AmEx Diversifies Funding

On Monday, American Express Co. (AXP - Analyst Report) launched a new line of certificates of deposit (CD) in order to diversify its funding sources as the financial crisis has tightened overall lending.

The saving lines are available in a range of maturities from three months to five years. The Federal Deposit Insurance Corporation (FDIC) will insure these saving lines by up to $250,000.

Failing financial institutions have significantly stretched the regulator's deposit insurance fund. The FDIC insures deposits at 8,195 institutions with roughly $13.5 trillion in assets. When a bank fails, it reimburses customers for deposits of up to $250,000 per account. As of June 30, the fund corpus had touched $10.4 billion, the lowest since 1993, from $13 billion in the prior quarter.

Like other credit card issuers, American Express has traditionally arranged its funding through credit card asset-backed securities. But of late, funding from credit card asset-backed securities has been hurt by the financial crisis. As a result, the company needed an alternative source of funding.

American Express is also not strong with respect to retail deposits to fund its operations. This is a competitive disadvantage for the company as many of its peers like JPMorgan Chase & Co. (JPM - Analyst Report), Bank of America Corp. (BAC - Analyst Report) and Citigroup Inc. (C - Analyst Report) hold a strong retail deposit base.

In the second quarter, 22% of American Express' funding came from short-term debt, short-term and long-term retail deposits and institutional deposits. The company estimates those sources to represent up to 55% percent of its funding needs in the coming years.

Though the last few quarters benefited from successful re-engineering efforts and a diversified business model, American Express experienced continued weakness in card-member spending and high levels of loan losses. We expect continued benefits from the company's diversification and cost-cutting efforts, but the ongoing global crisis and a strong US dollar will continue to impact the results in the coming quarters. However, the new funding initiative will bring some stability to the company's funding options.

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