(Adds analyst comment)
By Juan Lagorio and Patrick Rucker
NEW YORK/WASHINGTON, Nov 10 (Reuters) - American Express Co said it won approval to become a bank holding company, in a step that could cut its borrowing costs and give it more access to government money.
American Express, the fourth-largest U.S. credit card issuer, offered more credit to more customers even as the housing crisis began last year, and is paying the price as delinquencies rise.
Adding to its difficulties, its main sources of funding have grown more expensive as secured and unsecured bond markets have shut down.
Investors are wondering whether financial companies that loan money but fund themselves mainly in the bond markets are a thing of the past. Goldman Sachs Group Inc and Morgan Stanley both became banks in September.
With American Express winning U.S. Federal Reserve approval to convert to a bank holding company, it can issue bonds that are government guaranteed through the end of June 2012.
The company can also apply to receive money under the U.S. Treasury's $700 billion Troubled Assets Relief Program, which is making direct investments in banks, insurers and possibly other financial companies.
Analyst Moshe Orenbuch at Credit Suisse estimates that American Express would be eligible for several billion dollars of capital under the program.
The company will also find it easier to buy banks now, and take deposits from consumers and companies, which can be a cheap source of funding.
"Given the continued volatility in the financial markets, we want to be best positioned to take advantage of the various programs the federal government has introduced ... to support U.S. financial institutions," Kenneth Chenault, chairman and chief executive officer of American Express, said in a statement.
"With Federal Reserve oversight we should gain greater access to the capital on offer," he added.
But investors cautioned that being a bank does not solve all of American Express' difficulties. A growing number of financial institutions are looking to buy banks and gather deposits.
"There's a lot of competition for deposits now, and pricing for deposits is still high," said Blake Howells, director of equity research at Becker Capital Management in Portland, Oregon.
American Express' borrowing costs relative to a benchmark rate have risen dramatically this year. The company is paying about 1.65 percentage points more than one-month Libor to fund itself, compared with its average in recent years of 0.20 to 0.40 percentage point.
CREDIT PRESSURE, TOO
The funding pressure is combining with credit pressure. The default rate among its credit card clients in the United States almost doubled in the third quarter of 2008 from a year earlier.
"An unemployed consumer is going to be a big challenge," for American Express, Anton Schutz, president and chief investment officer at Mendon Capital, said at the Reuters Global Finance Summit, on Monday prior to the announcement.
"Their clients are hurting and, on top of that, their upper income client base isn't spending either, which is hitting the travel side of their business."
American Express already has two U.S. bank subsidiaries: American Express Centurion Bank, an industrial loan bank chartered in Utah, and American Express Bank FSB, a federal savings bank.
Through those institutions, the company issues proprietary credit and charge cards, funds cardmember loans and offers certificates of deposit. But those banks are relatively small.
Goldman Sachs and Morgan Stanley became bank holding companies in September, meaning that when Bank of America Corp buys Merrill Lynch & Co, there will be no standalone U.S. investment banks left.
Other companies that lend and fund themselves in the bond markets are looking at becoming bank holding companies, most notably CIT Group Inc.. (Additional reporting by Dan Wilchins in New York and Ajay Kamalakaran in Bangalore; Editing by Dan Grebler, Jeffrey Benkoe and Andre Grenon)