Last week, we heard from an experienced Money journalist who was fact-checking an online claim about American Express. He asked whether Javelin was aware of any strategic shift to close or reduce risk on credit card accounts, and whether concerns about a looming recession were driving the decision.
Our first reaction was that American Express is hitting on all cylinders. In the latest quarter, billed business was up 9% YOY, net income is up 8%, and if you read Steve Squeri’s note, life is grand. We think so too.
The Request Goes Deeper
The author continued with some anecdotal stories about customers reporting that their American Express credit card lines were slashed, and we responded that managing credit lines is something issuers routinely do. It is good housekeeping. Not every bank does it, but those that do so do it to protect their balance sheets.
Lives change, circumstances improve or worsen, and the credit line someone had two years ago might need an adjustment. Perhaps the person got a promotion or raise; they might need a larger line. On the other hand, maybe they lost their job and shifted their spending from durable goods or travel to groceries. There are red flags that issuers must watch.
American Express Protects Its Balance Sheet (and Investors)
We continued by telling the reporter that the Dodd-Frank-mandated Federal Reserve stress test results continue to show American Express as the best-performing credit card issuer in the United States if we were to face a severe economic downturn. Under stress testing, credit card issuers must simulate credit losses under deteriorated financial conditions. The result is what will happen to CET1, the industry metric for aggregate common equity tier 1 capital ratio. That is a mouthful, but it simply means capital that can absorb losses without threatening bank operations.
Notably, under factors that the Fed projects would be very close to those of the Great Recession, American Express would have the lowest credit card loss rate, at 9.5%. Other top banks would have average credit card loss rates of 17.1%. American Express frequently holds this best-in-class position.
Are We in a Recession?
The U.S. is certainly facing bumpy times, high inflation, unsteady interest rates, and the classic K-shaped economy. However, it is not in recession until the National Bureau of Economic Research declares it. For me, my favorite definition of a recession is attributed to Ronald Reagan: “A recession is when your neighbor loses his job; a depression is when you lose your own.”
But we stipulate we are not in a recession and move on, mentioning the current unemployment rate is 4.1%, down from the same period last year at 4.3%
Why Cut Credit Lines?
The business of credit is the extension of credit. Lenders earn interest and fees, but they must also protect their balance sheets. Javelin covered this topic in a report for their subscribers in 2022, in a research note titled “Reducing Operational Risk Through Careful Credit Line Decreases.”
Highlights in the report included reducing credit lines for extremely high usage, dormant activity, and a shift in purchase transactions, such as an abrupt shift from groceries to travel. We also noted the importance of surgical precision, not BS moves to reduce lines.
We also pointed to research from the CFPB, which indicated that the median credit line decrease for a Super-Prime account was from $6,666 to $1,165, and for a Prime account, from $1,934 to $336. Professionally, I’d say these are right in line with the claims about American Express.
Summary
First, for American Express, it looks like a pristine lender is simply keeping pace with account-level risk. For the recession, there are some bumps, but a recession has not been called. With regards to credit card issuers massively reducing lines, that is not the case. And kudos to the Money journalist for checking the facts.
As to credit lines, there are still plenty available. According to the Federal Reserve, lenders’ credit card debt is currently $1.26 trillion, but with total credit card lines in the U.S. at $5.56 trillion, there is still another $4.30 trillion in the open-to-buy category.
