Nov. 11 (Bloomberg) -- American Express Co., the credit-card company most dependent on capital markets for fundraising, fell 6.6 percent in New York trading on concern that converting to a bank to gain deposits won't protect it from rising credit losses.

The firm slipped $1.58 to $22.40 in New York Stock Exchange composite trading at 4:07 p.m. American Express won Federal Reserve approval yesterday to become a commercial bank, which may help the New York-based company expand funding from consumer deposits and get access to the Treasury's $250 billion bank rescue program.

American Express has dropped 57 percent this year as more consumers fell behind on payments and doubt was raised about its own access to credit. The firm had to reassure investors last month that it had enough cash to last for a year, and tapped the Federal Reserve's commercial paper program designed to help corporations shut out of short-term debt markets.

``Monday's quick decision is an ominous sign that either things are a lot worse than AmEx described in its recent third- quarter earnings, or that AmEx sees the writing on the wall and recognizes that a Federal fund infusion is its only path to survival,'' said Red Gillen, a senior analyst with Boston-based consulting firm Celent.

The company could qualify for about $3.8 billion through the government's Troubled Asset Relief Program, KBW Inc. analyst Sanjay Sakhrani said today in a research note.

Debt Funding

Profit at American Express has been squeezed as rising consumer defaults force it to set aside more reserves and the market for bonds backed by credit-card debt seized up. Customers failed to repay loans in the third quarter at almost twice the rate of a year earlier and credit-card lenders couldn't sell any asset-backed debt last month for the first time in 15 years.

American Express needs $4 billion from the commercial paper market and $7 billion from debt with long-term maturities during the next 6 months, said Oppenheimer & Co. analyst Meredith Whitney in a note today. The long-term debt requirement for the next 12 months will be $20 billion, Whitney said.

``Our concern for American Express and other consumer lending-related stocks continue to be worse-than-expected credit losses,'' Whitney said. ``The firm will continue to build a larger deposit base to broaden its funding sources'' and the conversion will help American Express ``afford a more stable funding mix.''

Deposit Base

Rival credit-card lender Discover Financial Services is ``unlikely'' to convert into a commercial bank, Chief Executive Officer David Nelms said today in a conference hosted by Merrill Lynch & Co. Inc. in New York.

``Most of our activities are already in a regulated bank,'' Nelms told analysts. The lender collects consumer deposits and has access to government programs through its bank unit, Nelms said, and is ``happy'' with the FDIC as its regulator.

The company can use cash from selling certificates of deposit to replace funding from bonds backed by credit-card debt if that market remains stalled next year, he said.

Friedman Billings Ramsey & Co. last month estimated that American Express derived just 14 percent of its funding from deposits. American Express has two bank units: American Express Centurion Bank, which operated as an industrial loan company under Federal Deposit Insurance Corp. supervision, and American Express Bank, which was regulated by the Office of Thrift Supervision. Each has assets of about $25 billion and deposits of about $7.2 billion, the Fed said. Centurion is being converted to a bank, according to the Fed order.

Cost Cuts

The conversion shows ``the significant funding stress we believe American Express is experiencing,'' said FBR analyst Scott Valentin in a note today. The company was ``disadvantaged more than its peers given its greater reliance on capital markets for funding.''

American Express is trimming expenses to adjust to the economic slowdown, saying last month it will cut 10 percent of its workforce, or 7,000 jobs, to save as much as $1.8 billion next year. The company said it will freeze hiring and management raises and spend less on technology and marketing.

To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net

Last Updated: November 11, 2008 17:23 EST