Moody's cuts American Express' credit rating to A2

NEW YORK, Oct 20 (Reuters) - Moody's Investors Service on Monday cut its ratings on American Express Co (AXP.N), citing the credit card issuer's exposure to consumers in areas hit hard by housing price declines.

American Express on Monday reported a 23 percent drop in third-quarter income from continuing operations as it set aside more money to cover credit losses, but nevertheless beat analysts estimates. For details, see [ID:nN20534511]

The company generates much of its income from fees, as opposed to interest from revolving credit balances, however its lending exposures have increased significantly over time, Moody's said in a statement.

"With this shift, eroding economic conditions across the U.S. will likely pose a greater burden on Amex's asset quality and profitability," Moody's said.

"Broad economic weakness in the U.S., heavy consumer debt burdens, and home price erosion have also combined to dampen Amex's card-member spending growth in the U.S.," Moody's added.

Moody's cut American Express' rated one notch to "A2," the sixth highest investment grade, from "A1" and gave it a negative outlook, indicating an additional downgrade is more likely over the next 12 to 18 months.

The downgrade also reflects the company's model of relying on market funding, which has caused strain to most financial institutions.

"The current credit crisis has highlighted the risk to firms that rely on wholesale funding, both in terms of funding availability and cost," Moody's said.

The cost to insure American Express' debt with credit default swaps fell after its earnings to 580 basis points after the report, or $580,000 to insure $10 million of debt for five years, from 615 basis points before earnings, according to data from Phoenix Partners. (Reporting by Karen Brettell; editing by Gary Crosse)