American Express, MasterCard Drop 7%

123jump.com Staff
11 Jan, 2008
New York City

American Express declined 10% after it took $440 million pre-tax charge to cover potential losses in the lending portfolio to card members. The softer billing in California and Florida from the ongoing housing market correction was one of the factors. The company said that worldwide billing in the fourth quarter tailed off to 10%, when adjusted for currency, and raised delinquencies charges to 3.2% from 2.9%. MasterCard, second largest payment processor fell 7% after the news.

[R]12:00PM New York – American Express fell 10% on the earnings warning.[/R]

American Express ((AXP)) declined $4.70 to $44.20 after it said that the third quarter profit will be below previous estimates and customers are slow in paying bills.

American Express will take a pre-tax charge of approximately $440 million (approximately $275 million after-tax) for the fourth quarter. This charge will raise worldwide lending reserves to one hundred percent of past-due loans and increase reserves related to the charge card portfolio.

American Express said it expects to report overall growth in worldwide Cardmember spending of about 16 percent for the fourth quarter (13 percent on a foreign exchange adjusted basis). The growth rate, however, trailed off to 13 percent in December (10 percent FX adjusted) with particular weakness in U.S. billings. The Company also expects to report that delinquencies in the managed U.S. lending portfolio increased to approximately 3.2 percent in the fourth quarter of 2007 from 2.9 percent in the third quarter, and that the write-off rate in this portfolio increased to approximately 4.3 percent from 3.7 percent for the same periods.

American Express expects fully-diluted earnings per share from continuing operations to be in the range of $0.70 to $0.72 for the quarter compared to $0.73 per share a year ago. For the full year 2007, fully-diluted earnings per share from continuing operations is expected to be in the range of $3.38 to $3.40, an increase of approximately 16% from 2006.

Amex chairman and chief executive Kenneth I Chenault said, “We see some negative credit trends among U.S. consumers during December, particularly in California, Florida and other parts of the country most affected by the housing downturn.”

As previously announced, fourth quarter results will also recognize the $1.13 billion ($700 million after-tax) initial payment in the Company’s settlement agreement with Visa, along with a number of significant additional expenses.

Based on business and economic trends during December, the Company expects that growth in spending will slow in 2008. The Company’s 2008 business plan currently assumes worldwide billed business growth of approximately 8% to 10% for the full year.

While such growth would be higher than industry-wide levels during the recent strong economy, it will still represent a decline from the levels American Express has been generating in recent years.

The 2008 business plan also assumes write-off levels in the managed U.S. lending portfolio will average 5.1% to 5.3% for the full year.

MasterCard ((MA)), the second largest network of credit card processors, fell 7% or $15 to $181.03.

[R]10:00AM New York – Bank of America agrees to purchase Countrywide Financial for $4 billion.[/R]

Countrywide Financial Corporation, at the center of the mortgage market malaise, agreed to be bought out by Bank of America for $7.16 per share or $4 billion.

In August 2007, Bank of America purchased preferred stock in the troubled mortgage lender for $2 billion at $18 with 7.25% yield and is convertible at $18 per share.

Countrywide stock has plummeted in value after taking significant losses and rumors of impending bankruptcy filing that the company has denied.

Deal Terms

Under the terms of the agreement, shareholders of Countrywide would receive .1822 of a share of Bank of America stock in exchange for each share of Countrywide.

The purchase is expected to close in the third quarter and to be neutral to Bank of America earnings per share in 2008 and accretive in 2009, excluding merger and restructuring costs.

Bank of America expects $670 million in after-tax cost savings in the transaction, or 11% of the expense base of the two companies'' mortgage operations. About one third of those savings would come in 2009, two thirds would be realized in 2010 and savings would be fully realized in 2011.

Bank of America in the morning trading fell 93 cents to $38.36 and Countrywide fell $1.27 to $6.49.

Why Now?

Bank of America is looking for a scale in originating and servicing mortgages in the U.S. Countrywide had $408 billion in mortgage originations in 2007 and has a servicing portfolio of about $1.5 trillion with 9 million loans. The purchase also includes Countrywide''s Lender Placed insurance and other businesses.

Bank of America will benefit from Countrywide''s broader mortgage capabilities, including its extensive retail, wholesale and correspondent distribution networks. The Calabasas, California-based company operates more than 1,000 field offices and has a sales force of nearly 15,000. Countrywide also has a leading mortgage technology platform, a well known brand in home lending and management expertise in a number of key areas.

