Yesterday, American Express Company (AXP), also known as AmEx, reported third quarter 2011 operating earnings of $1.03 per share, comfortably ahead of the Zacks Consensus Estimate of 96 cents and 90 cents recorded in the year-ago quarter.
Meanwhile, net income from operations increased 13% year over year to $1.24 billion from $1.09 billion in the year-ago period. However, no extraordinary items were recorded during both the comparable periods.
AmEx continues to benefit from an improved credit quality with an increased usage of cards and lesser defaults, across all business segments. Higher spending not only drove earnings and return on average equity (ROE) but also helped the steady growth the company’s loan portfolio. 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 16% over the prior-year quarter. The increase came from international cards in force that rose about 11.5% year over year to $45.6 million while cards in use grew 4.3% year over year in the US.
Behind the Headlines
AmEx posted total revenue, net of interest expenses, of $7.57 billion, up 9% year over year from $6.97 billion while marginally exceeding the Zacks Consensus Estimate of $7.58 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.
Provisions for losses were $249 million, sinking 33% from $373 million 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 charge and credit card portfolios. However, lending balances and yield continue to remain sluggish.
Total expenses of AmEx escalated to $5.61 billion in the reported quarter, up 13% year over year from $4.96 billion, reflecting growth of investments in certain business building initiatives, escalated cost of card member rewards and services along with higher salaries and employee benefits. These were partially offset by lower marketing and promotion expenses. However, tax rate witnessed a decline across all business segments.
Segment Results
U.S. Card Services reported a net income of $733 million, up 23% from $595 million incurred in the prior-year quarter. Total revenues, net of interest expenses, increased to $3.8 billion from $3.6 billion, up 6% year over year.
International Card Services‘ net income came in at $221 million, up by a substantial 53% from $144 million in the year-ago quarter. Total revenues, net of interest expenses, were $1.3 billion, up 16% from the year-ago quarter.
Global Commercial Services‘ net income surged 31% to $197 million from $150 million in the prior-year quarter. Total revenue, net of interest expense, increased 5% year over year to $1.1 billion, reflecting increased spending by corporate card members, which were partially offset by lower travel commissions and fees.
Global Network & Merchant Services reported a net income of $332 million, up 32% from $252 million in the prior-year quarter. Total revenue, net of interest expense, increased 14% year over year to $1.3 billion. The company’s total billed business continued to witness improvement in the U.S. and beyond, climbing 16% year over year to $207.7 billion.
Corporate & Other reported net loss of $248 million compared with a net loss of $48 million a year ago, partially reflecting investments in Enterprise Growth Group initiatives. The results for reported quarter reflect investments in Enterprise Growth Group initiatives, litigation charges and an income of $70 million ($43 million after-tax) for the previously announced Visa Inc. (V) settlements. The year-ago quarter included $70 million and $150 million ($93 million after-tax) from the Visa and MasterCard Inc. (MA) settlements.
Financial Update
AmEx’s total assets were recorded at $149 billion as of September 30, 2011, while long-term debt totaled $62 billion against cash of $25 billion at the quarter’s end. Besides, shareholder’s equity totaled $18 billion at the end of the reported quarter.
As of September 30, 2011, AmEx’ ROE was 27.8%, up from 25.9% as of September 30, 2010. Return on average common equity (ROCE) was 27.5%, up from 25.6% in the year-ago period. Besides, return on average tangible common equity was 35.7%, up from 33.1% in the year-ago quarter. Moreover, book value increased 17% year over year to $15.49 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 competitive advantage while also improved its overall risk profile.
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 have ended in the second quarter and that of Visa that are ending by 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, 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 $46.13, down 1.2%, at the New York Stock Exchange.
