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American Express reserves to increase up to 40% with CECL implementation


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American Express reserves to increase up to 40% with CECL implementation

American Express Co. expects its reserves will increase 25% to 40% after it implements new accounting standards.

That estimate includes a 55% to 70% increase in lending card reserves, which will be somewhat offset by a "significantly lower" charge card reserve due to the short life of charge receivables, said CFO Jeffrey Campbell on a call to discuss third-quarter earnings. The resulting capital impact from the one-time implementation increase in reserves will be "very manageable" for the card company, he added.

American Express posted total noninterest revenues for the third quarter of $8.79 billion, up from $8.18 billion in the year-ago period. Discount revenues came in at $6.57 billion for the quarter, and net card fees were $1.03 billion.

The current expected credit loss model, also known as CECL, introduces a new accounting method for recording projected loan losses by requiring companies to reserve against them at origination instead of the current standard that requires companies to record provisions for loan losses only when a loss becomes likely. It goes into effect for larger companies on Jan. 1, 2020, while smaller companies must comply by 2023.

American Express will likely have a higher provision expense under CECL relative to the current accounting method, Campbell said, declining to provide specific expectations. The company will provide details on the expected 2020 impact on the fourth-quarter earnings call.

"From our perspective, this is pure accounting-driven acceleration of losses that ultimately would've run through our financial statements anyway," the CFO said. "It has zero impact on real economics. It has zero impact on our view of risk."

The company does not intend to change its capital investment plan because of CECL, Campbell added. In September, the board authorized American Express to repurchase up to 120 million of its common shares. It also approved a 4-cent increase in the quarterly dividend.