While few analysts dispute the benefits of the scale and Countrywide network of branches it is the timing and price tag of the deal that worries the most. The housing market correction is still ongoing and is likely to get worst in the next eighteen months.

Bank of America will take $1.2 billion restructuring charges.

Bank of America appears to be motivated in parts from its earlier $2 billion investment in the company. Since the purchase of convertible stock in the company in August 2007 Countrywide stock has lost more than 66% in value.

Acquisition Spree

Bank of America has done deals of nearly $100 billion in the last four years including the purchase of $48 billion of Fleet Boston Financial in 2004, purchase of MBNA in 2006 $34.2 billion, U.S. Trust from Charles Schwab for $3.3 billion, and LaSalle Bank in Chicago for $21 billion.


Bank of America was advised by Banc of America Securities and the law firms of Cleary, Gottlieb, Steen & Hamilton LLP and K&L Gates in the transaction. Countrywide was advised by Sandler O''Neill & Partners LP and Goldman Sachs Group Inc. and the law firm of Wachtell Lipton Rosen & Katz. Countrywide''s Board of Directors was advised by Sandler O''Neill & Partners LP. Both Goldman Sachs and Sandler O''Neill delivered fairness opinions to the Countrywide Board.


[R]6:00AM New York, 6:00PM - Hong Kong stock index closed down 2.4% for the week. China world trade rose 23.5% in 2007 and trade surplus in the year increased 48%.[/R]

Stocks in Hong Kong tumbled on worries that the subprime related losses will widen following a report Merrill Lynch might suffer more write-downs. The ongoing housing market correction has forced several large banks and brokers to seek additional capital from Middle East and China.

In Hong Kong trading the Hang Seng index fell 1.3% or 363.85 to 26,867.01, a decline of 2.4% for the week.

The China Enterprises index of H shares, or Hong Kong-listed shares in mainland companies fell 1.2 %, or 193.94 to 15,833.75, down 0.4% for the week.

Daily turnover on main board was HK$128.7 billion compared to HK$123.3 billion a day ago.

The New York Times reported yesterday that Merrill Lynch might report $15 billion more in write-downs, twice the previous estimate.

Xinhua News Agency reported yesterday that China’s trade surplus rose 48% to $262.2 billion, while the surplus for December narrowed to $22.7 billion from $26.2 billion in November.

Total trade in 2007 rose 23.5% to $2.17 trillion and trade surplus rose to $262.2 billion in 2007 from $177.47 billion in 2006. In 2007, exports rose 25.7% to $1.22 trillion, and imports climbed 20.8% to $955.8 billion, according to the administration.

The export growth was 1.5% points lower than in 2006 and import rose at 0.9%.

The total bi-lateral trade with the U.S rose 15% in 2007 from 2006 to $302.08 billion.

U.S. Federal Reserve Chairman Ben Bernanke in a speech in Washington hinted the risks for the economic slowdown has substantially increased in the last few months.

He further added, “Financial conditions continue to pose a downside risk to the outlook for growth. Market participants still express considerable uncertainty about the appropriate valuation of complex financial assets and about the extent of additional losses that may be disclosed in the future.

On the whole, despite improvements in some areas, the financial situation remains fragile, and many funding markets remain impaired. Adverse economic or financial news has the potential to increase financial strains and to lead to further constraints on the supply of credit to households and businesses.”

Telecommunications stock rose after South China Morning Post reported the Chinese government had approved the merger of China Mobile Limited with fixed line operator China Tietong Telecommunications Corporation.

The restructure is expected to be unveiled in April. China Telecom fell 5.1% to HK$6.64, while China Mobile declined 1% at HK$133.90.China Unicom, the country’s second largest wireless, however climbed 6.6% to HK$18.68.

Mainland developers also plummeted despite the approval yesterday by the China Securities Regulatory of the initial public offering of Hefei City Construction and a share placement of Finance Street Holding.

Declining oil prices dragged refiners lower. Sinopec Corp lost 2.6% to HK$10.48 as a result.

Financial stocks declined on the worries of the U.S economy. HSBC Holdings dropped 2.5% to a two-year low at HK$123.6.

