American Express profit quest sends it back in time

NEW YORK (Reuters) - American Express Co (AXP.N) is returning to its charge card roots after an aggressive bid to expand its credit card portfolio backfired, leading to huge losses.

The shopping card that American Express launched 50 years ago -- and that unlike credit cards has to be paid in full at the end of the month -- could regain a starring role as frugal consumers try to cut back debt and live within their means.

The company is targeting millions of debit cardholders who still like to pay electronically, but prefer to avoid credit cards, particularly when banks are raising interest rates and fees ahead of tougher industry regulations.

Debit card purchase volume is expected to grow nearly 70 percent in the next four years, analysts said, while credit purchase volume will only expand 10 percent.

"People are migrating away from credit cards, quite frankly, more toward debit, and living for today and paying for today," said Ralph Andretta, general manager of card member services at American Express. "We are seeing people ask more for the charge card."

The company, which got its start 159 years ago as an express delivery service, does not break out charge cards as a percentage of revenue in its earnings statement and Andretta declined to provide those numbers.

The strategy would also enhance the use of American Express network -- a highly profitable and low risk business that competes with Visa Inc (V.N) and MasterCard Inc (MA.N).

Though charge cards have an annual fee of around $100 while debit cards are free, American Express will try to attract customers with its Membership Rewards program, Andretta said.

The program, which allows members to accumulate points that can be redeemed to purchase plane tickets, hotel stays, concert tickets and consumer products at a variety of retailers, is widely seen as the industry's most attractive.

To gain momentum, the largest U.S. credit card company is offering double reward points on purchases of gas and groceries with its charge cards.

"In this environment where you are trying to reduce your credit line exposure, you have much more control with a charge card in terms of limiting losses, so it makes perfect sense," said Scott Valentin, an analyst at FBR Capital Markets.

But American Express could struggle to expand its large existing chunk of the charge card market.

"It's probably the most penetrated part of the market for them," Valentin said, adding the company could find it hard to identify credit card holders willing to move to the charge card scheme or heavy debit card users interested in rewards.

And it is not like American Express is abandoning its credit card business. But the company will refocus on corporate and wealthy clients, two very profitable niches.

Andretta said American Express planned to rely more on products such as its co-branded credit cards with Delta Air Lines (DAL.N), Costco Wholesale Corp (COST.O), JetBlue Airways Corp (JBLU.O), and Hilton Hotels Corp.

BETTER PROFITS

Still, the move to reemphasize charge cards could benefit the company's earnings, as it removes risk -- defaults on charge cards are half that for credit cards -- and adds a source of higher margins.

"It should result in a higher value earnings stream. Credit card earnings are reduced as a percentage to earnings. And you have a greater percentage coming from the network and the charge cards. It should improve the valuation of the company because investors place a higher value on those charge card earnings given the lower level of credit risk," Valentin said.

American Express was the fastest growing credit card company during the credit boom of 2003-07, relaxing lending standards and expanding in California and Florida, two of the states most affected by the recession, but the company paid a heavy price when the bubble burst.

Mounting credit losses sent its earnings spiraling lower and a paralysis in short-term funding markets forced the firm to seek U.S. government funds.

Since then, American Express has been slashing lending, trimming costs by $2.5 billion, and divesting to shore up its balance sheet. The firm also repaid the $3.4 billion in Troubled Asset Relief Fund (TARP) money it received during the financial meltdown.

It is also the only credit card company that did not cut its dividend and the only that remains profitable.

The company is trading at 30 times its estimated 2010 earnings, well above most financial companies. But some analysts said that, instead of suggesting the stock is overpriced, it suggests that earnings forecasts are conservative.

"We think American Express' relative strengths support its premium valuation," Stifel Nicolaus analyst Chris Brendler said in a research note this week, after upgrading the stock to hold from sell.

Like a roller coaster following the drastic moves in financial markets, American Express fell as much as 47 percent this year to a 14-year low of $9.71 on March 6, just to triple that price weeks later. The stock is up 24 percent so far this year.

(Reporting by Juan Lagorio; Editing by Richard Chang)