Amex Bucks the Trend Towards Rising Credit Card Write-Offs

By Eva Norlyk Smith, Ph.D.

In a year filled with otherwise bleak credit card news, card issuer American Express managed to buck the trend and post higher-than expected profits, even as other U.S. credit card issuers continue to struggle with huge credit losses from escalating defaults.

Excluding a $180 million gain from foreign subsidiaries, Amex reported third-quarter profit of 44 cents a share, higher than the 38 cents on average estimated by Wall Street analysts. Net income, however, was still down 27 percent compared to the same period last year, falling from 74 cents a share, or $861 million, to 54 cents a share, or $642 million, from the third quarter last year.

One reason for the card issuer’s strong performance is that Amex has seen credit card defaults begin to stabilize and even decrease, bucking the trend towards increasing credit losses, which continues to weigh down other credit card companies. Amex has reported declines in credit card charge-offs for five months in a row, from a high of 10.1 percent in April to 8.4 percent in September. The company’s delinquency rate, i.e. loans 30 days overdue or more, stands at 4.1 percent, also one of the lowest among card issuers. This makes Amex the only card issuer among the six biggest U.S. card issuers, including JPMorgan Chase & Co. and Citigroup Inc., which did not struggle with rising credit card defaults or delinquencies. The company also improved performance by trimming expenses by 17 percent, to $3.9 billion, as it cut jobs and reduced expenses for marketing and its rewards program.

American Express Chief Executive Officer Kenneth Chenault commented in a statement that, while high unemployment levels continue to be a reason for caution, “we are seeing broad-based improvements in credit quality, the trends in card-member spending are encouraging, and there are signs that the recession may be approaching an end.”

However, Amex’s decreasing credit card default rates, unfortunately, are not likely a sign of a broad-based rebound in consumer finances. Amex’s improving profits are attributed in large part to increased spending among wealthy consumers. Amex dominates the credit card market for affluent U.S. consumers. While not the largest card issuer by numbers, Amex is the largest credit card company by purchases. According to Bloomberg, American Express card holders on average charged $9,392 last year to their credit cards, compared with $2,699 for Visa and $2,269 for MasterCard holders.

Overall spending on luxury goods and services rose 29.4 percent from second quarter to third quarter of 2009, according to Unity Marketing, a research firm that specializes in tracking the spending patterns of high-end consumers. However, as Pam Danziger, president of Unity Marketing and lead researcher in the study points out, even the increase in luxury spending was driven only by the highest segment of affluent consumers, i.e. people earning $250,000 a year and above. Affluent consumers in the lower income range of $100,000-$149,999 still showed little signs of a rebound in luxury spending.

American Express is one of the top performers this year in the Dow Jones Industrial Average so far this year, up about 36 % from mid-October about a year ago, and a whopping 96% from its lows at the start of this year.

Will the changing fortunes of American Express spread to other credit card companies? Probably not anytime soon. Credit card charge-offs are typically linked to the U.S. unemployment rate, which continued to stand at 9.8 percent in September, its highest level since 1983. Analysts expect credit card defaults to increase for other card issuers, including Capital One, Discover, Bank of America, and Citigroup.

Published: October 24, 2009