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AmEx profit rises but costs soar

AmEx profit rises but costs soar
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First Published: Thu, Apr 21 2011. 02 16 PM IST
Updated: Thu, Apr 21 2011. 02 16 PM IST
New York: American Express Co’s first-quarter profit rose 33% from a year ago, beating expectations, but its expenses soared, and its shares fell.
The company’s wealthy customers spent more on their credit cards than a year earlier, but expenses outpaced American Express’s revenue growth as it spent more on rewards programs for its customers.
“People are skeptical about those kinds of moves,” said Michael Holland, chairman of money manager Holland & Co, which includes American Express shares in its holdings.
“If they are actually picking up some competitive advantage by spending now, I’ll be delighted. They don’t have a history of being wasteful with expenditures, but time will tell,” he said.
American Express was one of the first to recover from a surge in losses on its credit cards during the financial crisis, when people lost their jobs and could no longer pay their bills. Most lenders have seen credit quality gradually improve over the past year.
American Express has refocused its business on processing the transactions of high-spending customers who mostly pay their bills in full every month.
But those customers expect to earn pricey rewards, such as free flight upgrades or hotel stays, from the points they earn every time they swipe their American Express cards. Chief Financial Officer Dan Henry told analysts on a conference call that more customers are redeeming their points for awards.
The company may not be able to afford to reduce its spending on rewards or marketing very much in the face of the increased competition it is facing for its affluent customers.
JPMorgan Chase & Co, the second-largest US bank, has revamped its credit card unit to focus on processing transactions for wealthy customers — and is also offering them some new rewards for using its credit cards.
Spending to slow
American Express, which lends directly to consumers but also competes with Visa Inc and MasterCard Inc to process credit card transactions, has recovered from the financial crisis more fully than many other consumer lenders.
Like the other U.S. banks that reported first-quarter results this week, American Express powered much of its profits by dipping into the reserves it had set aside to cover losses on bad loans. It released $725 million in lending reserves.
The New York-based company said on Wednesday it earned $1.18 billion, or 97 cents per share, in the first quarter — up from $885 million, or 73 cents per share, a year earlier.
The earnings were 4 cents per share better than analysts’ average expectation of 93 cents per share, according to Thomson Reuters.
Spending on American Express cards rose 17%.
Chief Executive Kenneth Chenault said in the earnings release that the company’s results reflected “credit quality and billed business trends that are among the best we’ve seen.”
Revenues rose 7% from a year earlier, slightly more than expected, to $7.03 billion.
Expenses soared 19% to $5.2 billion, with the biggest increases coming from what the company spends on its rewards programs for customers. Marketing expenses also rose 15%.
Chenault said in the release that the increase in expenses had helped American Express jump-start its expansion into new payment technologies, including online payments. But the company plans “to slow the growth of our operating expenses towards the end of this year and into next,” he said. .
American Express shares fell 1.7% to $46.20 in after-hours trading following the earnings report on Wednesday. They had closed less than 1% higher at $47.00 during the regular session on the New York Stock Exchange.
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First Published: Thu, Apr 21 2011. 02 16 PM IST