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Tickers in this Article: AXP, BAC, DFS
Credit problems impacting large institutions are becoming personal for American Express (NYSE:AXP) cardholders. The slowing U.S. economy plagued with layoffs and subsequent lower consumer spending has motivated American Express to beginning lowering credit limits on its customer accounts.

Rising Provisions For Losses
In preparation for weaker consumer and business sentiment through 2009, American Express raised it provisions for losses 51% to $1.4 billion during the third quarter. The credit card issuer has also begun to limit its credit risk by lowering credit limits of existing cardholders. In some cases the credit limits have been imposed based upon the negative repayment history of consumers who share similar shopping habits and not necessary a strong individual repayment history. (Speaking of credit cards don't miss How To Dispute A Credit Card Charge.)

American Express is not alone in scaling back on credit available to consumers. Large credit card issuers like Bank of America (NYSE:BAC) are also cutting credit lines while Discover (NYSE:DFS) is closing potentially high-risk inactive accounts due to the slowdown in consumer spending.

Status Appeal
The stand-alone card company separates itself from competitors by focusing on the exclusivity granted to cardholders. The American Express "Are You a Cardmember?" ads feature celebrities like singer Beyoncé and comedian Tina Fey, and they have been helpful in generating attention to the cards benefits of fraud protection and security. While customer accounts may be safe, American Express has to deal with the greater risk of relying heavily on revenue generated from consumer spending. In addition the risks of rising delinquencies and access to capital needed to fund its lending operations are issues investors should consider.

Credit Risk
American Express was able to raise revenue for the first nine months of the year 8% over the same period a year ago to $21.9 billion, but its net income was down 23%. Higher operating expenses and costs associated with human resources increased 12% from the same period last year. Also loan write-offs increased to $60 million from $42 million last year, which all contributed to the negative results.

Looming Material Events
American Express filed a report of unscheduled material events on October 20. In the report American Express notes the potential of reducing operating costs and staffing levels. American Express reports confidence in its ability to generate and managed its liquidity even during difficult market conditions. The difficulty for investor is being lost in the fog of not knowing when the difficult times will end.

Final Thoughts
American Express stock jumped 8.37% a day after its earnings results, but, along with other financials that have tumbled, the stock is down sharply since the beginning of the year. If consumer spending begins to show signs of a recovery, then American Express may be an investment worth following, but given the recent failures of seemingly unsinkable financial institutions like Lehman Brothers (OTC:LEHMQ) investors should wait a while before considering an investment.

For related reading, see Stop Keeping Up With The Joneses - They're Broke.

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