AmEx Exits 2011 Gracefully - Analyst Blog

By
A A A

Yesterday, American Express Co. ( AXP ), also known as AmEx, reported fourth-quarter 2011 operating earnings of $1.01 per share, a penny above the Zacks Consensus Estimate but comfortably ahead of 88 cents recorded in the year-ago quarter.

Meanwhile, net income from operations increased 12% year over year to $1.19 billion from $1.06 billion in the year-ago period. However, no extraordinary items were recorded during both the comparable periods.

AmEx continues to benefit from an improved credit quality with an increased usage of cards and lesser defaults, across all business segments. Higher spending also drove earnings and return on average equity (ROE). However, healthy top-line growth and flattish expense growth were partially offset by higher-than-expected provision for losses, plunge in loan portfolio, higher tax-rate and lower interest income.


AmEx' average basic card members' spending increased 8.4% over the prior-year quarter. The increase came from international cards in force that rose about 11.0% year over year to $46.8 million while cards in use grew 3.0% year over year in the US.

Behind the Headlines

AmEx posted total revenue, net of interest expenses, of $7.74 billion, up 7% year over year from $7.24 billion while slightly exceeding the Zacks Consensus Estimate of $7.91 billion. Additionally, the upside in revenues was supported by higher spending and higher travel commissions from card members. This was partially offset by sluggish growth in interest income and lower yields on the loan portfolio.

Provisions for losses were $409 million, surging 71% from $239 million in the prior-year quarter. The increase was driven primarily by larger reserve release in the year-ago period and loans outstanding in the reported quarter, partially offset by lower net write-offs in the reported quarter. Meanwhile, lending balances and yield continued to remain sluggish.

However, total expenses of AmEx inched up 1% to $5.59 billion in the reported quarter, reflecting radical decline in operating expenses growth that were partially offset by escalated cost of card member rewards and services . Besides, restructuring and other reengineering costs declined to $49 million ($32 million after-tax) in the reported quarter against $113 million ($74 million after-tax) in the year-ago period. However, tax rate witnessed an uptick across most business segments.

Segment Results

U.S. Card Services reported a net income of $727 million, up 4% from $700 million incurred in the prior-year quarter. Total revenues, net of interest expenses, increased to $3.9 billion from $3.7 billion, up 5% year over year.

International Card Services ' net income came in at $152 million, up by a substantial 54% from $99 million in the year-ago quarter. Total revenues, net of interest expenses, were $1.3 billion, up 8% from the year-ago quarter, driven by higher cardmember spending and revenues related to Loyalty Partner acquisition, partially offset by lower net interest income.

Global Commercial Services ' net income surged 75% to $180 million from $103 million in the prior-year quarter. Total revenue, net of interest expense, increased 11% year over year to $1.2 billion, reflecting increased spending by corporate card members and higher travel commissions and fees.

Global Network & Merchant Services reported a net income of $324 million, up 25% from $259 million in the prior-year quarter. Total revenue, net of interest expense, increased 12% year over year to $1.3 billion. The company's total billed business continued to witness improvement in the U.S. and beyond, climbing 11% year over year to $219 billion.

Corporate & Other reported net loss of $191 million compared with a net loss of $99 million a year ago. The results for reported quarter reflect an income of $70 million ($43 million after-tax) for the previously announced Visa Inc. ( V ) settlements. The year-ago quarter included $70 million and $150 million ($93 million after-tax) from the Visa and MasterCard Inc. ( MA ) settlements.

Full-Year 2011 Highlights

For full year 2011, AmEx reported operating net income of $4.9 billion or $4.09 per share against $4.06 billion or $3.35 per share in 2010. Earnings per share also exceeded the Zacks Consensus Estimate by three pennies. Reported net income came in at $4.94 billion or $4.12 per share against $4.06 billion or $3.35 per share in 2010.

Total revenue, net of interest expenses, was $30.0 billion, up 9% year over year from $27.6 billion while marginally exceeding the Zacks Consensus Estimate of $30.12 billion. AmEx' average basic card members' spending increased 12.2% over the prior year. Total expenses increased 13% over 2010 to $21.89 billion, while provision for losses plunged 50% year over year to $1.11 billion.

Financial Update

As of December 31, 2011, AmEx's total assets stood at $153 billion (up from $147 billion at end of 2010), while long-term debt totaled $60 billion (down from $66 billion) against cash of $25 billion (up from $16 billion). Besides, shareholder's equity totaled $18.8 billion at the end of 2011, up from $16.2 billion at 2010-end.

As of December 31, 2011, AmEx' ROE was 27.7%, up from 27.5% at 2010-end. Return on average common equity (ROCE) was 27.3%, up from 27.2% in 2010. Besides, return on average tangible common equity was 35.8%, up from 35.1% at 2010-end. Moreover, book value increased 19% year over year to $16.15 per share.

Our Take

AmEx has pulled itself out of the recession more quickly than its rivals, owing to its creditworthy customers, while its spend-centric model has also improved its overall risk profile. Besides, there has been an impressive recovery in credit trends, with increased card spending and strong billings over the past year. Besides, the company appears to initiate disciplined expense management with the extinguishment of the settlement payments with MasterCard and Visa that ended in 2011.

A challenging regulatory environment is expected to make AmEx' credit cards costlier and will in turn result in lower interest income and loan fee income. On the other hand, the volatile economic outlook raises near-term caution. However, we believe the company is focusing on product diversification such as no-fee prepaid cards. Alongside, AmEx has been upgrading its digital payment platform through strategic alliances, which will not only expand the company's card membership base but also help it penetrate the unexplored market and tap the upcoming opportunities in the field of eCommerce.

On Thursday, the shares of American Express closed at $50.95, up 0.8%, at the New York Stock Exchange.


 
AMER EXPRESS CO ( AXP ): Free Stock Analysis Report
 
MASTERCARD INC ( MA ): Free Stock Analysis Report
 
VISA INC-A ( V ): Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Business , Stocks

Referenced Stocks: AXP , MA , V

Zacks.com

Zacks.com

More from Zacks.com:

Related Videos

Stocks

Referenced

85%
88%
64%

Most Active by Volume

33,110,376
  • $113.99 ▲ 1.77%
25,034,179
    $17.98 unch
24,486,872
  • $7.41 ▲ 2.07%
20,864,535
  • $7.39 ▼ 2.76%
18,600,501
  • $8.30 ▼ 0.36%
17,530,211
  • $8.14 ▲ 3.17%
17,299,208
  • $93.79 ▲ 2.74%
14,669,760
  • $25.78 ▼ 0.19%
As of 12/26/2014, 04:15 PM


Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com