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AmEx Poses Slow Growth in 3Q

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Yesterday, American Express Co. (AXP - Free Report) , also known as AmEx, reported its third-quarter 2012 operating earnings per share of $1.09, which came in line with the Zacks Consensus Estimate but climbed from $1.03 recorded in the year-ago quarter, primarily on lower share count.

Meanwhile, net income from operations edged up 1% year over year to $1.25 billion from $1.23 billion in the year-ago period. However, no extraordinary items or results from discontinued operations were recorded during the reported quarter.

AmEx continues to benefit from an improved credit quality with an increased usage of cards and fewer defaults, across all business segments. Superior market network and moderate growth in spending and loan portfolio also drove the net interest income, while disciplined expense control supported the bottom line. However, healthy top-line and earnings growth were partially offset by higher-than-expected provision for losses, higher tax rate and lower return on average equity (ROE).

AmEx’ total billed business, or global card spending, continued to witness improvement in the U.S. and beyond climbing 6% year over year to $220.1 billion. The increase came from international cards-in-force that escalated 9% year over year to $49.6 million and after adjusting for foreign currency translations, this grew 8% year-over-year, while cards-in-use improved 3% in the U.S.

Behind the Headlines

AmEx posted total revenue, net of interest expenses, of $7.86 billion, up 4% year over year from $7.57 billion. However, revenues fell short of the Zacks Consensus Estimate of $7.91 billion. The upside in revenues was supported by moderate growth in card spending, net interest income and the loan portfolio. Further, lending balances and yield exhibited stability.

However, provisions for losses were $479 million, spiking 92% from $249 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 inched down 2% year over year to $5.5 billion in the reported quarter, reflecting radical decline in card member rewards and stable market and promotion expenses that were partially offset by higher cost of card member services and other operating expenses. Tax rate escalated 33% from 28% in the year-ago quarter, as the company realized some foreign tax credits in the prior-year period.

Segment Results

U.S. Card Services reported a net income of $699 million, down 5% from $733 million in the prior-year quarter. Total revenue, net of interest expenses, increased 6% to $4.1 billion from $3.8 billion in the year-ago quarter.

International Card Servicesnet income came in at $164 million, plunging 26% from $221 million in the year-ago quarter. However, total revenue, net of interest expenses, came in at $1.3 billion, down 3% from the year-ago quarter, driven by low net interest income.

Global Commercial Services net income dipped 7% to $183 million from $197 million in the prior-year quarter. Total revenue, net of interest expense, inched up 2% 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 a net income of $360 million, up 8% from $324 million in the prior-year quarter. Total revenue, net of interest expense, increased 5% year over year to $1.3 billion, driven by higher merchant-related revenues.

Corporate & Other reported net loss of $156 million compared with a net loss of $248 million a year ago. The results in the year-ago quarter included settlements worth $70 million with Visa Inc. (V - Free Report) .

Financial Update

As of September 30, 2012, AmEx’s total assets stood at $153 billion (flat from 2011-end), while long-term debt totalled $56 billion (down from $60 billion) against cash of $25 billion (in line with 2011-end). Meanwhile, shareholder’s equity totalled $19 billion at the end of the reported quarter, unchanged from 2011-end.

As of September 30, 2012, AmEx’ ROE was 26.3%, down from 27.8% in the year-ago period. Return on average common equity (ROCE) was 26.0%, dipping from 27.5% in prior-year quarter. As well, return on average tangible common equity was 33.5%, also down from 35.7% in the comparable quarter last year. However, book value increased 12% year over year to $17.37 per share.

Dividend Update

On September 24, 2012, the board of AmEx declared a regular quarterly dividend of 20 cents per share, which is payable on November 9, 2012 to shareholders of record as on October 5, 2012. In March 2012, this dividend was hiked by 11% from the prior 18 cents, which was sustained even during the recession period.

Our Take

Despite a challenging regulatory environment and volatile economic outlook that sparks near-term concerns, AmEx is expected to continue creating valued accretion in its interest income and loan portfolio. The company has been able to improve its risk profile through its spend-centric business model and creditworthy customers. We believe that the company’s focus on product diversification such as no-fee prepaid cards along with other innovative card products is contributing to the upside.

Moreover, AmEx has been upgrading its digital payment platform through strategic alliances, which is not only expanding the company’s card membership base and billings but also helping it to penetrate the unexplored market and tap the upcoming opportunities in the field of e-commerce. Going ahead, the company appears to initiate disciplined expense management with the termination of the settlement payments with MasterCard Inc. (MA - Free Report) and Visa in 2011.

As a result, we maintain our long-term Neutral stance on the stock with a Zacks Rank #3, which implies a short-term Hold rating.

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