American Express Earnings Preview: Moderate Volume Growth, Regulatory Pressures To Continue

American Express (NYSE:AXP) is scheduled to report earnings for the first quarter of 2015 on Thursday, April 16. In 2014, the company reported a 10% year-over-year increase in net income to $5.9 billion, with revenues – net of interest expense – increasing 4% y-o-y. ^[1] American Express (AmEx) benefited from higher cardmember spending and an increase in net interest income, while FX headwinds impacted earnings from its international operations.

For the first quarter, we expect the company to maintain its growth momentum, albeit at a slower pace. The improving U.S. economy is spurring consumer spending, which should drive volumes. However, the the company continues to face regulatory pressures as well as potential FX headwinds. 

We have a $97 price estimate for American Express’ stock, which is around 20% above the market price.

See our complete analysis of AmEx’s stock here

Card Billed Business To Grow Moderately

Around 28% of American Express’ net revenues come from transaction fees charged from merchants accepting its cards in the U.S. American Express reported an 8% year-on-year increase in card billed business in the U.S. in 2014. This was complemented by a 5% increase in AmEx issued cards in the U.S., which increased from 32.5 million to 34 million as the company maintained growth with the strengthening of the U.S. economy. Additionally, in the first quarter of 2015, AmEx introduced ‘Pay with Points’, which allows AmEx cardholders to shop while paying in real time with reward points at various outlets. The better reward redemption experience along with a continued focus on mobile payments could provide a boost to the average spend per AmEx card, which in turn could push transaction volumes upwards. However, in the intermediate term this segment is likely to slow down as it announced the termination of its co-branded partnership with Costco, which will take effect in March 2016. ^[2]

Increasing Interest Income

In the last quarter, we also saw AmEx raise rates for more than 1 million of its customers by an average of 2.5% as it reassessed certain cardholders’ APRs. The company concluded that certain cardholders had an interest rate considerably lower than the rate offered by a competitor for a similar credit profile. According to the CARD act, AmEx will give affected customers 45 days to either keep the card at the higher interest rate or cancel their cards. ((AmEx Said to Boost Rates for More Than 1 Million Customers, Bloomberg)) As the new interest rates are still generally below the industry standard of 15.78% ^[3]

If merchants do being promoting the use of other cards, AmEx could come under pressure to reduce fees in order to stay competitive. The average discount rate charged to merchants by Amex is 2.48%, which is higher than the industry average of 2%. AmEx is able to charge a higher rate from merchants as it is likely to bring them higher spending customers.

We will look out for how the aforementioned developments have impacted the earnings of American Express in the first quarter of 2015.

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1. Annual Report, Press Release [↩]
2. AmEx-Costco Divorce Shakes Up Card Industry, Wall Street Journal [↩]
3. National credit card rates for April 9, 2015, Bankrate), we do not expect a significant drop in AmEx cardholders. If most cardholders do keep their cards, this step should increase the company’s interest income in the near future.

   Interest income from credit loans accounts for 15% of American Express’ revenues. In 2014, interest income from credit card loans in U.S. grew by 6.5% y-o-y to reach $5.1 billion.

   Regulatory Pressures

   In February 2014, AmEx lost an antitrust case with the U.S. Department of Justice that claimed it engaged in anti-competitive practices, in restricting its co-branded merchants from promote the use of other cards such as Visa and MasterCard. ((American Express Loses Antitrust Suit Over Merchant Rules, Bloomberg [↩]