American Express Earnings: Higher Spending, Growing Loans Drive Income

American Express (NYSE:AXP) kicked off the credit card earnings season on Wednesday, October 15. The company reported third quarter net income of $1.5 billion, up 8% year-over-year. Total net revenues of $8.3 billion were about flat relative to the third quarter of 2013 as higher spending and an improving loan balance lifted the results the quarter. However, a higher effective tax rate of 34% compared to 32% a year ago did have a somewhat moderating effect. The company reported a 12% year-over-year increase in diluted earnings per share to $1.40. ^[1]

We have a price estimate of $104 for the company’s stock, which is about 30% higher than the current market price.

See our complete analysis of AmEx’s stock here

Higher Spending Continues To Drive Growth In The U.S.

The company benefited from a 4% year-over-year increase in total cards in force, which rose to 45.2 million compared to 44.7 million in the second quarter. ^[2] Average cardmember spending also rose 5% as compared to the previous year, though it was slightly lower than the previous quarter. Total card billed business surged by 9% year-over-year to $136.2 billion, while interest income saw an increase of 4% year-over-year to $1.4 billion as the total loan balance also improved. Total cardmember loans increased from $57.7 billion in the previous quarter to $58 billion in the third quarter. Since AmEx operates a spend-centric model, rising billed business translates into higher discount fee revenues for the company. ^[3] There was a 2% year-over-year increase in expenses, primarily due to higher rewards expenses, while net income of $889 million was up 14% from $782 million a year ago.

The delinquency rate, the percentage of loans at least 30 days past due, remained low at 1% on average for the quarter.  ^[4] This is well below the U.S. credit card industry average of 2.25%. ^[5]

Asian Markets Keep The Growth Momentum Going

Internationally, the Asia-Pacific region remained a strong growth market for the company. The region reported a 16% growth in billed business volumes in the third quarter. ^[4] Total revenues were up 5% year-over-year on an FX-adjusted basis. Both Korea and Australia contributed to the upswing in revenues. Going forward, the company expects China to be a key driver of growth in the long term. Currently AmEx has a total of 43.5 million cards in force internationally through its global network and merchant services.

Investments And Partnerships Will Aid Future Growth

AmEx recently entered into a variety of partnerships with companies such as Apple (NYSE:AAPL), Uber and McDonald‘s (NYSE:MCD) in order to leverage new opportunities. ^[6] In addition, the company has been investing to expand its American Express EveryDay credit cards and OptBlue program, which is designed to extend AmEx’s coverage to small merchants in the U.S. Going forward, the company expects volumes from these programs to substantially increase in the long term and make up for a slight decline in discount fees. ^[4]

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1. American Express Third Quarter EPS Up 12% to $1.40; Card Member Spending and Loans Continue to Grow; Credit Indicators Remain Strong, American Express Release [↩]
2. SEC 8-K Filing [↩]
3. American Express Company (AXP) Q3 2014 Results – Earnings Call Transcript, Seeking Alpha [↩]
4. Sec 8-K Filing [↩] [↩] [↩]
5. Charge-Off and Delinquency Rates on Loans and Leases at Commercial Banks, Federal Reserve [↩]
6. American Express and McDonald’s USA to Bring the Power of Membership Rewards Points to McDonald’s Restaurants Nationwide, American Express Press Release [↩]