American Express 2001 Annual Report Download - page 18

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returns for many years, we did not anticipate the full effect that the economic
downturn, coupled with the worst high-yield default rate in many years, would
have on our portfolio. Given our loss experience, as well as our view that the
default rates would continue to be high for some time, we took decisive action
to rebalance the portfolio’s risk-reward profile.
We sold or wrote down specific investments and repositioned our portfolio
toward lower-risk securities. We continued our risk reduction efforts through-
out 2001, thereby decreasing our level of high-yield securities to approximately
4 percent of AEFA’s $34 billion investment portfolio. This is down from 12 per-
cent at the end of 2000. Going forward, we plan to work toward a level that is
more in line with the industry average of approximately 7 percent.
ATAMERICAN EXPRESS BANK,WE HAVE SIGNIFICANTLY SHIFTED
OUR LOAN EXPOSURE. In recent years we have increasingly moved away from
the corporate banking business toward more broad-based consumer activities. As
a result, we had less than $1 billion in corporate loans at year-end 2001, down
from $3.1 billion in 1997. During the same period, our Personal Financial Services
and Private Banking loans grew to $3.2 billion from $1.4 billion, or 60 percent of
total loans, up from 22 percent. Despite the deterioration in many economies
around the world, non-performing loans at AEB have been well controlled.
INTRAVEL RELATED SERVICES,WE ADDRESSED BOTH INDUSTRY-
WIDE DETERIORATION IN CREDIT QUALITY AND THE GROWING RISK
RELATED TO MERCHANT BANKRUPTCIES. Within our U.S. charge card and
lending portfolios, we have maintained our coverage ratios at the higher end of
our reserve range. We also increased our reserve coverage of total receivables
and loans and coverage of past due balances in excess of 100 percent. To reduce
the risk associated with merchant bankruptcies in a difficult economy – par-
ticularly in the travel industry where merchants may be paid by American
Express prior to rendering the actual services to cardmembers – we hold
reserves to cover this exposure where appropriate. In some cases, we have insti-
tuted annual fees or lengthened the time between when the card charges are
submitted to us and when we pay the merchant.
axp_16
AMERICAN EXPRESS BANK LOANS
(in billions)
$1
$2
$3
$4
$5
$6
$7
0100
97
$5.3 $5.3
$6.2
50% 34% 18%
❚Corporate and Other
28% 25% 22% ❚Financial Institutions
22% 41% 60% ❚PFS and Private
Banking
American Express Bank
continued to grow its lending
to individuals while decreasing
its corporate loan portfolio.