American Express (NYSE:AXP) reported strong earnings for the third quarter of 2012 on Wednesday, October 17. Net revenues came in at $7.82 billion, up 4% from the same period in 2011. The company maintained strong growth in billed business, total cards-in-force and cardmember loans, which grew by 6% each over the prior year. We believe that Amex has a sound business model and is geared for sustainable growth in the future. Our $62 price estimate for the company’s stock is in-line with the current market price.
American Express is currently the fourth largest card processing company in the world in terms of cards-in-force behind China UnionPay, Visa (NYSE:V) and MasterCard (NYSE:MA). The company accounted for 25% of credit-card spending in the U.S. last year, which totaled $2.05 trillion.  Unlike Visa and MasterCard, American Express issues its own cards through its banking subsidiaries, American Express Centurion Bank and American Express Bank, FSB (AEBFSB) and maintains a closed-loop network wherein it acts as both the issuer (customer’s bank) and the acquirer (merchant’s bank).
In-line with its spend-centric strategy, the company reported 5% growth in average basic cardmember spending in the U.S., reaching $3,725. The U.S. is currently the most important region for the company, accounting for more than half of its revenues in the last quarter. Increased spending also led to 8% growth in billed business and a 6% increase in total cardmember loans in the country. With slow growth rate observed in the U.S. national income and a sluggish recovery, we expect credit card usage to increase over the next few years, leading to an increase in average loan balance per cardmember in the U.S., as illustrated in the interactive chart below.
Growth in terms of cards-in-force was higher outside the U.S. at 9%, compared to 3% in the U.S. The growth in billed business, however, did not match the growth in cards, and the average customer spent only $3,026. The main reason for this is the slowdown in the growth rate in Australia.
We forecast steady growth in Amex-issued cards-in-use internationally based on expansion in developing countries in Asia. An increase in the number of cards will eventually lead to higher income for American Express as global macro-economic conditions improve, leading to higher spending.
Provision For Losses
American Express reported a 92% increase in provisions for losses as provisions for cardmember loans which increased from $48 million in the third quarter of 2011 to $264 million. This was due to substantially lower reserve releases during the period which led to an increase in provisions. The net-write off delinquency rates remained stable, indicating strong credit performance. We believe that Amex has established a stable foundation, particularly in the U.S. and will be able maintain margins going forward.Notes:
- AmEx Profit Meets Estimates as Card-Spending Growth Slows, Bloomberg Businessweek, 18th October, 2012 [↩]