U.S. Bancorp’s Partnership With AmEx Should Unlock Value For Both Companies

Earlier this week, U.S. Bancorp (NYSE:USB) announced that it will partner with American Express (NYSE:AXP) to issue credit cards which will be accepted on the latter’s payment network. ^[1] The country’s largest regional bank has already started working with AmEx to customize offerings for its existing customers, and is expected to begin issuing the cards in the second half of 2014. The partnership provides U.S. Bancorp a great opportunity to grow its credit card business, which has largely remained stagnant over recent years.

This announcement comes within months of a similar arrangement between American Express and Wells Fargo (NYSE:WFC) that was made public this August, and highlights the continuing shift in AmEx’s policy from running a strict closed-loop business model to one that incorporates third-party arrangements to better leverage its established payment network. This has helped AmEx expand its global footprint and steadily grow its card business in recent years. Also, with this tie-up AmEx now has a third-party card issuer agreement (with varying degrees of involvement) with four of the five largest commercial banks in the country. The one remaining banking group – JPMorgan Chase (NYSE:JPM) – is unlikely to join this list as it issues its own line of cards that rival AmEx’s offerings.

See the full Trefis analysis for U.S. Bancorp | American Express

The importance of U.S. Bancorp’s card & payments business to its overall business model is evidenced by the fact that it contributes more than 20% of its total share value, as shown in the chart above. But over the last three years, the card loan portfolio in itself has seen no notable increase in size with the average card loans outstanding hovering around $16.5 billion since 2010. The only real source of revenue growth for the business over this period has been sequentially increasing transaction revenues.

The partnership with American Express should help break this stagnant card loan growth once the card program is in place late next year. Coupled with the expected increase in net interest margins once the interest rate environment begins to improve in coming years, this should help boost top-line figures for U.S. Bancorp.

Another important aspect of the deal that should have a positive impact on U.S. Bancorp’s value is the expected reduction in charge-off figures. While AmEx cards issued by partners do not specifically target the affluent segment, as is the norm for cards which AmEx issues on its own, the average cardholder income for its third-party cards is still on the higher side. This reduces the default risk for an issuer like U.S. Bancorp – helping reduce charge-off rates. The impact on U.S. Bancorp’s share price can be understood by making changes to the chart below which shows the bank’s annual provisions on card loans as a percentage of its card portfolio. As higher charge-off rates require an issuer to set aside higher provisions in subsequent quarters, a reduction in charge-offs would mean lower provisions in the future.

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1. U.S. Bank and American Express Announce Card-Issuing Agreement, U.S. Bancorp Press Releases, Nov 20 2013 [↩]