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A "confluence" of factors is amplifying the unfavorable effects of a poor economy for American Express Co., according to an industry analyst. "Small-business lending balances are about 18% of the portfolio, says Sanjay Sakhrani, an analyst with Keefe, Bruyette & Woods Inc. "Generally what happens is, during periods of economic stress, you see a higher frequency of default," he says. AmEx last month reported net income of $21 million for its U.S. Card Services division for the second quarter ended June 30, a 96% decline from $580 million for the same period in 2007 (CardLine, 7/22). The company attributed the reduction, in part, to rising charge-offs caused by the weakening economy. "It's a confluence of different things," Sakhrani tells CardLine sister publication Collections & Credit Risk. "They are exposed to some of the high housing-appreciation markets like California and Florida," he says, adding that approximately 25% of the company's lending balances come from those two states. Credit quality, which Sakhrani says is tied to the nation's unemployment rate, will continue to falter in during the next six months. "If the unemployment rate peaks sometime in the second half of this year, we could see some improvement toward the beginning part of next year," he says. "The odds are we are probably going to see some more deterioration [of credit quality] in the early part of next year."
