American Express earnings fall as credit losses top 10 percent

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American Express (AXP), the issuer of credit cards primarily to corporations and affluent consumers, reported earnings after the market closed today. Earnings for the second quarter of 2009, excluding TARP charges, were $342 million -- down 48 percent from a year ago -- or 27 cents per share, compared to the average of 26 cents per share expected from analysts. Revenues were $6.1 billion compared to the $6.29 billion expected from analysts, as spending by card members fell.

After closing more than two percent higher today, shares fell nearly five percent in after-hours trading following the announcement.

American Express converted to a bank holding company during the financial crisis in the fall of 2008. The company received $3.4 billion in capital from the Treasury Department as part of the TARP program, and during later "stress tests" of the country's major financial institutions concluded in May, American Express was found to have sufficient capital. The company repaid the government's money in June with the approval of regulators.

After falling below $10 per share in March, American Express stock has almost tripled as part of the broad rally in the stock market. This has led many to question if the stock has become overvalued, especially as economic data continues to indicate weak consumer spending.

Not everyone is skeptical, however. In a July 16 note obtained by DailyFinance, Jefferies & Co. analysts upgraded the stock to "Buy" with a $33 price target, saying, "we think credit losses are peaking sooner than expected," and that the peak losses will come by the end of 2009. Jefferies & Co. expects American Express to earn $2.00 per share in fiscal 2010, compared to the $1.46 average analyst estimate, even though it believes revenues will not experience growth year-over-year.

Unlike most credit card issuers, American Express primarily earns money from transaction fees when its card is used to pay for a purchase. This makes it similar to payment processors like Visa (V) and Mastercard (MA), except that American Express also retains some loans it makes, making the company a lender as well. Most other credit card issuers are banks that earn money -- at least in theory -- from the interest rate spread between what customers pay and what they borrow at. Rising unemployment has led to greater defaults on credit cards; after suffering losses on fewer than two percent of loans in parts of 2006, American Express' current loss rate is in excess of 10 percent.

Chairman and CEO Ken Chenault, commenting on the company's results, said, "Although it is still too early to point to any sure signs of an economic recovery, the number of card members who are falling behind in their payments, the volume of bankruptcy filings and the level of loan write-offs were better than we had expected. If these trends continue, we expect U.S. lending write-off rates on a managed basis to be below 10 percent for the second half of the year, which is lower than the outlook we offered earlier this year."

Chenault, who rarely gives interviews, made headlines earlier in the month by offering a downbeat outlook for the economy -- saying that he hopes growth will resume in the second half of 2010.

James Cullen edits and writes at CollegeAnalysts.com. He has no personal position in the stocks mentioned above.

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