American Express Quarterly Profit Drops 58% as Defaults Rise

By Hugh Son
Bloomberg.com
April 23, 2009

April 23 (Bloomberg) - American Express Co., the biggest U.S. credit-card company by purchases, said first-quarter profit dropped 58 percent as consumers cut back on spending and defaulted on more loans.

Profit from continuing operations declined to $443 million, or 32 cents a share, from $1 billion, or 89 cents, a year earlier, the New York-based company said today in a statement distributed by Business Wire. Results beat the 13-cent average estimate of 20 analysts surveyed by Bloomberg.

"Given the terribly weak spending trends that we have seen from other issuers' card portfolios so far," results at American Express are under pressure, John Williams, an analyst at Macquarie Capital, said yesterday in a research note rating the company "underperform."

American Express may have to set aside more reserves for failed loans this year as surging U.S. unemployment makes it harder for their customers to repay debt. The jobless rate reached 8.5 percent last month, a 25-year high, already matching the peak 2009 estimate Chief Financial Officer Daniel Henry gave in a January conference call.

American Express rose $1.54, or 7.9 percent, to $20.97 as of 4 p.m. today in New York trading, and has declined 51 percent this year.

Defaults will probably set records this year as more delinquent accounts are turning into losses for lenders, Fitch Ratings said in a November report. American Express said this month that March defaults rose to 8.8 percent from 8.6 percent in February, and the rate would have been worse if the company hadn’t sold loans that had been written off.

Future Losses

Lenders are cutting jobs, closing unused accounts and scaling back credit lines to insulate against further losses as the Federal Reserve approved rules last year to curtail interest-rate increases and late fees.

Managers from 13 credit-card firms, including Lawrence Sharnak, head of American Express’s U.S. lending, met with President Barack Obama today to discuss proposed legislation intended to make their loans more transparent. Industry representatives have said that the pending Fed rules, which take effect next year, are sufficient and further regulation will raise consumer costs and limit the availability of credit.

"In this kind of an environment with this kind of administration, there's certainly the risk of more credit-card regulation," said Claire Gruppo, managing director of Gruppo, Levey & Co., a New York investment banking firm.

American Express said in October it was slashing about 7,000 jobs, or 10 percent of its workforce, and rival Discover Financial Services said this month it was cutting about 500 positions, or about 4.2 percent of staff.

Capital One

Capital One Financial Corp., the Mclean, Virginia-based credit-card company, posted a $111.9 million first-quarter loss this week as it set aside more for loan defaults. The bank said its previous estimate of $8.6 billion in failed 2009 loans was too low and declined to update the guidance.

Capital One said charge-offs in its U.S. card business reached 8.4 percent in the first quarter, exceeding the 8.1 percent estimate given last year. The rate will “cross 10 percent in the next couple of months,” Chief Executive Officer Richard Fairbank said in a conference call.

Bank of America Corp., the largest U.S. lender by assets, reported a $1.77 billion first-quarter loss in its credit-card services unit, compared with an $867 million gain a year earlier. Charging off bad credit-card loans and increasing reserves for expected defaults cost $8.2 billion, up from $4.3 billion a year earlier.

Discover

Discover, the Riverwoods, Illinois-based lender that also runs the fourth-largest credit-card network, said last month that first-quarter earnings from continuing operations fell 50 percent to $120 million. The firm tripled its provision for loan losses to $937.8 million from $305.6 million a year earlier.

American Express was ranked first by the total value of purchases and cash advances to U.S. cardholders in the first half of 2007, according to the Carpinteria, California-based Nilson Report, a trade publication. JPMorgan Chase & Co. and Bank of America Corp. were ranked second- and third-largest.

Billionaire Warren Buffett’s Berkshire Hathaway Inc. owns the largest American Express stake with 151.6 million shares, 13 percent of outstanding stock, according to Bloomberg data.