AmEx as a Bank Holding Company

AmEx becoming a bank holding company (BHC) is not just net positive for the company it is simply positive. When a highly leveraged investment bank like Goldman Sachs turns into a BHC, its future profitability suffers as its leverage drops to commensurate level of the bank. Lower leverage leads to lower profitability.  AmEx on another hand, though not regulated by the Fed, maintained a capital structure very similar to a bank – it securitized its credit card portfolios and market participants demanded bank-like leverage ratios. AmEx’s profitability will not be altered by becoming a BHC so no negative here.

But here is a very significant positive – it will be able to borrow from the Fed, paying a puny 1-1.5% to fund its credit card portfolio. AmEx becoming a BHC removed a liquidity risk a risk that AmEx will not be able to fund float and provide credit in its credit portfolio. Fed funds and discount rates will not stay at these levels forever but an increase in the rate will coincide with an improved economy and stabilized credit markets and thus AmEx will not need the Fed anymore.

I did a fairly in-depth analysis of AmEx in March 2008, though many things have changed since the thesis has not changed that much.

Vitaliy Katsenelson

I am the CEO at IMA, which is anything but your average investment firm. (Why? Get our company brochure here, or simply visit our website).

In a brief moment of senility, Forbes magazine called me “the new Benjamin Graham.”

I’ve written two books on investing, which were published by John Wiley & Sons and have been translated into eight languages. (I’m working on a third - you can read a chapter from it, titled “The 6 Commandments of Value Investing” here).

And if you prefer listening, audio versions of my articles are published weekly at investor.fm.

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