AmEx Loan Push Pays Off In Results -- WSJ

By AnnaMaria Andriotis and Ali Stratton Features Dow Jones Newswires

Earnings, revenue top expectations, as card-member borrowing in U.S. increases 10%

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This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (July 20, 2017).

American Express Co. reported net income and revenue for the second quarter that exceeded analysts' expectations, results largely helped by the company's push into lending.

Total revenue net of interest expense was $8.3 billion, up 1% from a year prior. It was the first quarter of adjusted revenue growth since a year ago.

Still, second-quarter earnings fell 33% from last year as the card giant endured heavy competition from large banks and the loss of its 16-year exclusive relationship with Costco Wholesale Corp. Shares of AmEx, up 16% year to date, fell 1% to $85.93 after hours.

The firm, run by Chairman and Chief Executive Kenneth Chenault, posted net income of $1.3 billion, or $1.47 a share. Analysts polled by Thomson Reuters expected earnings of $1.43.

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When removing the Costco balances that AmEx had for most of the second quarter last year, adjusted revenue grew by 8%, compared with 7% in the first quarter and 4% a year prior.

Jeffrey Campbell, chief financial officer of AmEx, said the company now expects full-year adjusted revenue growth to be above the top end of the 5% to 6% range it shared at Investor Day in March. "We're off to a stronger start than we expected," he said.

AmEx's revenue growth is largely due to its efforts to take on more loan balances. The company has traditionally focused on affluent consumers who pay their bills in full each month.

AmEx's world-wide card member loans reached $66 billion in the second quarter, up 10% from a year prior. In the U.S., card-member loans hit $58.5 billion, also up 10% from a year prior. Industrywide, credit-card balances in the U.S. are up about 6% from a year prior, according to Federal Reserve data from May.

Mr. Campbell said the company believes it has "a long runway for growth" with lending, as it increases lending to existing customers as well as new ones.

The company increased loan-loss reserves for worldwide card-member loans by 21% to $1.3 billion. Its net write-off rate, including principal, interest and fees written off as a loss, increased to 2.1% from 2.0% in the first quarter and 1.8% a year prior -- though it still remains among the lowest in the industry.

Mr. Campbell said that loss rates will "gradually" move higher and the company's growth rate in provisions for losses will continue to exceed its growth rate in loans.

AmEx's appetite for consumer debt has grown over the last couple of years. It is fueled largely by its attempt to fill the balances it lost with the Costco account. In 2015, Mr. Chenault and his deputies turned to lending as a way to boost revenues after the announced departure. AmEx launched personal loans last year and is launching a new payment option called Plan It that will allow U.S. consumers to spread out paying off credit-card purchases of at least $100 over periods ranging from three to 24 months. The company plans to begin rolling this out starting Aug. 30.

Expenses continued to rise in large part due to costs related to the credit-card rewards wars between AmEx and other issuers. Total expenses increased 21% from a year prior to $5.77 billion.

Its biggest expense remains card member rewards, which include the points that AmEx pays out when cardholders redeem them for hotels and airfare. That rose 9% to $1.9 billion from a year prior.

AmEx's overhaul of its Platinum card rewards program geared to high spenders kicked in March 30. That includes a higher number of points that the issuer is giving to cardholders for certain purchases and $200 worth of Uber rides per year. Competition in the premium card market -- in which high-spenders pay annual fees in the hundreds of dollars in exchange for more generous rewards on travel -- has been rising as other issuers have entered the market in recent years. That has raised red flags with some AmEx investors because this was a market that the company dominated for decades.

Mr. Campbell pointed to net card fees, which increased 8% from a year prior, as a positive sign of how the company is faring in the current competitive environment.

The second quarter has yielded much-needed good news for AmEx. The company won the rights to become the exclusive issuer of the Hilton Worldwide Holdings Inc. credit cards beginning in January 2018, ending a longheld arrangement in which AmEx and Citigroup Inc. each issued the hotel's credit cards.

Write to AnnaMaria Andriotis at annamaria.andriotis@wsj.com

(END) Dow Jones Newswires

July 20, 2017 02:47 ET (06:47 GMT)