American Express Company’s (AXP) fourth quarter earnings from continuing operations of 59 cents per share were ahead of the Zacks Consensus Estimate of 56 cents. This also compares favorably to an earnings from continuing operations of 26 cents in the prior-year quarter. 

Including income from discontinued operations, GAAP net income came in at $716 million or 60 cents per share, compared to $240 million or 21 cents in the year ago. 

AmEx’s earnings improved from the prior year quarter primarily driven by a decline in provision for credit losses, increased cardmember spending and stable expenses aided by efficient reengineering initiatives. Also, a relatively weaker U.S. dollar contributed to higher non-U.S. revenues, provisions and expenses during the reported quarter. However, the downside came from decreased revenue, a lower return on average equity (ROE) and miserable real estate values as a result of higher unemployment during the reported quarter. 

For full year 2009, AmEx’s net income came in at $2.1 billion or $1.54 per share, compared to $2.7 billion or $2.32 in the previous year. 

Behind the Headlines 

Total revenue, net of interest expense, was marginally lower compared to the prior-year quarter at $6.5 billion as a 7.9% decrease in net interest income was largely offset by the increase in discount revenue and net card fees. 

Total interest income decreased 18.9% year-over-year to $1.3 billion. The decrease was primarily driven by a lower average owned loan balance, reduced market interest rates and the impact of various customer assistance programs, partially offset by the benefit of certain re-pricing initiatives effective 2009. 

Provisions for losses were $748 billion, down 46.7% from $1.4 billion in the prior-year quarter. The year-over-year decrease in provisions for losses was driven primarily by lower reserve requirements due to improving credit performance within both the charge card and cardmember lending portfolios, and lower loan balances. 

Total expenses for the quarter decreased 1.1% year-over-year to $4.8 billion, reflecting in part the results of the company’s re-engineering initiatives and higher investment in business building initiatives. 

In AmEx’s U.S. Card Services business, managed net loan write-off rate fell to 7.5% from 8.9% in the prior quarter; though up from 6.7% reported in the prior-year quarter. 

Evaluation of Capital and Profitability Ratios 

As on Dec 31, 2009, AmEx’s Tier-1 risk based capital ratio was 9.8%. Its Tier-1 leverage ratio was 9.7%. This compared favorably to the regulatory benchmark of 5%. AmEx’s ROE came in at 14.6%, down substantially from 22.3% in the year-ago quarter. Return on average common equity (ROCE) – which excludes the impact of preferred shares and other adjustments – was 13.6%, down from 22.1% in the prior-year quarter. 

Segment Results 

U.S. Card Services reported a net income of $365 million, substantially up from $64 million earned in the prior-year quarter. Total revenue for the quarter decreased 3.5% year-over-year to $3.1 billion, driven by lower commissions and fees, as well as lower net card fees, partially offset by slightly higher discount revenue. 

International Card Services’ net income came in at $73 million, more than double compared to $36 million in the year-ago quarter. Total revenue increased 11.2% year-over-year to $1.2 billion, primarily driven by increased cardmember spending, increased net interest income and higher net card fees. 

Global Commercial Services’ net income came in at $117 million, compared to a net loss of $7 million in the prior-year quarter. Total revenues decreased 5.6% year-over-year to $1.1 billion, reflecting increased spending by corporate cardmembers. 

Global Network & Merchant Services reported a net income of $185 million, down 14.0% from $215 million in the prior-year quarter. Total revenues increased 6.6% year-over-year to $1.0 billion, primarily reflecting higher merchant-related revenues, as well as an increase in revenues from Global Network Services’ bank partners. 

Corporate & Other net expense came in at $30 million, compared to $2 million in the prior-year quarter. The results for the reported quarter include the recognition of $220 million ($136 million after-tax) for the MasterCard and Visa settlements. 

Following 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 in the reported quarter. Additionally, with some early signs of economic recovery, we note that the monthly comparisons of cardmembers spending volume have improved. Credit quality showed improvement, which was impressive. However, we expect the recovery to be sluggish and hence significant expansion of its top line will be restricted in the near term. 

Comparison with Peers 

Rival card company Capital One Financial (COF) also reported its fourth quarter results concurrent with AmEx’s earnings release after the market closed on Jan 21, 2009. Capital One’s fourth-quarter earnings from continuing operations of 90 cents per share were substantially ahead of the Zacks Consensus Estimate of 45 cents. This compares favorably to a net loss of $3.67 per share in the year-ago period.
Read the full analyst report on “AXP”
Read the full analyst report on “COF”
Zacks Investment Research