Yesterday, American Express Company (AXP) (AmEx) reported first quarter operating earnings of 97 cents per share, modestly ahead of the Zacks Consensus Estimate of 93 cents but dramatically ahead of the year-ago quarter’s 73 cents. Meanwhile, net income increased 33% year over year to $ 1.18 billion from $ 885 million in the year-ago period.
Results for American Express continued to benefit from an increased usage of cards with lesser defaults as consumers resumed their spending to that of 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.
American Express’ card members' spending increased 17% over the prior-year quarter. The increase came from international cards that rose about 10% year over year to $ 42.1 million while cards in use grew 1% year over year in US.
Behind the Headlines
American Express posted total revenues, net of interest expenses, of $ 7.03 billion, up 7% year over year from $ 6.56 billion and a tad higher from the Zacks Consensus Estimate of $ 7.02 billion. Additionally, the increase in revenues was supported by higher spending and higher travel commissions from card members, offset by a smaller loan portfolio due to lower interest income and lower yields. Over the last several quarters, American Express has generated lower interest income on account of lesser borrowing by card members and clearing of their outstanding debt.
Provisions for losses were $ 97 billion, spectacularly down 90% from $ 943 million in the prior-year quarter, although 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 American Express escalated to $ 5.2 billion in the reported quarter, up 19% year over year from $ 4.4 billion, reflecting growth of investment in business building initiatives along with higher reward costs.
Segment Results
U.S. Card Services reported a net income of $ 555 million, up 34% from $ 414 million incurred in the prior-year quarter. Total revenues, net of interest expenses, increased 2% year over year to $ 3.6 billion from $ 3.5 billion.
International Card Services’ net income came in at $ 189 million, up 36% from $ 139 million in the year-ago quarter. Total revenues, net of interest expenses, were $ 1.2 billion, up 6% from the year-ago quarter.
Global Commercial Services’ net income increased 116% to $ 184 million from $ 85 million in the prior-year quarter. Total revenues, net of interest expense, increased 16% year over year to $ 1.1 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 $ 313 million, up 24% from $ 253 million in the prior-year quarter. Total revenue, net of interest expense, increased 16% year over year to $ 1.1 billion from $ 982 million. The company’s total billed business continued to witness improvement in the U.S. and beyond, climbing 17% year over year to $ 187.9 billion.
Corporate & Other reported net loss of $ 64 million compared with a net loss of $ 6 million a year ago. The results for both periods reflect income of $ 220 million ($ 136 million after-tax) form the previously announced MasterCard Inc. (MA) and Visa Inc. (V) settlements.
Financial Update
American Express’ total assets were recorded at $ 144 billion as of March 31, 2011, while long-term debt totaled $ 61 billion against cash of $ 22 billion at the quarter’s end. Besides, shareholder’s equity totalled $ 17 billion at the end of the reported quarter.
As of March 31, 2011, American Express’ return on average equity (ROE) was 27.9%, up from 10.0% as of March 31, 2010. Return on average common equity (ROCE) was 27.6%, up from 17.1% in the year-ago period. Besides, return on average tangible common equity was 35.6%, up from 22.2% in the year-ago quarter. Moreover, book value increased 30% year over year to $ 14.54 per share.
Our Take
American Express 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. 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 quarter this year will limit the rise in expense growth.
However, we remain concerned about the challenging regulatory conditions and the impact of new regulations on the card industry. We fear that the new regulations under the Consumer Protection Act, Dodd-Frank Act and Durbin Amendment, all regulated in 2010, are expected to make American Express’ credit cards costlier and will in turn result in lower interest income and loan fee income. Even the volatile economic outlook raises near-term caution. Hence, we remain Neutral on the stock with a Zacks #3 Rank.
On Wedneday, the shares of American Express closed at $ 47.00, up 0.77%, at the New York Stock Exchange.
AMER EXPRESS CO (AXP): Free Stock Analysis Report
MASTERCARD INC (MA): Free Stock Analysis Report
VISA INC-A (V): Free Stock Analysis Report
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