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Earnings Review: Operational Discipline Helps American Express Report Higher Margins

American Express ( AXP ) reported earnings for the fourth quarter and full year of fiscal year 2016 on Thursday, January 19th. The company reported an earnings per share of $5.65 on a net income of $5.4 billion, compared to the previous year's figures of $5.07 EPS on a net income of $5.15 billion. The company's overall revenue for the year was relatively flat at $26.4 billion compared to $26.9 billion, with the decline largely attributable to the loss in revenue from transactions lost as a result of the termination of the company's contract for a co-branding partnership with Costco. As you can see from the table below, the company's non-interest income declined by 2% compared to 2015's non-interest income, with interest declining by 0.9% and interest expenses growing by 5%, resulting in an overall revenue decline of 2.1%.

In 2017, the company wants to try to recover the loss in revenue from the Costco partnership by adding new clients, who make transactions on which the company can charge higher fees and also spend on higher ticket items. The partnership with Walmart's members only warehouse retail club Sam's Club is one such deal.

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As part of its efforts to keep operating margins high despite the loss in revenue, the company has vowed to cut operating expenses by $1 billion each year by 2017. In 2016, American Express managed to cut operating expenses by close to $1 billion despite increasing marketing expenses, expenditure on member services and salaries and benefits paid out to employees. The decline was largely the $1.5 billion cut in "other expenses". As a result, the company managed to grow its operating income by 2%, despite the 2% reduction in revenue. The company's operating margin for the year stood at 31.5% compared to last year's 30.3%, an increase of 120 basis points. Excluding provisions made for losses, the operating margin stood at 25.2% compared to last year's 24.2%, an increase of 100 basis points.

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Going forward, the company is focusing on three specific things: 1) Adding new co-branding partners to increase the number of transactions made on the American Express payment network. The company would preferably like to keep the transaction fees high on these payments, which would allow it to make higher profits. 2) Increase the acceptability of credit and debit cards issued by the company. Adding partners like Uber and Airbnb will help the company on this front, since a larger and larger number of transactions are being done online now, and allowing merchants to accept payments through your network makes it easier to persuade consumers to join the same networks. 3) Lower operating costs to raise margins. On this front, the company is a little hazy as to how it will go about achieving its targets but 2016's reduction of operating costs by 4% is a good start.

Have more questions about American Express? See the links below:

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com

2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for American Express

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


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

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