% at the end of 2014. Long-term debt is trending down, now making up 36.6% of total liabilities, versus 41.9% at year-end 2014.

Of course, American Express can't solve all its woes with financial engineering. Eliminating the entirety of its $48.7 billion of long-term debt and replacing it with deposits -- a Herculean task no one should expect -- would save it about $600 million in annual pre-tax interest expense. It made three times that amount in the third quarter of 2015.

There are some risks to accumulating deposits to offset long-term debt. Should rates rise, rate-sensitive deposits will expose the company to higher borrowing costs it might have otherwise locked in with long-term debt financing. Its borrowers won't necessarily pay a higher rate to offset higher deposit interest rates, given the competitive landscape for credit card balances.

But it is interesting to see American Express springing to action to save a few million dollars here and there. It needs it. Its long-standing deal with Costco comes to an end in March.

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The article 1 Way American Express Is Preparing for Life After Costco originally appeared on Fool.com.

Jordan Wathen has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Costco Wholesale. The Motley Fool recommends American Express. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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