Yesterday, American Express Company (AXP), also known as AmEx, reported first quarter operating earnings of $1.07 per share, modestly ahead of the Zacks Consensus Estimate of 99 cents but substantially ahead of the year-ago quarter’s 84 cents.
Meanwhile, net operating income increased 30% year over year to $1.3 billion from $1.02 billion in the year-ago period. Including income from discontinued operations of $36 million or 3 cents per share, AmEx reported a 32% rise in net income year over year to $1.33 billion or $1.10 per share.
AmEx continues to benefit from an increased use of cards with fewer defaults as consumers again resume their spending akin to that in the pre-recession period. The company’s loan portfolio has also witnessed steady growth. However, healthy top line growth, lower tax-rate and substantial reduction in provision for losses were partially offset by higher-than-expected operating expenses and lower interest income.
AmEx’ card members’ spending increased 18% over the prior-year quarter. The increase came from international cards in force that rose about 11% year over year to $44.2 million while cards in use grew 2% year over year in the US.
Behind the Headlines
AmEx posted total revenues, net of interest expenses, of $7.62 billion, up 12% year over year from $6.81 billion, a tad higher than the Zacks Consensus Estimate of $7.4 billion. Additionally, the increase in revenues was supported by higher spending and higher travel commissions from card members coupled with improved loan portfolio. This was partially offset by sluggish growth in interest income due to lower yields.
However, card member borrowing rose 2% year over year, reversing the trend seen over the last several quarters when card members were keen on lower borrowing and clearing outstanding debt.
Provisions for losses were $357 million, spectacularly down by 45% from $652 million in the prior-year quarter. However, lending balances and yield continue to remain sluggish. The year-over-year decrease in provisions for losses was driven primarily by continued improvement in credit quality on the charge and credit card portfolios.
Total expenses of AmEx escalated to $5.5 billion in the reported quarter, up 21% year over year from $4.6 billion, reflecting growth of investment in business-building initiatives along with higher reward costs. However, the tax rate reduced to 27% from 36% in the year-ago quarter.
Segment Results
U.S. Card Services reported a net income of $665 million, up 29% from $516 million earned in the prior-year quarter. Total revenues, net of interest expenses, increased 4% year over year to $3.8 billion from $3.6 billion.
International Card Services’ net income came in at $161 million, up 4% from $155 million in the year-ago quarter. Total revenues, net of interest expenses, were $1.4 billion, up 22% from the year-ago quarter.
Global Commercial Services’ net income increased 58% to $177 million from $112 million in the prior-year quarter. Total revenue, net of interest expense, increased 16% year over year to $1.2 billion, reflecting increased spending by corporate card members and higher travel commissions as well as fees.
Global Network & Merchant Services reported a net income of $324 million, up 24% from $261 million in the prior-year quarter. Total revenue, net of interest expense, increased 18% year over year to $1.2 billion. The company’s total billed business continued to witness improvement in the U.S. and beyond, climbing 18% year over year to $207.6 billion.
Corporate & Other reported a net loss of $32 million compared with a net loss of $27 million a year ago, partially reflecting investments in Enterprise Growth Group initiatives. The results for both periods reflect an income of $220 million ($136 million after-tax) form the previously announced MasterCard Inc. (MA) and Visa Inc. (V) settlements.
Financial Update
AmEx’ total assets were recorded at $148 billion as of June 30, 2011, while long-term debt totaled $61 billion against cash of $23 billion at the quarter’s end. Besides, shareholder’s equity totalled $18 billion at the end of the reported quarter.
As of June 310 2011, AmEx’ return on average equity (ROE) was 28.2%, up from 23.5% as of June 30, 2010. Return on average common equity (ROCE) was 27.9%, up from 23.2% in the year-ago period. Besides, return on average tangible common equity was 36.1%, up from 30.0% in the year-ago quarter. Moreover, book value increased 26% year over year to $15.26 per share.
Our Take
AmEx has pulled itself out of the recession more quickly than its rivals, owing to its creditworthy customers. Moreover, less reliance on revolving credit and back-end fees has helped gain a competitive advantage while also improving its overall risk profile.
Besides, there has been an impressive recovery in credit trends, with increased card spending and strong billings over the last few quarters. Besides, settlement payments with MasterCard and Visa that are ending in the second and fourth quarters this year will limit the extensive rise in expenses.
A challenging regulatory environment is expected to make AmEx’ credit cards costlier and will in turn result in lower interest income and loan fee income. On the other hand, the volatile economic outlook raises near-term caution. However, we believe the company is focusing on product diversification such as no-fee prepaid cards.
Alongside, AmEx has been upgrading its digital payment platform through strategic alliances with Foursquare, Serve and Facebook, all of which will not only expand the company’s card membership base but also help it penetrate the unexplored market and tap the upcoming opportunities in the field of eCommerce.
On Wednesday, the shares of American Express closed at $52.09, up 0.54%, at the New York Stock Exchange.
