August 7, 2009
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News: AmEx Reports Lower Defaults
In spite of high credit card delinquency and faults rates, American Express continues to see a modest improvement in early stages of credit card delinquencies. During a recent investor's briefing, Kenneth Chenault, Chairman and Chief Executive Officer of the New York based company stated that while default rates continue to be very high, they are "better than expected." The news is welcomed as it indicates a leveling off and moderate stability in the economy. Many of the credit card companies have reported operating in the red in the wake of the recession and record breaking unemployment and card defaults. American Express was hit particularly hard because it had changed it traditional business strategy of requiring customers to pay the full balance of their account each month just prior to the bottom dropping out.
American Express experienced credit card defaults for July of 9.2% down from 10% from the second quarter. If defaults continue to trend down, defaults should fall below the 10% mark for third and fourth quarter. All credit card companies have experienced the same massive defaults and all expect to remain operating their card divisions in the red for the next year. However, as losses begin to level off, many lenders including American Express have accelerated investments. It is expected that American Express will also increase allocations for marketing, and promotions to entice customers.
Moderate changes in customer spending habits have also been noticed. Contrary to what one might think, portfolios with the more creditworthy customer are being out performed by the subprime customer portfolios. This would indicate that the more creditworthy customer continues to cut credit card spending while the subprime are using their cards and experiencing lower levels of delinquencies and defaults. Speculation is that more of the creditworthy customers are affected by the unemployment rate. When these customers lose their jobs, they tend to focus more on protecting their homes by making mortgage payments.