AmEx Outdoes, Profit Drops 

American Express Company’s (AXP - Analyst Report) third quarter earnings from continuing operations of 54 cents per share came in substantially ahead of the Zacks Consensus Estimate of 36 cents. However, the results were down 27.0% from 74 cents in the year-ago quarter.

The results for the quarter included an after tax $113 million non-recurring benefit associated with the company’s accounting for a net investment in consolidated foreign subsidiaries. Excluding that benefit, earnings from continuing operations would have been 44 cents per share.

Results for the quarter deteriorated over the prior-year quarter primarily as a result of decrease in income in all segments except International Card Services, which recorded a net income of $127 million, compared to $67 million in the prior-year quarter. Also, a relatively strong U.S. dollar contributed to lower non-U.S. revenues, provisions and expenses during the reported quarter.

Net income for the quarter came in at $640 million, down 21.5% from $861 million in the prior-year quarter. On a per share basis, income was 53 cents, compared to 70 cents in the prior-year quarter. Loss from discontinued operations came in at $2 million, compared to $46 million in the year-ago quarter.

Total revenue net of interest expense declined 16.0% year-over-year to $6.0 billion. The decrease in revenue was due primarily to a decline in card-member spending and loan volumes. However, overall billings have stabilized during the last few months.

Provisions for losses were $1.2 billion, compared to $1.4 billion in the prior-year quarter.  A 13.3% year-over-year decrease in provisions for losses was due primarily to lower average card-member receivables and loans.

Total expenses for the quarter decreased 17.1% year-over-year to $3.9 billion, reflecting in part the results of the company’s re-engineering initiatives.

In the U.S. Card Services business, net charge-offs fell to 8.9% from 10.0% in the prior quarter, though up over the prior-year quarter.

The management expects credit card charge-off rate to decline in the fourth quarter compared to the third quarter.

At June 30, 2009, the company’s Tier-1 risk based capital ratio was 9.7%. Its Tier-1 common risk based ratio was also 9.7%. This compared favorably to the regulatory benchmark of 4%.

Return on average equity (ROE) came in at 11.7%, down substantially from 27.8% in the year-ago quarter. Return on average common equity (ROCE) – which excludes the impact of preferred shares and other adjustments – was 10.4%, down from 27.6% in the prior-year quarter.

U.S. Card Services reported a net income of $109 million, compared to a net income of $244 million in the prior-year quarter. Total revenue for the quarter decreased 16.1% year-over-year to $2.9 billion, driven by reduced card-member spending, lower loan balances and lower securitization income.

International Card Services net income came in at $127 million, compared to $67 million in the year-ago quarter. Total revenue decreased 6.8% year-over-year to $1.1 billion, primarily driven by reduced card-member spending and lower loan balances.

Global Commercial Services net income came in at $116 million, compared to $134 million in the prior-year quarter. Total revenues decreased 16.9% year-over-year $997 million, reflecting reduced spending by corporate card-members and lower travel commissions and fees.

Global Network & Merchant Services reported a net income of $240 million, down 7.0% from $258 million in the prior-year quarter. Total revenues decreased 10.1% year-over-year to $963 million, primarily reflecting lower merchant-related revenues driven by a decrease in global card billed business.

Corporate & Other net income came in at $50 million, compared to a net income of $158 million in the prior-year quarter. The results for the reported quarter include recognition of $220 million ($136 million after-tax) for the MasterCard and Visa settlements.

Though results for the last few quarters benefited from successful re-engineering efforts and a diversified business model, American Express experienced continued weakness in card-member spending and high levels of loan losses. We anticipate continued benefits from the company’s diversification and cost-cutting efforts, but the ongoing global crisis and volatile U.S. dollar will continue to impact the results in the coming quarters.