American Express Bank Ltd., the $12.5 billion-asset offshore bank run by the travel services giant, is tightening links to its parent company and slashing costs in a bid to boost sagging profits.
"We remain a niche bank, but we will increasingly become integrated with American Express Co.," said John A. Ward 3d, the bank's chairman and chief executive officer.
The latest effort to redefine the unit, by cutting expenses and integrating banking, credit card, and travelers check operations, comes after several attempts to reorganize an extensive international network that has generated only lackluster earnings.
With 77 offices in 37 countries and 55 cities, ranging from Frankfurt to Katmandu, Nepal, American Express operates one of the biggest international branch networks among U.S. banks.
But it earned only $68 million in 1996, a paltry sum compared with American Express Co.'s $1.74 billion that year. In both 1996 and 1995, the bank posted returns on average assets of only 0.62% and returns on equity of 11%, less than half what many banks of its size generate. Although results for 1997 are not in yet, earnings over the first three quarters of last year only improved return on assets to 0.66%.
Some analysts say they don't quite know what to make of the bank. "Their approach, to say the least, has been confusing," said an analyst who declined to be identified.
Although American Express put the bank up for sale a couple of years ago, it was taken off the block after failing to attract high enough bids.
"I can't really make a strong case for its importance to American Express," said Mark C. Alpert, a banking analyst at BT Alex. Brown. "The attraction seems to be mainly the large number of banking licenses they have around the world, but there doesn't seem to be any plan to invest in those licenses or expand the business."
Some analysts argue that American Express Bank cannot be judged by the standards applied to other banks. A large measure of its value, they say, comes from the supporting role it plays to the parent company.
"The answer is that the bank is sufficiently profitable and gives the group advantages on the travel agency and card front they wouldn't have otherwise," said Moshe Orenbuch, a banking analyst at Sanford C. Bernstein & Co.
Licensed by the state of Connecticut in 1919 to help finance the freight-forwarding operations of American Express Co., the bank is barred from taking deposits or making loans in the United States. Expanding domestically is not an option because that would violate Bank Holding Company Act restrictions on combining banking with American Express' other activities, such as selling insurance.
As part of an earlier effort to reorganize the bank and boost earnings, Mr. Ward's predecessor, Steven D. Goldstein, concentrated on five areas: corporate banking, correspondent banking, private banking, trading, and personal financial services. He also curtailed the long-standing operational autonomy given to country managers, replacing that strategy with one that ran the bank along product lines rather than geographic ones.
Mr. Ward, who joined American Express two years ago from Chase Manhattan Corp., where he headed bank card services, aims to go even further.
Under an ambitious plan to reduce costs by centralizing and standardizing the bank's worldwide operating systems, Mr. Ward plans to bring the ratio of expenses to revenues down to 65%, from 78%.
Low-margin businesses, such as portfolio lending, will be discouraged in favor of higher-yielding activities, like private banking and personal financial services.
Mr. Ward also plans to offer new products, such as money orders, certified checks, and spot deliveries of foreign exchange to banks that don't want to stockpile foreign currency.
He also said he expects to boost the bank's return on equity to 18% during the next two years.
"We are not going to play the bricks-and-mortar game against local banks," said Mr. Ward. "But we can cross-sell our own products."
The bank, Mr. Ward pointed out, is an ideal vehicle for stepping up sales of travelers checks, especially in emerging markets where sales are growing at more than 20% annually.
American Express Bank's hard currency denomination and security features, he added, make it especially attractive in countries where the local currency is shaky and consumers are afraid their bank accounts might be blocked. Emerging markets, he added, are also attractive to American Express because the float-or the time that elapses between when checks are bought and when they are cashed-can stretch to six months or more.
Mr. Ward said he is satisfied with last year's improvement in results, even if analysts still have reservations.
If profits are still below par, he added, it is largely because of the bite ongoing investments take out of earnings.
American Express Bank, he adds, is "definitely not for sale."