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American Express Profit Drops 9.9% as Card Defaults Increase; Shares Fall
American Express Profit Falls 9.9% on Loss Charge (Update2)
By Hugh Son
Jan. 28 (Bloomberg) -- American Express Co., the third- largest U.S. credit-card network, said fourth-quarter profit fell 9.9 percent as it set aside more for customer defaults amid a slowing economy. The company declined in extended trading.
Net income was $831 million, or 71 cents a share, compared with $922 million, or 75 cents, a year earlier, the New York- based company said today in a statement. Profit matched the average estimate of 15 analysts surveyed by Bloomberg.
The report adds to evidence that bad debts are spreading in the U.S. from borrowers in the housing market to customers who owe money on credit cards and auto loans. Citigroup Inc., the biggest U.S. bank by assets, and Capital One Financial Corp. each doubled reserves for loan losses in the fourth quarter.
``Even the high-end consumer that uses American Express has been impacted by the housing issues this country has,'' Michael Taiano, analyst at Sandler O'Neill & Partners, said in an interview before results were released. ``Spending pulled back abruptly in December, which is unusual since it's the holiday season peak.'' Taiano has a ``buy'' rating on the firm.
American Express fell $1.33, or 2.8 percent, to $46.07 in trading after the close of regular U.S. markets. Before the results were announced, the company rose $1.96, or 4.3 percent, to $47.40 in New York Stock Exchange composite trading today. The company has declined 18 percent in the past year.
``We are not immune from further deterioration in the economic and credit environment,'' Chief Executive Officer Kenneth Chenault said in the statement.
Credit Reserves
The firm took a $274 million after-tax charge in the quarter to boost reserves for credit-card losses in the U.S. Purchases rose 16 percent from a year earlier to $177.5 billion and loans to cardholders rose 22 percent to $77.2 billion.
Goldman Sachs Group Inc. and Merrill Lynch & Co. analysts cut their recommendations on American Express in the past two months on concern slower consumer spending will limit loans made by credit-card companies.
U.S. retailers' holiday sales gained 2.2 percent, the slowest pace in five years, according to the International Council of Shopping Centers. The U.S. jobless rate jumped to a two-year high of 5 percent in December.
American Express will lower marketing expenses to below 2007 levels because of its forecast for slower growth in transactions, the company said this month.
``Credit-card performance will noticeably deteriorate during the year, given spillover from residential mortgages, weaker economic trends, and higher levels of unemployment,'' Fitch Ratings said in a Jan. 10 report on the U.S. industry.
Discover, MasterCard
Discover Financial Services, the No. 4 network, has fallen about 44 percent since trading formally began in July after being spun off from Morgan Stanley. MasterCard Inc., which runs the second-biggest U.S. card network after Visa Inc., has surged 74 percent in the past year.
Discover and American Express are lenders that offer cards and run networks that process transactions for other issuers. MasterCard, reporting fourth-quarter results on Jan. 31, and Visa, planning an initial public offering this year, run only networks.
American Express cardholders spent an average $3,228 in the quarter, 8 percent more than a year earlier. The company added 11 percent more cardholders to 86.4 million.
Discount revenue, the fees collected from merchants when cardholders buy goods or services, climbed 13 percent to $3.91 billion.
Visa Settlement
American Express's earnings included a $1.13 billion payment from a $2.25 billion settlement on Nov. 7 with Visa Inc. American Express filed the lawsuit in November 2004, accusing the company of barring member banks from offering rival cards.
Revenue from the suit was largely offset by higher expenses from litigation, charitable contributions and its rewards program.
Warren Buffett's Berkshire Hathaway Inc. is the largest American Express investor, owning 151.6 million shares, or 13 percent of outstanding stock as of Sept. 30, according to Bloomberg data.
