American Express’ (NYSE:AXP) stock has climbed by more than 20% since the turn of the year buoyed by strong first quarter earnings and positive economic trends in the U.S. With half of the company’s revenues coming from the country, it is easy to see why Amex’s performance is closely linked to macroeconomic conditions in the U.S. In our last article, we analyzed American Express’ transaction fees from propriety cards issued in the U.S. In this article, we turn our attention to interest income from the country, which accounts for 15% of the company’s revenue.
Unlike Visa (NYSE:V) and MasterCard (NYSE:MA), American Express issues its own cards through its bank subsidiaries, American Express Centurion Bank and American Express Bank, FSB (AEBFSB). The company employs a closed-loop model, wherein it acts as both the acquirer or merchant’s bank and the issuer or the cardholder’s bank. By doing so, Amex not only collects discount fees from merchants accepting American Express cards, but also earns interest income from credit loans issued to cardholders.
The company reduces the risk of consumers defaulting on loans by targeting the affluent customers who are likely to spend high amounts and are less likely to default on a credit loan. Amex’s delinquency rate or the percentage of total loans that are past due date on credit card loans is 0.36% for loans 30-59 days past due date, 0.27% for loans that are 60-89 days past due date and 0.59% for loans that are more than 90 days past due date. This is far ahead of the industry average, the delinquency rate for all commercial banks in the U.S. was around 2.73% in the fourth quarter of 2012. 
American Express’ average loan balance on propriety cards in the U.S. dropped from $55 billion in 2009 to $50 billion in 2010, largely because of the financial downturn experienced during the period, but has since recovered to $53 billion. The company has maintained a market share of 6% of the total revolving credit owned and securitized outstanding across the U.S. through the last four years.
One of the metrics that can be used to determine the market trend is the per capita disposable income.  This figure represents the income available to an individual for spending after paying taxes. The total revolving credit loans in the U.S. fell from around 9.6% of the country’s gross actual disposable income in the pre-recession period to around 7% in the last three years.  To forecast the disposable income, we must use the growth rate observed in the real disposable income, calculated using chained 2005 U.S. dollars.  The per capita real disposable income fell by 3% from 2008 to 2009, as the U.S. economy was affected by the global financial crisis, but has since been growing at an annual rate of 0.7% in the last few years, reaching $38,072 at the end of 2012.
The U.S. economy is now on the road to recovery, most notably highlighted by the remarkable decline in unemployment rate from the peak of 10.1% observed during the financial crisis in 2009 to a four-year low of 7.5% in April, indicating a general recovery in the job market that has led to higher disposable income.  Assuming the per capita disposable income continues to grow at a rate of 0.7% for the next three years, followed by higher growth ~1%-1.5% in the next four years, we get actual per capita disposable income of $40,528 by the end of the decade.
The U.S. population annual growth rate is around 0.7% to 1%. Extrapolating this rate to the end of the decade, we get a population of 330 million. Multiplying the two figures, we get actual disposable income of $13.3 trillion by 2019.
The economic recovery in the U.S. has sparked more spending confidence. Personal consumption expenditures (PCE) as a percentage of actual disposable income in the U.S. (the income available to an individual for spending after paying taxes) dipped from 96% in 2007 to 91% in 2008 and 2009, as a direct consequence of the economic downturn observed worldwide during this period. However, the percentage has improved to 94% in the last three years as the economy has improved.  Given these trends, we can expect the total revolving credit in the U.S. to reach its pre-recession level at around 9.5% of the actual disposable income in the country, giving us a figure of $1.3 trillion.
American Express’ market share of the total revolving credit currently stands at 6.24%. The company is looking to expand its target demographic, entering a partnership with Wal-Mart (NYSE:WMT) to offer a prepaid debit card last year, called Bluebird. More than 5o% of Wal-Mart’s customers making less than $50,000 per year  and account for about 50% of the U.S. population.  We expect Amex’s market share to expand to about 7%, allowing the company to reach an average loan balance of around $90 billion by 2019. In our last article, How The Recovering Economy Could Drive Growth For American Express, we discussed how the company could reach 39 million cards in circulation by the end of our forecast period. This would give an average loan balance per cardmember in the U.S. of $2,300
American Express currently earns an average net interest yield of 8.7% on its credit loans in the U.S. We expect a slight decline in this yield, given the change in demographics. With a yield of 8.5%, Amex can earn $7.6 billion in interest income from its U.S. credit card business by the end of the decade. You can modify the interactive charts in this article to gauge the effect a change in forecast would have on our price estimate.Notes:
- Delinquency Rate On Credit Card Loans, All Commercial Banks, Board of Governors of the Federal Reserve System [↩]
- Real disposable personal income: Per capita, U.S. Department of Commerce: Bureau of Economic Analysis [↩] [↩] [↩]
- Disposable personal income, U.S. Department of Commerce: Bureau of Economic Analysis [↩] [↩]
- U.S. Department of Labor, Labor Force Statistics from the Current Population Survey [↩]
- The Demographics of Retail, AdAge, 19th March, 2012 [↩]