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Record customer spending boosts American Express 2Q

Record customer spending boosts American Express 2Q

July 21st, 2011 by EILEEN AJ CONNELLY, AP Business Writer in News

NEW YORK (AP) - Record customer spending on American Express cards led the company's second-quarter profit to leap 31 percent, American Express Co. said Wednesday.

The New York-based credit card issuer said its net income attributable to common shareholders rose to $1.33 billion, or $1.07 per share, for the three months that ended June 30. That's compared with $1 billion, or 84 cents per share, a year earlier.

Its revenue jumped 12 percent to $7.62 billion from $6.81 billion last year.

The results topped Wall Street analysts' average forecasts for profit of 98 cents per share and revenue of $7.34 billion.

"Strong revenues and excellent credit performance helped us deliver record earnings this quarter," said CEO Kenneth I. Chenault in a statement. Customer spending reached an all-time high, rising 15 percent to $207.6 billion, with growth seen throughout the world.

That averaged out to $3,767 per customer for the quarter. Chief Financial Officer Daniel Henry said balances rose 6 percent during the quarter.

Henry said during a conference call to discuss results that customers who pay off their balances each month have become a larger portion of their customer base than in recent years. That cut into the company's net interest income, which slipped 3 percent.

American Express has the lowest default rate in the credit card industry, and its results were helped by writing off less debt as uncollectible than a year earlier and by setting aside a lower amount to cover unpaid bills. The company released $400 million from its reserve to cover unpaid bills, adding to its earnings.

The company's travel business also provided a boost. Travel commissions and fees rose 21 percent to $523 million.

The company also recorded 16 percent higher revenue from its processing network, to $1.14 billion.

One factor that got analysts' attention was an increase in expenses, which rose 21 percent, to $5.5 billion. In particular, card member rewards expenses jumped 35 percent to $1.61 billion.

Henry said the higher rewards costs came from improvements in its program that encourage customers to earn more points and redeem more rewards. American Express also saw more expensive types of rewards claimed, he said, without detailing exactly what they were.

"We view the fact that we are enhancing the program and we are getting better loyalty and engagement, from an economic point of view, we view that as very positive," he said. "It provides value to our card members."

But analyst Sanjay Sakhrani of Keefe, Bruyette & Woods said higher expenses do concern investors, and some may worry that American Express can't slow the increase in rewards costs.

"There's a question as to whether or not those costs will rise due to competition," he said. "People always worry about expenses and whether or not they can moderate them. I'm not really sure this quarter can help alleviate those concerns."

Investors sent American Express stock down 29 cents to $51.80 after hours. The shares closed Wednesday's regular session at $52.09.

Amex also reported a lower tax rate than last year, 27 percent versus 36 percent. Its income tax provision dropped 19 percent to $470 million, from $578 million last year. It said the decrease was mainly due to favorable resolution of items from last year.

American Express also benefitted from a weak dollar, which added 4 percentage points to revenue growth.

The company said it had 2 percent more cards outstanding during the quarter than a year ago, including 49.8 million in the U.S. Outside the U.S., total cards jumped 11 percent to 44.2 million.

The company touted several recent projects aimed at gleaning growth from digital technologies. Among the initiative introduced in recent months were a location-based retail offering with Foursquare, its Serve digital payments platform and a deal with Facebook to offer discount offers based on the "likes" of cardholders and their friends who use the social networking site.