American Express Company’s (AXP) first quarter earnings of 73 cents per share from continuing operations were much ahead of the Zacks Consensus Estimate of 63 cents. This also compares favorably with earnings of 32 cents in the prior-year quarter.
Discontinued operations’ results were nil during the reported quarter. However, excluding the loss from discontinued operations of one cent, GAAP net income was 31 cents per share in the year-ago quarter.
AmEx’s earnings improved from the prior-year quarter primarily due to higher revenues as a result of increased cardmember spending and a decline in provision for credit losses. However, the downside came from increased expenses on account of business building initiatives and higher rewards costs, miserable real estate values as a result of higher unemployment and the uncertain legislative environment during the reported quarter.
A relatively weaker U.S. dollar contributed to higher non-U.S. revenues, provisions and expenses during the reported quarter.
Behind the Headlines
Total revenues, net of interest expense, increased 11% year-over-year to $6.6 billion, primarily as a result of a 42% increase in net interest income. The increase in total revenues net of interest expense was driven by the new GAAP adopted effective Jan 1, 2010. Additionally, the increase in total revenues was supported by higher discount revenues, higher other commissions and fees and higher travel commissions and fees.
Net interest income increased 42% year-over-year to $1.3 billion. The increase was primarily driven by a 37% increase in interest and fees on loans. Interest income and interest expense from the higher loan and debt balances were partially offset by lower average non-securitized cardmember loans, as well as a lower net yield due to lower market interest rates.
Provisions for losses were $943 million, down 48% from $1.8 billion in the prior-year quarter. The year-over-year decrease in provisions for losses was driven primarily by continued improvement in credit quality on the overall portfolio.
Total expenses for the quarter increased 23% year-over-year to $4.4 billion, reflecting higher investment in business building initiatives and higher rewards costs.
Evaluation of Capital and Profitability Ratios
As on Mar 31, 2010, AmEx’s Tier-1 risk based capital ratio was 9.8%. Its Tier-1 leverage ratio was 7.8%. The Tier-1 risk based capital ratio and Tier-1 leverage ratio compared favorably to the regulatory benchmark of 6% and 5%, respectively.
AmEx’s ROE came in at 18.0%, up from 16.3% in the year-ago quarter. Return on average common equity (ROCE) – which excludes the impact of preferred shares and other adjustments – was 17.1%, up from 16.7% in the prior-year quarter.
Following a moderation in the rate of decline over the last few quarters, finally, we noticed a decent improvement in AmEx’s billed business in the U.S. and beyond since fourth quarter of 2009. Additionally, with some early signs of economic recovery, we note that the monthly comparisons of cardmembers spending volume have improved.
Also, Cardmembers have started paying down their outstanding debt. Credit quality has shown improvement, which is impressive. However, we expect the recovery to be sluggish. Hence, any significant expansion of its top line will face constraints in the near term.
Comparison with Competitor
Rival card company Capital One Financial (COF) also reported its first quarter results concurrent with AmEx’s earnings release after the market closed on Apr 22, 2010. Capital One’s first-quarter earnings from continuing operations of $1.58 per share were substantially better than the Zacks Consensus Estimate of 59 cents. This also compares favorably with a loss of 38 cents in the year-ago period.
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