On Monday, American Express Co. (AXP) launched a new line of certificates of deposit (CD) in order to diversify its funding sources as the financial crisis has tightened overall lending.
The saving lines are available in a range of maturities from three months to five years. The Federal Deposit Insurance Corporation (FDIC) will insure these saving lines by up to $250,000.
Failing financial institutions have significantly stretched the regulator’s deposit insurance fund. The FDIC insures deposits at 8,195 institutions with roughly $13.5 trillion in assets. When a bank fails, it reimburses customers for deposits of up to $250,000 per account. As of June 30, the fund corpus had touched $10.4 billion, the lowest since 1993, from $13 billion in the prior quarter.
Like other credit card issuers, American Express has traditionally arranged its funding through credit card asset-backed securities. But of late, funding from credit card asset-backed securities has been hurt by the financial crisis. As a result, the company needed an alternative source of funding.
American Express is also not strong with respect to retail deposits to fund its operations. This is a competitive disadvantage for the company as many of its peers like JPMorgan Chase & Co. (JPM), Bank of America Corp. (BAC) and Citigroup Inc. (C) hold a strong retail deposit base.
In the second quarter, 22% of American Express’ funding came from short-term debt, short-term and long-term retail deposits and institutional deposits. The company estimates those sources to represent up to 55% percent of its funding needs in the coming years.
Though the last few quarters benefited from successful re-engineering efforts and a diversified business model, American Express experienced continued weakness in card-member spending and high levels of loan losses. We expect continued benefits from the company’s diversification and cost-cutting efforts, but the ongoing global crisis and a strong US dollar will continue to impact the results in the coming quarters. However, the new funding initiative will bring some stability to the company’s funding options.
Read the full analyst report on “AXP”
Read the full analyst report on “JPM”
Read the full analyst report on “BAC”
Read the full analyst report on “C”
Zacks Investment Research
