American Express managed to report decent results last night, despite what it described as the “harshest operating environment in decades.” As bad as that sounds, the company still might be guilty of too much optimism.
In a research note, FBR analyst Scott Valentin says the company’s assumptions are too positive and that the firm only managed to beat estimates by keeping loan-loss reserves unsustainably low:
Despite an outlook for a deteriorating economy and increasing losses for the next two quarters (at least), the ratio of reserves to delinquent loans declined, counter to other issuers that materially increased loss reserves. Given the access to government funding programs and growing deposits, we view AXP’s liquidity as sufficient in the near term, but we believe AXP still needs to address its reliance on the capital markets.
Valentin also notes that AXP sees unemployment peaking at 8.5%, which is pretty optimistic by standards these days, and he notes the potential roadbump if cramdown legislation is passed. As we discussed yesterday, the measure to help homeowners could have a follow-on effect on credit card companies, that may instantly be required to write off more loans.