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AmEx's Profitability Unchanged


Becoming a bank holding company won't hurt a bit.

AmEx as a Bank Holding Company

American Express (AXP) becoming a bank holding company (BHC) is not just a net positive for the company - it's simply positive. When a highly leveraged investment bank like Goldman Sachs (GS) turns into a BHC, its future profitability suffers as its leverage drops to the commensurate level of the bank. Lower leverage leads to lower profitability.

AmEx, on the other 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 won't be altered by becoming a BHC - so no negative here.

But here's a very significant positive: It will be able to borrow from the Fed, paying a puny 1% to 1.5% to fund its credit-card portfolio. AmEx becoming a BHC removed a liquidity risk - a risk that AmEx won't be able to fund, float, and provide credit in its credit portfolio.

Fed funds and discount rates won't stay at these levels forever, but an increase in the rate will coincide with an improved economy and stabilized credit markets. At that point, AmEx won't need the Fed anymore.

I did a fairly in-depth analysis of AmEx in March 2008 - and, though many things have changed since then, the thesis is largely the same.

China Is Slowing Down

I've said for a long time that one shouldn't trust economic statistics data coming from the Chinese government as it has the incentives, (and the power) to interrogate the data until it confesses to whatever the government wants to see.

Today, we learned that industrial production in China rose 8.2% in October, a slowdown from 11.4% growth in September, and below expectations of 10.8%. Even though industrial production growth wasn't great, it was still growth - and fairly decent growth by "developed" world standards.

But there was another bit of news (in the same article) that really bothered me: The volume of electricity generation dropped 4% in October. Yes, a drop. So which number would you trust?

Maybe it's the pessimist in me -- or maybe I've written so many "China will slow down" articles -- that I'm looking for data that confirms my view. Or maybe I have a hard time imagining industrial production rising in high single-digits, when electricity generated declined during the same time period.

China may have some country-specific subtleties that I'm missing (given that I'm thousands of miles away), but unless proven otherwise, the Chinese economy is declining, not growing - especially when all the other numbers show decline as well. Car inventories are at 4-year highs, the real-estate market (both commercial and residential) are overbuilt, the government is coming up with a $600 billion stimulus package, unemployment is rising, demand from the developed world has slowed down, and so on.
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Position in AXP

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