The Credit Card Company Search

Since the economy has turned south from the COVID-19 pandemic, I have been looking at credit card companies to invest in. Looking into Capital One Financial (COF), Discover Financial Services (DFS), and Synchrony Financial (SYF), I have found that the future outlook does not look as grim as expected. Analyzing these banks has shown that 2020 will be a poor year financially, but the programs they have in place have helped their customers tremendously. Each of the three banks I have looked at have seen significant losses in the stock market this year and Capital One Financial has so far been the best value play. This article will be focused on American Express Co. (AXP) and will show that the underlying trends are the same. Although American Express is profitable and has started to wind down the forbearance program, I believe that Capital One still offers the best value of the bunch.

American Express Overview

American Express has been known as a top-tier card issuer for decades. Seen as a credit card for the more well-off individual or business member, American Express has a very strong brand. The company differs in the business strategy from a solely card issuer like Capital One. Instead, American Express is much more like Discover and Synchrony, as these banks both issue cards and have a card network to service the transaction. American Express is the largest card company in the United States when ranked by purchase volume.

Fiscal Year 2019 & 2020 Quarterly Review

Top Down Look

In fiscal year 2019, American Express reported interest income of $12.084 billion, which was up 13.94%. The thing is American Express makes the majority of revenue from non-interest. Therefore, it is important to compare this over time even though it isn’t a big factor for the other banks I have written about. In 2019, the bank made $34.936 billion in non-interest revenue, which was a 6.92% increase. The provision for losses totaled $3.573 billion for the year, up 6.6%. Overall, the net income came in at $6.759 billion, down 2.34% from prior year. In 2019, the efficiency ratio and average interest yield were 72.44% and 11%. As a note, the efficiency ratio is higher for American Express when compared to the other banks due to the amount of revenue from fees & non-interest expense, therefore it should be viewed over a time period.

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In Q1 of 2020, American Express saw interest income at $3.046 billion and non-interest income at $7.98 billion, up 3.11% and down 3.91% each. The provision for losses jumped 224% to $2.621 billion from $809 million. This resulted in a decrease of 76.32% in net income to $367 million for the quarter. The efficiency ratio was better at 70.19% and average interest yield was higher at 11.9%.

For Q2, nothing was better than the prior year. Interest income was $2.426 billion while non-interest income was $5.791 billion. These revenue sources were both down 18.17% and 33.92%, respectively. The provision for credit losses jumped again up 80.6% to $1.555 billion. Net income was reported at $257 million for Q2, down 85.41%. With an efficiency ratio of 71.64% and an average interest yield of 10%, Q2 saw overall declines across the board.

In total, for the six months of 2020, interest income and non-interest income were $5.472 billion and $13.771 billion, each down 7.55% and 19.32%. The provision for credit losses totaled to $4.176 billion, up 150% to make sure the bank has proper reserve during this period of economic uncertainty. The result for the half year was net income of $624 million. Net income was down 81.15%, but as seen in my past research, any profit has been rare to come by. The bank was actually more efficient in the past half year than in 2019 with an efficiency ratio of 70.81%. On top of that, the average interest yield was only down 0.5% since fiscal year 2019 to 10.5% for the six months.

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Charge-Off & Delinquency Rates

Charge-Off Rate Delinquency Rate
February 2.6% 1.6%
March 2.8% 1.7%
April 2.7% 1.7%
May 3.0% 1.6%
June 2.6% 1.5%
July 2.6% 1.4%

Source: Seeking Alpha News

The chart above shows the same trend I have seen for every credit card company. An increase in charge-off rate and delinquency rate up until May then a drop off thereafter. To put these numbers in perspective, in 2019, the yearly charge-off rate was 2.7% and the 30+ day delinquency rate was 1.5%. The rates above do not show much variation. For Q1, these rates were 3% and 1.7%, while in Q2, it was 3.3% and 1.6%. The total for the six-month period was 3.2% and 1.6%. Not out of control by any means.

Source: American Express Q2 Earnings Call Presentation

American Express has not provided much color on the programs offered during COVID-19. The above graphic shows the total of loans currently in the Customer Pandemic Relief (CPR) program, and as can be seen, this number has drastically come down since the peak in April. In the latest quarterly filing, the company stated that it is winding down this pandemic relief program. This is great news as it shows that American Express has mitigated the effects of the pandemic pretty well.

The Bank Vault

Source: 2020 Federal Reserve Stress Test

Along with the solid book of loans American Express holds, the bank is very well capitalized. As of most recent quarter, the tier 1 capital rate was 14.8%. The CET1 rate was at 13.6%. This is up from 11.6% and 10.7% each in 2019. In the 2020 Fed stress tests, the government set a minimum tier 1 and CET1 rate of 11.7% and 10.8%. As can be seen, American Express is well above these minimums, providing ample capitalization and allowing the bank to still provide a dividend and conduct share buybacks.

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Valuation

As of writing, American Express is trading around $107 a share. Currently, 2020 EPS stands at $0.71. Being very conservative, I will mirror the same results for the second half of 2020, giving me an EPS of 1.42, meaning the bank is trading at 75.35x. If we take the average 10-year EPS of $5.13, the bank has a P/E of 20.86x. Compared with the of three banks I have analyzed, American Express has seen the lowest decrease in stock price this year, which explains the higher ratios. With that being said, American Express is also trading at 4.09x book value, with the per share at $26.16. The bank does offer a small dividend yield of 1.61%. Overall, in comparison to the other credit card companies, American Express does offer a bit more security due to the large non-interest revenue, lack of pandemic relief accounts, and sustaining profitability.

Conclusion

After looking at four different credit card companies, each has had the same trends that make me feel the long-term value holds up. American Express has remained profitable, is offering a dividend still, and is ending the relief programs it has set up. Overall, this is great to see as the other banks are still needing to assist customers. I believe that American Express does offer long-term value and it may be a good time to buy on this dip. I personally look for the most value and I do believe Capital One offers this with a very solid valuation. Therefore, I have decided to stick to building up my position in Capital One rather than diversify among the industry.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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