American Express Profit Falls on Higher Defaults by Borrowers
By Hugh Son
July 21 (Bloomberg) -- American Express Co., the biggest U.S. credit-card company by purchases, said second-quarter profit fell 37 percent as more consumers defaulted on loans. The shares dropped 9.9 percent in extended trading.
Profit from continuing operations was $655 million, or 56 cents a share, missing the 82-cent average estimate of 17 analysts surveyed by Bloomberg. Net income declined to $653 million, or 56 cents a share, from $1.06 billion, or 88 cents a year earlier, the New York-based company said today in a statement distributed by Business Wire.
American Express, Capital One Financial Corp. and Discover Financial Services shares have dropped by more than a third in the past year amid concern the lenders underestimated the depth of the U.S. slowdown. American Express Chief Executive Officer Kenneth Chenault, 57, said last month that defaults in June had worsened beyond his expectations. The U.S. lost 62,000 jobs that month, the sixth straight period of shrinking payrolls.
``The broader economy and the employment situation is likely to remain weak for the remainder of the year,'' Sanjay Sakhrani, an analyst at KBW Inc. who rates American Express ``market perform,'' said in a July 15 research note. Rising unemployment may ``lead to further deterioration in credit quality at card issuers.''
American Express fell $1.29, or 3.1 percent, to $40.90 in New York trading at 4:15 p.m. The shares have lost 37 percent this year.
Moody's Investors Service has a negative outlook on credit- card lenders and said defaults ``will most certainly'' rise this year. Stressed consumers are tapping plastic as access to home- equity loans falls off, New York-based Moody's said in a February report.
Delinquent Accounts
Consumer prices surged 1.1 percent in June on higher food and fuel prices, more than analysts had expected, the Labor Department said this month. The cost of living rose 5 percent in the year leading to June, the biggest increase since 1991.
Delinquent credit-card accounts rose more than a full percentage point from a year earlier to 3.99 percent in May, according to Bloomberg data.
Rising defaults hurt second-quarter profit at Capital One, where earnings fell 40 percent to $452.9 million. The McLean, Virginia-based company said it expected as much as $7 billion in soured loans in the next year. Discover, based in Riverwoods, Illinois, said last month that profit from continuing operations in the quarter ended May 31 fell 19 percent to $202 million.
American Express said in March it was buying General Electric Co.'s corporate charge-card unit for $1.1 billion to add business customers. The unit, which handled $14 billion in transactions last year, will help offset declines in U.S. consumer spending, said Goldman Sachs Group Inc. analyst James Fotheringham.
Rising Loan Losses
Some of American Express's rising loan losses will be cushioned by about $4 billion in settlement payments from Visa Inc. and MasterCard Inc. American Express said last month it settled an antitrust suit against MasterCard for $1.8 billion. Visa and bank partners settled in November for $2.25 billion.
American Express sued the two largest credit-card networks in November 2004 after the U.S. Supreme Court ruled they violated antitrust laws by preventing banks from offering rivals' cards. Citigroup Inc. and Bank of America Corp., the two biggest U.S. banks by assets, later agreed to offer American Express services.
American Express was ranked first by the total value of purchases and cash advances to U.S. cardholders in the first half of 2007, according to the Carpinteria, California-based Nilson Report, a trade publication. JPMorgan Chase & Co. and Bank of America Corp. are ranked second- and third-largest.
Billionaire Warren Buffett's Berkshire Hathaway Inc. owns the largest American Express stake with 151.6 million shares, 13 percent of outstanding stock at year-end, according to Bloomberg data.
To contact the reporter on this story: Hugh Son in New York at hson1@bloomberg.net
Last Updated: July 21, 2008 16:26 EDT |