Li & Fung, which manufactures products to Wal-Mart and other discount retailers, plunged 6% to HK$25.35 after the weak same store sales increase in December in the U.S. Esprit, based in Europe, fell 4.1% to HK$96.

Hong Kong Exchanges and Clearing also edged down 2.6% to HK$204.20.


[R]5:00AM New York, 7:00PM Tokyo - Retailers and realty stocks drag Tokyo down 1.93%.[/R]

Stocks in Japan fell as retailers cut profit estimates and fears of widening credit market losses affected investor sentiment.

In Tokyo trading Nikkei 225 declined 1.93% or 277.32 to 14,110.79, down 7.8% since trading resumed this year on January 4, while the broader Topix Index fell 1.7% to 1,377.58.

In the first section of the Tokyo Stock Exchange 11 billion shares worth 1.4 trillion yen were traded and in the second section 312 million shares valued at 3.6 billion yen changed hands.

Of the Nikkei 225 stocks 33 rose, 189 declined, and 3 were unchanged.

J Front Retailing led decliners in the index with a loss of 10.72% after it cut its full year net income forecast by 12% to 195 billion yen on lower than expected revenue.

Bank of Japan Talks

Bank of Japan Governor Toshihiko Fukui told a parliamentary committee in Tokyo today that Japan’s economic growth is slowing on the sharp decline in housing investment.

Fukui also added that core consumer prices are expected to increase on rising food and energy costs.

U.S. Federal Reserve Chairman Ben Bernanke also said yesterday that the downside risks to economic growth have become pronounced in 2008 and further cuts may be necessary.

The New York Times reported yesterday that Merrill Lynch might report $15 billion in write-downs, twice higher than the previous estimates.


Mergers and Capitalization Plans

Nikkei news online reported today that JFE Holdings Inc and IHI Corp are in talks to create Japan’s largest shipbuilding company to compete with Chinese and South Korean yards as early as this year.

According to the reports, IHI shipbuilding unit IHI Marine United Incorporated will be merged into JFE Universal Shipbuilding Corporation. JFE will also raise its stake in JFE Universal Shipbuilding Corporation from 50% to 80%.

The new company will have sales estimated at 345 billion yen. JFE Holdings slipped 0.55%, while IHI Corp climbed 1.40%.

The Japan Times online publication reported today that Japan Airlines Corporation is seeking a capital injection totaling 60 billion yen from its four major creditor banks as part of 150 billion yen capital increase plan.

The banks include the Development Bank of Japan, Mizuho Corporate Bank, Bank of Tokyo-Mitsubishi UFJ and Sumitomo Mitsui Banking Corporation.

Index Movers

Of the Nikkei 225 index shares Nichirei Corp led advancers with a rise of 7.43% followed by gains in Clarion Company Limited of 3.79%, in Trend Micro Incorporated of 2.43%, in NGK Insulators of 2.36%, and in Mitsui Sumitomo Insurance Company Limited of 2.30%.

Sharp Corporation and Matsushita Electrical Industrial Company rose after Nomura Holdings raised its rating on the stocks to “buy” from “neutral”. The stocks rose 2.16% and 0.93% respectively.

J Front Retailing led decliners of the Nikkei 225 index shares with a drop of 10.72% followed by losses in Sumitomo Heavy Industry of 8.32%, in Tokyu Land Corp of 7.59%, in Sumitomo Realty of 7.26%, and in Nippon Sheet Glass of 7.10%.

Aeon Company Limited also slipped 5.45%.


Earnings Update

J Front Retailing fell after it cut its full year net income forecast by 12% to 195 billion yen. Seven & I Holdings declined 6.33% after it lowered its net income forecast by 12% to 127 billion yen on costs associated to introducing an electric payment system at its convenient stores.

Asian Markets Update

In Tokyo Nikkei 225 Index closed lower 277.32 or 1.93% to 14,110.79, in Hong Kong Hang Seng index decreased 363.85 or 1.34% closed to 26,867.01, in Australia ASX 200 index lower 97.10 or 1.60% to close 5,981.60.

In South Korea Kospi Index decreased 42.51 or 2.33% to close at 1,782.27, in Thailand SET index closed lower 3.71 or 0.46% to 796.47. Sensex index in India increased 245.37 or 1.19% to 20,827.45. Market of Indonesia was closed today.