AmEx profit falls as cardholders struggle

American Express Co. said Monday its profit fell 24 percent in the third quarter as cardholders restrained their spending and had more trouble paying off debt.

But the results were better than anticipated and propelled Amex's shares more than 8 percent higher in after-hours trading. Still, the company's report echoed recent results from JPMorgan Chase & Co., Citigroup Inc. and Capital One Financial Corp. showing that the credit-card environment is worsening - even for companies like American Express that pride themselves in catering to more well-heeled borrowers.

The New York-based credit-card issuer said net income was $815 million, or 70 cents a share, in the July to September period, down from $1.07 billion, or 90 cents a share, in the same timeframe last year.

The company's customers tend to be more affluent than other card companies, but they are more heavily concentrated in California and Florida, where the slumping housing market is taking a toll. American Express also has a higher percentage of small businesses as customers; small businesses tend to miss payments more than individuals, executives said.

Analysts polled by Thomson Reuters on average had predicted earnings of 59 cents per share, excluding one-time items. AmEx's income from continuing operations is 74 cents a share.

Shares rose $2.02, or 8.3 percent, to $26.37 after the markets closed, having risen $1.02, or 4.4 percent, to $24.35 during the regular session.

The card company took a $1.36 billion provision for loan losses, 51 percent higher than its provision in the third quarter last year. It saw its loan-loss rates nearly double to 5.9 percent from 3.0 percent a year ago on a managed basis, which includes card loans that are securitized.

"We expect write-offs to increase over the next two quarters," said Chief Financial Officer Dan Henry in a conference call with investors. As a result, he said, the company will be boosting interest rates for certain higher-risk customers by 2 to 3 percentage points.

"We think it's prudent given the nature of those products and the economic environment that we face," Henry said.

Moody's Investors Service lowered its long-term rating on American Express to A2 from A1. That's still investment grade, but reflects "negative asset-quality trends and lending exposures."

"We saw clear signs earlier this year of a weakening environment and the recent volatility in the financial markets has reinforced our view that consumer and business sentiment is likely to deteriorate further, translating into weaker economies around the globe well into 2009," Chief Executive Kenneth Chenault said in a statement.

"Cardmember spending is likely to remain soft," Chenault added. "Loan growth will be restrained, in part because of the steps we are taking to reduce credit risks, and credit indicators are likely to reflect the continued downturn in the economy and throughout the housing sector.

Average basic cardholder spending was $3,049 during the third quarter - up only about 1 percent from the third quarter of 2007, and down 4.7 percent from the second quarter of 2008.

Revenues net of interest expense rose 2.9 percent to $7.16 billion compared with a year ago.

Red Gillen, senior analyst with Celent, a Boston-based financial research and consulting firm, said American Express has been shifting strategy in three phases: diversifying globally, tightening credit, and then restructuring. The credit card issuer said it plans to take a fourth-quarter restructuring charge related to reducing operating costs and cutting jobs.

"Unlike banks with broad retail and wholesale banking operations, AmEx has most of its eggs in the credit basket," Gillen wrote in a note. "Because of this, there is a considerable amount of pressure on the company to implement these strategies as soon as possible, especially in advance of the post-holiday credit repayment hangover."

American Express has been able to finance its operations amid the tight credit markets, but the efforts have been tougher and more costly. Henry said access to both secured and unsecured long-term funds in the markets has been essentially frozen since mid-September.

The company has raised $23 billion in term funding since the beginning of the year, and over the next 12 months it needs $4 billion in the short-term debt known as commercial paper and $20 billion in maturing long-term debt.

"We're looking to continue to diversify our funding sources," Henry said, adding that American Express plans to expand funding from deposits.