By Andrew R. Johnson and Matthias Rieker
Rising expenses are putting pressure on credit-card issuers, as the benefits from improving borrower behavior wanes and loan-portfolio growth prompts some lenders to set aside more money for future losses.
American Express Co. (>> American Express Company) and Capital One Financial Corp. (>> Capital One Financial Corp.), two of the industry's biggest players, each said Thursday their provision for loan losses and expenses increased in the fourth quarter, weighing on earnings.
Capital One's provision grew 33.7% to $1.2 billion from a year earlier due in part to its acquisition last year of HSBC Holdings PLC's (>> HSBC Holdings plc) U.S. credit-card business, through which it gained about $30 billion in loans.
The higher provision and operating expenses contributed to Capital One missing analysts' earnings and revenue estimates, sending Capital One's shares down more than 6% after hours to $57.40.
The credit-card business has performed well in the last two years thanks in large part to consumers' good behavior. Delinquency and net charge-off rates have fallen to near historic lows for American Express and others in the industry, allowing them to set aside less money to cover future losses.
This tendency among borrowers also means consumers by and large aren't carrying as big of balances on their credit cards as they once were, compressing the revenue that lenders make from charging interest on loans.
American Express, one of the few lenders generating consistent loan growth, said its U.S. credit-card loans totaled $56 billion in the fourth quarter, up 4.3% from a year earlier and 5.9% from the previous quarter.
"We'll strive to be a growth company in a slow growth environment," American Express Chief Financial Officer Dan Henry said during a conference call with investors on Thursday.
The company, which last week announced plans to cut 5,400 jobs this year mainly in its travel-services business, said its provision for losses was $638 million in the latest period, up from $409 million a year earlier and from $479 million in the previous quarter.
It blamed the increase partly to a larger release from its loan-loss reserves a year earlier, and noted its credit quality remains strong.
Its staffing cuts and related actions are intended to hold down operating expense growth--a source of worry for investors last year--to no more than 3% in 2013 and 2014, the company said last week in pre-announcing some of its quarterly results. The company said adjusted operating expenses increased 19% in the fourth quarter from a year earlier to $3.8 billion.
Most card issuers have ventured in to new businesses to find new sources of revenue as consumers remain cautious about borrowing and traditional sources of income, such as card fees, are limited by recent regulations.
"The outlook for industry balance growth remains weak and the revenue environment challenging," Bill Carcache, an analyst with Nomura, wrote in a research note last week.
For American Express, long known as a brand for the affluent, that has meant rolling out new products like prepaid cards, which typically are marketed to underbanked consumers and don't require a credit check like its main charge and credit cards do. Last year it began selling a card called Bluebird through thousands of Wal-Mart Stores Inc. (>> Wal-Mart Stores, Inc.) locations.
American Express had released preliminary estimates for the quarter last week when it unveiled the job cuts and special costs.
American Express confirmed that its profit for the latest period totaled $637 million, or 56 cents a share, down from $1.19 billion, or $1.01 a share, a year earlier. Excluding the charges, adjusted earnings were $1.09 a share in the latest period. Revenue, net of interest expense, increased 5.2% to $8.1 billion.
Capital One, which transformed from a monoline credit-card lender into a bank holding company before the financial crisis, has turned to acquisitions. Last year it acquired the U.S. online-banking arm of ING Groep NV (>> ING Groep N.V.) and the U.S. credit-card business of HSBC Holdings PLC (>> HSBC Holdings plc), a move that has made it one of the largest issuers of private-label credit cards that are marketed on behalf of retailers and other partners.
"We expect a modest reduction in loan balances in 2013," Chief Financial Officer Gary Perlin told investors during a conference call. About $12 billion of mortgages acquired with ING's online banking business and credit card loans acquired from HSBC will be paid back and not replaced with new loans. That run off will be "only partially offset by organic loan growth," he said.
Capital One reported a profit of $843 million, or $1.41 a share, up from $407 million, or 88 cents a share, a year earlier. Total net revenue climbed 39% to $5.62 billion.
Analysts polled by Thomson Reuters most recently projected earnings of $1.58 on revenue of $5.8 billion.
Capital One has seen weakening in its portfolio in recent months largely due to the integration of HSBC's U.S. credit-card business, which included a large portion of store credit cards, which often experience higher losses than general-purpose credit cards.
Its U.S. credit card loans rose 47% from a year earlier, mainly because of the HSBC acquisition, and 3.1% from the third quarter, to $83.1 billion.
The delinquency rate in domestic cards fell to 3.61% from 3.66% a year earlier but rose from the 3.52% in the third quarter. The charge-off rate for domestic card loans rose to 4.35%, from 4.07% a year earlier and 3.04% in the third quarter, an increase the bank blamed on a seasonal rise at year end and to accounting moves tied to the HSBC acquisition.
Operating expenses rose 30% from a year earlier and 5% from the third quarter, to $2.9 billion. The company blamed, in part, higher costs for the integration of HSBC. The company spent $393 million on marketing, 6.4% less than a year earlier but 24.4% more than in the third quarter.
-Tess Stynes contributed to this story.
Write to Andrew R. Johnson at [email protected]
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