Financial service companies experience constant change due to new regulation, political uncertainty, and market consolidation. After the financial crisis of 2008, global leaders implemented various regulations like the Financial Stability Board. These regulations have brought financial stability to financial institutions across the globe. With improving economies around the world, the outlook for the financial industry is also improving.
In this article, I have discussed companies that are taking advantage of the recovering economies with different strategies like acquisition, cost reduction, and finding benefit in regulation.
American Express (AXP) to benefit from growth in European market
American Express will benefit from an announcement by the European Commission, or EC regarding legislation of single Euro payments area, or SEPA. SEPA is the region where citizens are able to make or receive payment in Euros, and fees received by the card issuing bank are expected to reduce due to regulation. American Express expects the SEPA legislation will exclude it. This expectation comes after similar exclusion from Australian regulation. American Express has a three party network framework in comparison to companies like Visa and MasterCard, which follow a four party network. The three party framework eliminates the bank’s involvement in fixating fees. Australia made its legislation for four party networks. Thus, it excluded American Express.
Since both the Australian and European card markets are similar, EC will most likely exclude American Express in the regulation. The regulation will reduce credit interchange fees by around 75%. This will cause European issuers to shift their credit card portfolios to American Express due for higher margins. If MasterCard loses 1% market share, it will lose revenue of $22 million annually, which can go to American Express.
Total number of credit card accounts in the U.S. as of the third quarter of 2013 was 391.24 million. American Express generates 50% of revenue from the U.S. The company targets high spending affluent individuals with income of $97,000 per year. Thus, an American Express cardholder’s income is 33% more than a non-cardholder. Due to high income, the average expenditure per American Express card in the U.S. is $15,000, while it is $1,000 per card for Visa cardholders. Due to targeting affluent customers, its default risk also reduces.
The company will gain from the recovery of the U.S. economy. Total American Express cards in circulation will reach 32.6 million cards in 2013 from 31.3 million cards in 2012. This will result in an increase in net interest yield from 8.67% in 2012 to 8.97% in 2013. Net interest yield refers to total interest income earned on credit card loans as a percentage of average credit card loan balance.
BlackRock(BLK) recently acquired the exchange traded fund, or ETF, business of Credit Suisse. This will add 58 of Credit Suisse's ETF to BlackRock. With this acquisition; iShare, or the ETF brand of BlackRock, will manage $17.6 billion worth of assets of Credit Suisse's ETF in Europe. This will make iShare the biggest provider of ETF in Switzerland with $8.1 billion of assets. This deal will increase iShare's market share in European assets under management from 38% before the acquisition to 42%.
BlackRock's strength and stability of diversified platform again drove healthy results, with first quarter revenue up 9% and as adjusted operating income up 15% year-over-year.
Retail business continued to build on the momentum exhibited in 2013, with $14.0 billion of net inflows, led by further acceleration in international franchise, which contributed $9.8 billion of net inflows. U.S. Retail flows were driven by investor demand for top-tier non-traditional income solutions, led by Strategic Income Opportunities fund, which raised $2.7 billion in the quarter and has generated $10 billion of flows in the last five quarters. Additionally, strong client interest is witnessed in retail alternatives offerings, with $2.1 billion of net new flows in the quarter.
The Company has been sustaining with strong investment performance across active fixed income, multi-asset and alternatives. The U.S. active equity business of the Company, where it has invested in new managers, and foresees improved performance
Overall, all three financial service companies have implemented different strategies to increase stockholders' returns.
BlackRock is aiming for growth in Europe’s earnings after acquisition of Credit Suisse’s ETF, while American Express is eyeing the potential in the U.S. market and gain from European operations will bring revenue growth.
Therefore, I will recommend a buy these stocks.