The FINANCIAL — American Express Company on July 19 reported second-quarter net income of $1.3 billion, down 33 percent from $2.0 billion a year ago.
The year-ago quarter included results related to the Costco U.S. relationship that has since been discontinued, a gain of $1.1 billion ($677 million after-tax) from the sale of the related loan portfolio, and a $232 million ($151 million after-tax) restructuring charge.
Diluted earnings per share in the current quarter were $1.47, down 30 percent from $2.10 a year ago.
Second-quarter consolidated total revenues net of interest expense were $8.3 billion, up 1 percent from $8.2 billion a year ago. Excluding business from the discontinued relationship and the impact of foreign exchange rates, adjusted revenues net of interest expense grew 8 percent.1 Those increases primarily reflected higher net interest income and higher adjusted Card Member spending, according to American Express.
Consolidated provisions for losses were $584 million, up 26 percent from $463 million a year ago. The increase primarily reflected continued strong growth in the loan portfolio and a higher lending write-off rate.
Consolidated expenses were $5.8 billion, up 21 percent from $4.8 billion last year. The year-ago quarter included three significant items: the gain from the loan portfolio sale, which was reported as an expense reduction; the restructuring charge; and Costco-related rewards expenses. The current quarter reflected higher rewards expenses related to product enhancements.
Operating expenses were up 39 percent versus the prior year. Excluding the prior-year portfolio sale gain and restructuring charge, adjusted operating expenses were down 4 percent.
The effective tax rate for the quarter was 31 percent, down from 33 percent in the year-ago quarter, due largely to the geographic mix of earnings.
The company’s return on average equity (ROE) was 21.7 percent, down from 26.4 percent a year ago.
“We started the year strong and accelerated the pace this quarter by continuing to execute a strategy that is transforming our consumer, commercial and merchant businesses,” said Kenneth I. Chenault, chairman and chief executive officer.
“Our transition started in 2015 when we renewed several long term cobrand relationships and moved away from others that no longer made economic sense. It continued with aggressive initiatives to lower operating expenses and increase investment spending in businesses with the most attractive growth potential. While each of those moves suppressed short-term results, we believed they would put us in a stronger position for the longer term. They have.
“There were many signposts of progress this quarter: adjusted revenue growth accelerated to 8 percent; adjusted Card Member spending was up 8 percent and spread across business units and geographies3; healthy loan growth and credit quality; strong new card acquisition – particularly among affluent consumers in the U.S.; and continued progress on reducing operating expenses. The work is not complete, but we’re now moving forward with a stronger foundation and a blueprint for growth in the years ahead.
“Beyond any one quarter, though, we’ve been focused on emerging from the transition with a stronger, more diversified mix of businesses. We have built a leaner organization with:
A consumer business generating strong growth internationally and in the U.S. where we have strengthened our product offerings in the premium sector.
A lending business that has broadened our Card Member relationships and successfully balanced growth with strong credit quality.
An industry-leading presence with small and medium-sized enterprises that use our cards for their payment needs.
A larger merchant network that accommodates a greater share of our Card Member spending.
A card acquisition engine that has been successfully redesigned for the digital age.
A more agile technology infrastructure that brings customized products and services to market more quickly and efficiently.
“While this work was underway, we maintained a strong balance sheet and results from the Federal Reserve’s recent stress test show a resilient business model. We’re pleased that the Fed approved our plan to return an additional $4.4 billion to shareholders over the next four quarters through share repurchases.
“Now that we are halfway through the year, we are confident that we will deliver earnings per share between $5.60 and $5.80 in 2017.”
Segment Results
U.S. Consumer Services reported second-quarter net income of $440 million, down 59 percent from $1.1 billion a year ago. The year-ago period included Costco-related revenues, expenses and a portion of the previously mentioned portfolio sale gain.
Total revenues net of interest expense were $3.2 billion, unchanged from a year ago.
Provisions for losses totaled $345 million, up 46 percent from $237 million a year ago. The increase primarily reflected strong growth in the loan portfolio and a higher lending write-off rate.
Total expenses were $2.2 billion, up 71 percent from $1.3 billion a year ago. The year-ago period included a portion of the portfolio sale gain and restructuring charge, as well as Costco-related rewards expenses. The current quarter reflected rewards expenses related to product enhancements.
The effective tax rate was 34 percent compared to 37 percent a year ago.
International Consumer and Network Services reported second-quarter net income of $209 million, down 8 percent from $228 million a year ago.
Total revenues net of interest expense were $1.4 billion, up 1 percent (up 3 percent FX-adjusted4) from a year ago. The increase primarily reflected higher discount revenue, net interest income and net card fees, partially offset by the benefit of a contractual partner payment in the prior year.
Provisions for losses totaled $84 million, up 8 percent from $78 million a year ago.
Total expenses were $1.1 billion, up 1 percent (up 2 percent FX-adjusted4) from a year ago. The year-ago period included a portion of the previously mentioned restructuring charge. The increase in the current quarter primarily reflected rewards expenses driven by higher Card Member spending, as well as Card Member services costs.
The effective tax rate was 24 percent, compared to 17 percent in the year-ago quarter, which included a benefit related to the resolution of certain prior years’ tax items.
Global Commercial Services reported second-quarter net income of $500 million, down 13 percent from $576 million a year ago. The year-ago period included Costco-related revenues, expenses and a portion of the previously mentioned portfolio sale gain.
Total revenues net of interest expense were $2.6 billion, up 3 percent from $2.5 billion a year ago, primarily reflecting higher Card Member spending.
Provisions for losses totaled $154 million, up 11 percent from $139 million a year ago.
Total expenses were $1.6 billion, up 15 percent from $1.4 billion a year ago. The year-ago period included a portion of the portfolio sale gain and restructuring charge, as well as Costco-related rewards expenses. The current quarter reflected higher rewards expenses related to product enhancements.
The effective tax rate was 35 percent, down from 37 percent a year ago.
Global Merchant Services reported second-quarter net income of $430 million, up 15 percent from $373 million a year ago.
Total revenues net of interest expense were $1.2 billion, unchanged from a year ago. The prior-year period included Costco-related revenues.
Total expenses were $472 million, down 14 percent from $547 million a year ago. The decrease reflected lower operating expenses and marketing spending.
The effective tax rate was 37 percent, down from 38 percent a year ago.
Corporate and Other reported second-quarter net loss of $239 million compared with net loss of $229 million a year ago.
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