In a sign that even wealthier consumers are feeling the pinch of the credit crisis, American Express Co said its second-quarter profit tumbled as it set aside more money to cover souring loans across all its portfolios.
The credit card lender, known for catering to the US elite, said late on Monday that its second-quarter earnings fell 38 percent, well below Wall Street’s expectations.
The effects of the weakening economy were evident even among its more established members with excellent credit.
“Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations,” American Express chairman and CEO Kenneth Chenault said.
FALLOUT
“The scope of the economic fallout was evident even among our longer term, superprime cardmembers,” Chenault said.
The company’s shares dropped US$4.65, or 11.4 percent, to US$36.25 in aftermarket trading. They are down about 21 percent for the year.
For the period ended June 30, American Express reported net income of US$653 million, or US$0.56 per share, compared with US$1.06 billion, or US$0.88 per share, in the year-ago period.
Analysts, on average, expected earnings of US$0.83 per share, according to Thomson Financial.
Chenault said in a statement that fallout from the weakening economy accelerated last month with consumer confidence dropping, unemployment rates rising and home prices falling at “the fastest rate in decades.”
PROBLEMS
In a conference call with analysts, American Express executives said the company had begun to notice problems even among cardholders with credit scores ranging from 650 to 750, and those who hold mortgages on multiple properties. As a general rule, those with a credit score above 650 receive the lowest interest rates.
The pinch felt by American Express’ superprime cardholders mirrors a similar trend among borrowers at JPMorgan Chase & Co.
The bank said last week that even its more creditworthy borrowers were failing to make their mortgage payments — the charge-off rate for prime mortgages nearly doubled from the first quarter to the second.
JPMorgan CEO Jamie Dimon said he expected those losses could triple during the remainder of the year.
If economic conditions worsen, American Express said it would be forced to add to its credit reserves.
Quarterly revenue rose 8 percent to US$7.48 billion, slightly below analysts’ estimate of US$7.6 billion. Revenue was boosted by strong growth in the company’s international card services segment, as well as its global network and merchant services division and global commercial services unit.
Revenue from its international card services division increased 20 percent to US$1.3 billion thanks to higher cardmember spending and borrowing.
American Express no longer forecasts long-term earnings per share growth of between 4 percent and 6 percent, based on expectations of continued economic uncertainty and higher write-off levels. The company expects third and fourth-quarter write-off rates to be higher than last month’s levels.
The lender also hinted at various cost-trimming initiatives, including possible job cuts, that would result in restructuring charges in the second half of the year.
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