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What Does Dodd-Frank Amendment Mean for American Express?

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The American Express Co. (AXP - Free Report) is likely to get a breather from the senate’s recent decision to bring in a few amendment to the Dodd-Frank Act. Regulations and policies extensively control the company, TRS and its U.S. bank subsidiaries, American Express Centurion Bank (Centurion Bank) and American Express Bank, FSB (American Express Bank).

The Dodd-Frank Reform was put in place by President Obama in 2010 to prevent the reccurence of the 2008 financial crisis.

Amendment to the Act

One of the main tenet of the senate’s banking bill is to raise the minimium threshold bar for institutions that are deemed too big to fail to $250 billion  from $50 billion. This change would bring a relive to the small institutions and will result in a reduction in the number of banking institutions considered “too big to fail.” Further, it frees banks with less than $10 billion total assets from the Volcker rule. This rule was made to prevent banks from placing bets with their own money.

Some of the beneficiaries of change are BB&T Corporation (BBT - Free Report) , Fifth Third Bancorp (FITB - Free Report) , SunTrust Banks, Inc. (STI - Free Report) among others.

American Express to Gain from the Move

If the proposed changes see the light of the day, American Express will no longer have to undergo the annual stress test conducted by the Federal Reserve. These tests are designed to evaluate whether the company in question has sufficient capital on a total consolidated basis to recuperate losses and support operations under adverse economic conditions.

The company is now required to maintain capital ratios appreciably above the applicable minimum requirements and buffers. It is also restricted in its ability to make any capital distributions (including dividend and share buy backs). A relaxation of this rule will provide the company increased financial flexibility and greater autonomy in capital allocation.

We believe the company will be able to divert buffer capital for business expansion and enhance products.

Strong Economy Another Boon

Low unemployment, strong consumer confidence and reduction in tax rates bodes well for the company’s business which is directly dependent on consumer spending. The company has witnessed an increase in top line, thanks to increased spending.

Lower Tax Rate to Benefit American Express

A lower tax rate from the tax reform has enabled the company to plan to invest up to $200 million in 2018, for growth. For shareholders, the company expects to use the anticipated benefits to build capital and drive earnings in 2018.

The operating environment looks favorable for American Express which in the recent past suffered from loss of one of its biggest client Costco Wholesale Corp. The company thereafter undertook massive growth initiatives which included increased marketing and advertising, higher customer rewards, and investment in customer-facing activities increased frills on cards etc. to woo and retain customers.

The tearing away of the stiff capital regulations will further provide an impetus to its business.

Shares of the company have gained around 21% in a year’s time, outperforming the industry’s 5% rally.

American Express carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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