Amex Profit Up Slightly, Spending Growth Slows
07/18/2012| 05:55pm US/Eastern
--Cardholder spending growth shrinks amid weak economic trends
--Loan losses remain near historically low levels
--Company accrues more money for customer refunds
American Express Co.'s (>> American Express Company) second-quarter profit was essentially flat as the pace of customer card-spending slowed, though it continued to benefit from historically low loan losses.
The New York lender is considered a gauge for the optimism of affluent consumers because it issues credit and charge cards primarily to well-heeled customers who have sizeable disposable incomes and rarely miss their payments.
While spending growth slowed, American Express continued to benefit from low delinquency and charge-off rates, which are among the best in the credit-card industry.
Consumer, small business and corporate cardholder spending "remained healthy despite a very uneven economy," Ken Chenault, chairman and chief executive of American Express, said in a statement Wednesday. He added, total cardholder spending increased 7%, "slower than increases we've seen in the recent quarters, but it comes on top of a very strong performance a year ago."
American Express posted a profit of $1.34 billion, or $1.15 per share, up from $1.33 billion, or $1.10, a year earlier. Revenue, net of interest expense, was $7.97 billion, up 4.6% from a year earlier.
The earnings results beat estimates of analysts polled by Thomson Reuters, which were expecting earnings of $1.09 per share.
The company's shares closed down 0.7% at $58.29 Wednesday and fell an additional 1% in after-hours trading.
American Express is both a lender to customers and a processor of transactions, like its competitor Discover Financial Services (>> Discover Financial Services). Their larger rivals, Visa Inc. (V) and MasterCard Inc. (>> Mastercard Inc), only operate processing networks but partner with banks that issue cards and lend to consumers.
The company has continued to benefit from continuous improvement in loan quality, due in part to the propensity of its customers to avoid carrying balances month to month on their cards. While this means it earns little in the way of interest charged on loan balances, it generates a lot of income from fees that merchants pay as customers make purchases with their cards.
Concerns of a consumer spending slowdown have grown in recent months amid weak U.S. employment figures and a challenging economic environment in Europe. Such factors could further derail efforts by large credit-card issuers to grow their loan portfolios, which have been stagnant for most issuers.
Billed business, or spending on its cards, rose 6.7% to $221.6 billion, a slower growth rate than in quarters past.
On average, American Express customers spent $3,948 in the quarter, up from $3,767 a year earlier.
American Express's ending loans increased 5.2% to $52.5 billion in the quarter.
While the pace of cardholder spending dipped, American Express's customers haven't shown any signs they are under more financial strain. The delinquency rate, or percentage of borrowers at least 30 days past due, for U.S. card loans was 1.2%, down from 1.5% a year earlier and down from 1.3% in the previous quarter. Its net charge-off rate, or percentage of loans deemed uncollectible, was 2.2%, down from 3.2% a year earlier and down 2.3% in the previous quarter.
Credit-card executives have recently said they expect improvements to wane this year as borrower performance returns to more normal levels. Many consumers have reined in spending since the recession to get their personal finances in order.
Deterioration in credit quality, as well as loan growth, would prompt lenders to put aside more money to cover future losses.
American Express's provision for losses was $461 million in the quarter, up from $357 million a year earlier and up from $412 million in the previous quarter. The company attributed the increase partly to a larger release of reserves a year earlier.
Expenses, which increased last year as the company invested in new technology initiatives, have been a concern for investors. Total operating expenses increased 10.1% to $3.21 billion, driven partly by an accrual for refunds to customers, according to Dan Henry, Amex's chief financial officer.
Henry, speaking on a conference call with investors, didn't specify what the refunds are for but said the company is discussing matters with its U.S. banking regulators.
"Based on those conversations and our own ongoing internal reviews, we have made some changes to our card practices," Henry said. The changes "generally relate to items around either pricing disclosure or collections."
American Express disclosed in its annual report filed with the Securities and Exchange Commission in February that the Federal Deposit Insurance Corp., Utah Department of Financial Institutions and Consumer Financial Protection Bureau were looking into its late-fee and other practices. The company at the time said the FDIC was likely to take an enforcement action against it, and that the Utah banking regulator and CFPB were likely to join.
Henry declined to disclose the size of the accrual for refunds but said the "costs in this quarter were important enough to mention, but not large enough to quantify."
Capital One Financial Corp. (>> Capital One Financial Corp.) said Wednesday it would pay $210 million to resolve deceptive-practices claims around its sales of payment-protection plans and other add-on services. The amount includes $150 million in refunds to 2.5 million customers and $60 million in fines to the CFPB and Office of the Comptroller of the Currency, its federal banking regulator.
The issue stemmed from its use of third-party vendors that failed to follow company scripts when pitching the products, which also included credit monitoring, to credit-card customers, which regulators said were mislead into signing up for the products.
Another recent concern for investors has been a pending settlement that Visa, MasterCard and several large banks announced Friday with merchants over the fees merchants pay to accept cards. As part of the pending settlement, Visa and MasterCard agreed to temporarily lower the fees, though analysts don't expect this to put pressure on American Express to do the same.
However, the settlement, which is subject to court approval, would also allow merchants to surcharge customers who pay with a credit card, which could affect American Express customers. Visa and MasterCard have prohibited surcharging, but American Express allows its merchant clients to surcharge as long as they do so to all card brands they accept and at the same amount. The settlement includes a similar requirement for Visa and MasterCard merchants who decide to engage in the practice.
"The terms and conditions within the settlement agreement that deal with surcharging are very complicated, so given that complexity we think it's too early to know what the impact" of the rule changes might be, Henry said.
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