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Yesterday, American Express Co. (AXP - Analyst Report), or AmEx, reported its fourth-quarter 2012 operating earnings per share of $1.09. The result was in line with the Zacks Consensus Estimate but climbed from $1.01 in the year-ago quarter.

Consequently, net income from operations increased 3.2% year over year to $1.23 billion from $1.19 billion in the year-ago period. However, reported net income plunged to $637 million or 56 cents in the reported quarter due to higher expenses.

This included restructuring charges of $287 million or 26 cents per share, membership rewards estimation enhancement expense of $212 million or 19 cents per share and cardmember reimbursements of $95 million or 8 cents per share, all post-tax. Meanwhile, no adjustments were recorded in the year-ago quarter.

AmEx’s total billed business, or global card spending, continued to witness improvement in the U.S. and beyond climbing 8% year over year to $235.5 billion. The increase came from international cards-in-force that escalated 9% year over year to $80 million, while cards-in-use improved 7% in the U.S.

Behind the Headlines

AmEx posted total revenue, net of interest expenses, of $8.14 billion, up 5% year over year from $7.74 billion and edged past the Zacks Consensus Estimate of $8.11 billion. The upside in revenues was supported by moderate growth in card spending, net interest income and the loan portfolio. Further, delinquency rates and yield exhibited stability, partially offset by lower lending balances.

However, provisions for losses were $638 million, spiking 56% from $409 million in the prior-year quarter. The increase was driven primarily by lower reserve release, partially offset by lower net write-offs in the reported quarter.

Meanwhile, AmEx’s total expenses escalated 18% year over year to $6.57 billion in the reported quarter. This reflected a steep rise in card member rewards and restructuring charges along with higher salaries and benefits expenses and professional services. These were partially offset by lower cost market and promotion expenses and stability in other operating expenses.

The restructuring charge primarily includes severance payments to about 5,400 employees, expected to be discharged in 2013. AmEx also expects to create more jobs during the year, leading to an overall employee decline of 4–6% in 2013. The current staff strength stands at 63,500. Tax rate dipped to 31% from 32% in the year-ago quarter.

Segment Results

U.S. Card Services reported a net income of $423 million, down 42% from $727 million in the prior-year quarter. Total revenue, net of interest expenses, increased 4% to $4.1 billion from $3.9 billion in the year-ago quarter.

International Card Services net income came in at $95 million, plunging 38% from $152 million in the year-ago quarter. However, total revenue, net of interest expenses, came in at $1.4 billion, up 5% from the year-ago quarter, driven by higher cardmember spending and fee revenues related to Loyalty Partner.

Global Commercial Services net income plummeted 64% to $65 million from $180 million in the prior-year quarter. Total revenue, net of interest expense, inched up 3% year over year to $1.2 billion, reflecting higher spending by corporate card members, while business travel commissions and fees declined.

Global Network & Merchant Services reported net income of $354 million, up 9% from $324 million in the prior-year quarter. Total revenue, net of interest expense, increased 6% year over year to $1.4 billion, driven by higher merchant-related revenues.

Corporate & Other reported net loss of $300 million compared with a net loss of $191 million a year ago. The results included restructuring charges in the reported quarter and settlements worth $70 million with Visa Inc. (V - Analyst Report) in the year-ago quarter.

Highlights of Full-Year 2012

For full-year 2012, AmEx’s operating earnings of $4.40 per share were a penny higher than the Zacks Consensus Estimate of $4.39 and modestly rose from $4.09 per share reported in 2011. Operating net income grew 3.6% year over year to $5.08 billion.

However, including the charges on restructuring and membership rewards, reported net income stood at $4.48 billion or $3.89 a share, down from $4.94 billion or $4.12 per share in 2011.

Total revenue, net of interest expenses, rose 5% year over year to $31.6 billion and were almost flat from the Zacks Consensus Estimate of $31.5 billion. Provision for losses surged 79% over 2011 to $1.99 billion, while total expenses climbed 6% to $23.14 billion in 2012.

As of December 31, 2012, AmEx’s total assets stood at $153 billion (flat from 2011-end), while long-term debt totalled $59 billion (down from $60 billion at 2011-end) against cash of $22 billion (down from $25 billion at 2011-end). Meanwhile, shareholder’s equity totalled $19 billion at the end of the reported quarter, unchanged from 2011-end.

As of December 31, 2012, AmEx’s ROE was 23.1%, down from 27.7% in the year-ago period. Return on average common equity (ROCE) was 22.8%, declining from 27.3% in the prior-year quarter. Further, return on average tangible common equity was 29.2%, also down from 35.8% in the comparable period last year. However, book value increased 6% year over year to $17.09 per share.

Dividend Update

On November 20, 2012, the board of AmEx declared a regular quarterly dividend of 20 cents per share, which is payable on February 8, 2013 to shareholders of record as on January 4, 2013.

On November 9, 2012, AmEx paid a regular quarterly dividend of 20 cents per share to shareholders of record as on October 5, 2012. In March 2012, this dividend was hiked by 11% from 18 cents, which was sustained even during the recession period.

Peer Take

AmEx’s peer MasterCard Inc. (MA - Analyst Report) is scheduled to release its fourth quarter results before the market opens on January 31, 2013, and Visa is slated to announce its fiscal first quarter 2013 results after the closing bell on February 6, 2013. All the three companies carry a Zacks #3 Rank (Hold) along with a long-term Neutral recommendation.

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