Ken Chenault's State Of Denial On CNBC

I caught some of American Express CEO Ken Chenault's happy talk on CNBC this morning.

In my prior posts on the company, found under its label along the right side of the main page, I have catalogued some of the outrage that Chenault triggered by his firm's summary severing of account relationships with long time, non-delinquent customers.

This morning, he was all smiles and reporting falling chargeoffs.

But if you look at the nearby, five-year chart of Amex's and the S&P500 Index's prices, you can see that the firm has been struggling for nearly two years with anemic performance.

As long ago as early 2006, the company's return had begun to trail the index, and it's never recovered.

Thus, simply blaming last year's credit crisis is disingenuous.

It also begs the question of how Chenault's knee-jerk credit withdrawal decisions may have inflicted long term damage on American Express' brand name and earning power going forward.

Chenault confirmed that, despite having taken refuge in a commercial banking license, when his firm took federal cash to avoid bankruptcy, it has no plans to become a full service banks. Instead, he spoke of regionally-based growth through, one supposes, credit card relationships.

Isn't this more proof of excess capacity in the financial services sector? And, perhaps, that Amex should have been closed or merged with a healthier, broader financial utility?

Instead, all Chenault hopes for is to regrow charge card volumes and customers. Granted, it may be better than moving headlong into physical branch banking or other activities in which the firm has little or no experience or expertise. But simply changing direction on credit provision doesn't seem that creative, or worthwhile, in the greater scheme of US banking, does it?

I wonder how realistic that is, in view of Amex's recent shedding of so many paying, charging customers only a few months ago?

AmEx In Full Retreat From Credit Card Business

Almost two weeks ago, I wrote this followup post concerning American Express' rough treatment, without cause, of a colleague. In a prior post, linked to the followup, I had written,

"Going back some twenty years, it was common knowledge at Chase Manhattan Bank that credit card users charged more in proportion to their credit lines. The key to the process of profitably growing credit card businesses is to sensibly extend more credit to capable, creditworthy customers, who will then, as a group, on average, obligingly carry higher balances.

AmEx has stood this principle on its head now, cutting credit lines, and, thus, balances and spending with their cards.

It should come as no surprise that the firm is now seeing a plunging net income."

Yesterday's Wall Street Journal published an article entitled, "AmEx Encourages Cardholders to Leave."

In this latest piece, Journal reporter Mary Pilon wrote that AmEx is now literally paying some cardholders with a $300 gift card to close their account. Essentially, the firm believes some customers are accidents waiting to happen, and want payment in full, less a $300 writeoff, before something worse occurs.

It seems incredible that the firm is basically admitting it has failed in its prior judgment as to who were good credit risks, and who were not.

If you needed more evidence as to the total bankruptcy of AmEx's business model, I guess this would be it. They lost their natural funding hedge years ago. Then they converted to become a commercial bank, in order to tap taxpayers for help in funding themselves, when debt markets were no longer forthcoming.

Now, the firm is shedding customers by paying them a rebate to leave.

Truly, if any financial services firm should have been left to die on its own, American Express is that firm.

AmEx's share price hasn't been significantly or long above its 2000 high in the past nine years. Congratulations, Ken Chenault, on a stellar management job!

Readers "Express" Outrage At AmEx

On rare occasions, I follow up one of my posts due to reader comments. When a post is over a week old, the odds of comments on it being read by others declines markedly, absent the piece being found by direct searches.

Thus I found it interesting to draw attention back to this late January post concerning American Express' recent results and less-obvious actions regarding its customers.

Here are two comments on the anecdote concerning a colleague who was badly-treated by the credit card firm. The first comment contains an absolutely stunning account of credit management,

"Anonymous said...
Well they just did it to me. My credit line went from $13,000 to $1,800. It left one of my drivers stranded at a gas station out of town. Thank you Un-American Express."

And this one is on a par with the story in my post,

"Anonymous said...
My credit line was cut 40% for no reason. I haven't missed any payments and my business is growing. Bad leadership. Bad business."

Evidently, the credit limit shrinkage at AmEx is both real and widespread. Chances are good this will lead to even lower revenues and profits at the firm.

Anyone for shorting AmEx?

What Ken Chenault Isn't Telling You About AmEx's Performance

This morning's Wall Street Journal's front page of the Money & Investing section carries a headline at midpage screaming, "AmEx Net Sinks 79% as Customer Spending Falls."

Buried in the article is the passage,

"In addition to cutbacks in spending, the financial firms that issue credit cards are being hit hard by strapped consumers, who are falling behind on the bills with increasing frequency."

Maybe so, but that first element is circular, and Ken Chenault isn't telling you why AmEx is experiencing such a drop in charge volume.

The truth is, AmEx encouraged it. How?

Beginning several months ago, the firm began cutting the credit lines of even its best customers by 50%!

For example, a colleague of mine was told, while on a business trip, that his AmEx card had reached its limit. In a scene reminiscent of that old AmEx ad showing a young man being embarrassed when his Visa card can't handle the charge for his fiancee's ring, or a business dinner, this colleague was told to come up with another way to pay his hotel bill.

Upon contacting AmEx, he was told that, to use his card again that month, he'd have to immediately send them a check. Mind you, this customer has been with AmEx for decades.

Going back some twenty years, it was common knowledge at Chase Manhattan Bank that credit card users charged more in proportion to their credit lines. The key to the process of profitably growing credit card businesses is to sensibly extend more credit to capable, creditworthy customers, who will then, as a group, on average, obligingly carry higher balances.

AmEx has stood this principle on its head now, cutting credit lines, and, thus, balances and spending with their cards.

It should come as no surprise that the firm is now seeing a plunging net income.

The colleague in question was so furious that he closed every AmEx relationship he had, including business loans, and transferred all of them to a local bank's competing credit card.

AmEx has been a sinking ship ever since their naturally-hedged businesses, travelers checks and credit cards, unlinked. Without the free source of funding, their credit cards became less competitive just as credit card volumes soared.

This is yet another financial services company which, pursuant to today's first post, should have been allowed to die, merge, or be acquired, rather than become a commercial bank and suck up public funds to survive.