The pessimism seeping from banking companies' third-quarter earnings reports this month has lowered market expectations for American Express Co., which is scheduled to release its results after the market closes Monday.
The New York company is facing the same dire credit environment, sluggish consumer spending, and funding-cost increases as other issuers. Because of its affluent clientele, it was once considered the card company most insulated from credit and macroeconomic concerns. But its accelerated growth in recent years, its exposure to deteriorating markets like California and Florida and to the small-business sector, and its reliance on the capital markets have led analysts to put Amex on equal footing, at best, with the others.
"I expect them to no longer be the higher-quality lender in terms of what their chargeoff numbers show," said Craig Maurer, an analyst at Credit Agricole Group's Calyon Securities. "I expect them to perform basically in line with what others are showing."
Scott Valentin, an analyst at Friedman, Billings, Ramsey & Co. Inc., has gone so far as to predict Amex's chargeoff rate could surge to more than 10% by the end of next year. Among the major issuers, only Washington Mutual Inc. (whose banking operation JPMorgan Chase & Co. has acquired) has reported a rate that high.
Amex's chargeoff and delinquency rates are "not the absolute highest" in the industry, but they are "definitely among the fastest growing," Mr. Valentin said Thursday.
Amex would not discuss the analysts' predictions before its report.
On Wednesday, JPMorgan Chase reported a credit card chargeoff rate of 5% for the third quarter. Michael Cavanagh, its chief financial officer, said on a conference call that the rate could increase by as much as 200 basis points by the end of next year.
Amex reported a second-quarter rate of 6.3%, and several analysts expect it to post a third-quarter rate higher than 7%.
In a note to clients Wednesday, Mr. Valentin extrapolated from JPMorgan Chase's results. "Assuming a similar ramp for American Express, based on our estimate of 7.20%" for its third-quarter chargeoff rate, he wrote, "losses could reach more than 10%" by the end of next year.
Such losses could be propelled by Amex's exposure to California and Florida and its "rapid growth in 2006 and 2007 (at the top of the credit cycle)," he wrote. That growth has left it with a higher proportion of newer accounts, which tend to sour at a higher rate.
Amex's most recent monthly report for its securitized master trusts, released Wednesday, has also fueled fears about credit quality.
Delinquencies of more than 30 days climbed 34 basis points from August and 152 basis points from a year earlier, to 4.05% last month. Mr. Valentin wrote that it was "the highest rate since inception of this data."
Moshe Orenbuch, an analyst at Credit Suisse Group, wrote in a note to clients that the increase from August was about twice as much as that at most other issuers.
The chargeoff rate in Amex's master trust climbed 50 basis points from August and 308 basis points from a year earlier, to 6.14%. Mr. Valentin wrote that the rate was the highest since late 2005, when a change in the law prompted a rush by consumers to file for bankruptcy protection.
In notes published last week, Mr. Maurer predicted that Amex would report a managed chargeoff rate of 7.3% for the third quarter and 8% for next year, and Sanjay Sakhrani of KBW Inc.'s Keefe, Bruyette & Woods Inc. predicted rates of 7.3% for the second half of this year and 8.8% for next year.
Mr. Valentin and others said the rising cost of funds could also have a outsized impact on Amex, which gets only about 14% of its funding from deposits.
The company depends on the asset-backed "and corporate debt markets for funding," Mr. Valentin wrote, and those markets are "experiencing a great deal of volatility."
In a note to clients Tuesday, Joseph Astorina and Kayvan Darouian, analysts with Barclays PLC's investment bank in New York, projected that a jump in the London interbank offered rate would reduce the excess spread available to various card issuers from securitization trusts by about 200 basis points next month.
Four-fifths of card bonds have a floating rate, and they typically reset at the one-month Libor shortly before monthly distributions, the analysts wrote. The most recent reset date was Monday, so "the measures put in place by world governments [over the last week] to stabilize short-term interest rates comes too late to help this month's coupon reset."
Tightness in interbank credit markets has boosted Libor above the prime rate, which is typically used to price card receivables. "Most of the major U.S. credit card ABS master trusts will likely report substantially lower one-month excess spread figures in November as a result," the Barclays analysts wrote.
During JPMorgan Chase's conference call, James Dimon, its chief executive, said that if the spread between Libor and the prime rate stays where it is now, it could cost his company's card business $100 million a month. "We don't expect it to stay there, and obviously there are actions we can take that can reduce that over time."
Mr. Maurer said he is "not concerned" about Amex's access to liquidity. "It's going to be more expensive to fund, there's no doubt about that." However, "they also do a lot of their funding in the commercial paper market, which is now backstopped by the government."
Mr. Valentin said in an interview Thursday that Amex's access to the government-backed commercial paper market and to the Federal Reserve Board's discount window would help alleviate the funding issue.
But he also said Amex is facing "headwinds in a lot of different places." In addition to the slowdown in consumer spending, businesses are "pulling back on travel," and corporate travel-and-entertainment cards are an Amex mainstay.
Amex said in July its small-business portfolio grew 11% in the second quarter, or almost twice as quickly as its U.S. consumer portfolio.
In a June presentation to investors, Kenneth A. Chenault, its chairman and CEO, acknowledged the risks of this growth. "Small businesses consistently generate higher loss rates … but they also have higher spend and higher attractive returns," he said.
Cracks are showing in other small-business portfolios. Bank of America Corp. said last week that its small-business loan-loss rate increased 105 basis points from the second quarter and 526 basis points from a year earlier, to 10.64%. Kenneth A. Lewis, the Charlotte company's CEO, told analysts on a conference call that the portfolio "is relatively small, but it's a damn disaster."
Mr. Maurer said the "pretty awful numbers" in B of A's small-business results did not augur well for Amex. Because its small-business portfolio growth has been particularly strong, "that's probably going to be particularly toxic, as well."
Rosa Alfonso, a spokeswoman for Amex's Open small-business division, said this week that the company has taken a few steps to control costs on that portfolio this year beyond reducing credit limits on a "case by case basis."
In July, Amex reduced the cashback reward for gasoline purchases made with its "Simply Cash" small-business card by nearly half, to 3%, "in light of the increasing cost of gasoline," Ms. Alfonso said. In March it raised the annual fee for new customers applying for its platinum small-business card by $55, to $450, to fund additional rewards.
