The approval of American Express Co.'s application to become a bank holding company is a "modest positive" that will enhance its access to federal funding, according to Scott Valentin, an analyst at Friedman, Billings, Ramsey & Co. Inc.

The conversion plan is evidence of "the significant funding stress we believe" Amex is experiencing, but it does not "significantly change" its strategy of seeking more deposits and pulling back from capital markets, Mr. Valentin wrote in a note to clients issued Tuesday, the day after the approval was announced.

Though a bank holding company charter would give American Express "flexibility to expand its deposit base," it lacks a branch network and "will remain reliant upon high-cost CDs and, potentially, money market accounts," he wrote.

The Wall Street Journal, citing sources it did not identify, reported Wednesday that American Express is seeking $3.5 billion of capital from the federal government.

By midday shares of Amex had dropped about 7%, to $20.74 a share.

They had fallen 6.6% Tuesday.

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