AmEx sees hope, but bad loans plague sector

By Juan Lagorio - Analysis

NEW YORK (Reuters) - American Express Co (AXP.N) raised hopes for a battered credit card industry after estimating that bad loans were easing, but analysts cautioned that the sector is not out of the woods yet.

The largest U.S. credit card company by sales said on Wednesday that credit card charge-offs, loans it does not expect to be repaid, fell for second straight month to 9.2 percent in July from 9.9 percent in June, in the first clear sign of improvement in 18 months.

While most credit card companies reported lower charge-offs in June, investors attributed the drop to a seasonal trend, as consumers used tax rebates to pay down their debts.

But American Express Chief Executive Kenneth Chenault said during an investor meeting that the decline in its case was not seasonal and forecast the company's defaults could end the year below 10 percent, lagging analysts' earlier estimates of 12 percent to 14 percent.

"At the end of the day, the seasonality argument at least historically, I've been in the industry over 25 years, doesn't, last past May," Chenault said. "We saw the improvements in June as we talked about July. That's not seasonality."

Shares of American Express rose to 10-month highs and helped boost the stock of rival Capital One Financial Corp (COF.N) to its best price since January.

But analysts said the Dow component was helped by the company's own actions to improve the recovery of past due loans and by its wealthy customer base, adding it was difficult to extrapolate a trend to the entire industry.

"I wouldn't say it is going to be a broader trend," said Jason Arnold, an analyst at RBC Capital Markets. "We are not entirely convinced that the economy is out of the woods."

Sanjay Sakhrani, an analyst at KBW, agreed.

"There is definitely seasonality in the delinquency numbers," he said. "In July and August you generally see a decline in chargeoffs ... and then it increases a little bit in November and December."

Both analysts forecast rising unemployment and higher bankruptcies will keep weighing on bad loans.

"Investors that are thinking basically that the worst is behind us may be set for a disappointment ahead as we get more data," Arnold said.

SEPARATE WAYS

American Express was the fastest growing credit card company between 2003 and 2007, as it relaxed lending standards. But it paid a heavy price when the bubble burst and bad loans rose to record highs.

The company's portfolio remains the industry's least risky with 4 percent considered subprime, compared to about 30 percent of the credit card loans of Citigroup Inc (C.N) and Bank of America Corp (BAC.N).