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American Express second quarter income plunges 48%

24 July 2009  |  4971 views  |  0 Source: American Express

American Express Company (NYSE: AXP) today reported second-quarter income from continuing operations of $342 million, down 48 percent from $660 million a year ago.

Diluted earnings per share from continuing operations were $0.09, down 84 percent from $0.56 a year ago. The per share results include a reduction of $0.18 from a repurchase of preferred shares from the U.S. Treasury Department. Excluding this impact, adjusted diluted earnings per share from continuing operations were $0.27.

Net income totaled $337 million for the quarter, down 48 percent from a year ago. Per-share net income of $0.09 was down 84 percent from $0.56 a year ago, also reflecting the repurchase of preferred shares discussed above.

Consolidated total revenues net of interest expense declined 18 percent to $6.1 billion, down from $7.5 billion a year ago.

Consolidated provisions for losses totaled $1.6 billion compared to $1.8 billion in the year-ago period, primarily reflecting lower average cardmember receivables and loans, offset by higher write-offs and past due loans.

Consolidated expenses totaled $4.1 billion, down 16 percent from $4.9 billion a year ago, reflecting in part the results of the company's reengineering initiatives.

At the end of the quarter, the company's tier-one risk based capital ratio was 9.6 percent. Its tier-one common risk based ratio was also 9.6 percent, which compared favorably to the regulatory benchmark2 of 4 percent.

The company's return on average equity (ROE) was 13.2 percent, down from 31.1 percent a year ago. Return on average common equity (ROCE), which excludes the impact of preferred shares and other adjustments, was 12.0 percent, down from 30.9 percent a year ago.

"We continued to deliver on our three 2009 priorities by staying liquid, staying profitable and investing selectively in key business initiatives this quarter," said Kenneth I. Chenault, chairman and chief executive officer.

"Despite continued weakness in cardmember spending and historically high levels of loan losses, we generated $342 million of earnings from continuing operations, strengthened our capital base and further expanded our deposit gathering initiatives.

"Our results benefited from successful reengineering efforts and from a diverse business model that combines the roles of card issuer, network and merchant processor."

"Given the cutbacks in discretionary spending among affluent consumers, small businesses and corporations, our overall level of billed business is performing well relative to most of the other major card issuers. During June, the decline in cardmember spending moderated slightly from earlier in the quarter.

"Although it is still too early to point to any sure signs of an economic recovery, the number of cardmembers who are falling behind in their payments, the volume of bankruptcy filings and the level of loan write-offs were better than we had expected. If these trends continue, we expect U.S. lending write-off rates on a managed basis3 to be below 10 percent for the second half of the year, which is lower than the outlook we offered earlier this year.

"We plan to use a significant portion of any benefits from this trend improvement on marketing and promotion, investments and other business initiatives. Our priorities include growing our charge card portfolio, and expanding our merchant business, corporate services, relationships with other banks who issue cards on our network and information management capabilities. We will also continue to focus on a premium lending strategy linked to co-brand partners around the world.

"Just as in prior recessions, our aim is to be in position to gain competitive advantage once the economy begins to improve."

The second quarter results included two previously disclosed items: $182 million ($118 million after-tax) of net reengineering charges and a $211 million ($135 million after-tax) gain on the sale of a portion of the company's equity holding in Industrial and Commercial Bank of China (ICBC).

Year-ago results included a $136 million ($85 million after-tax) charge to the fair market value of the company's retained interest in securitized cardmember loans.

The lower tax provision for the quarter reflected lower pretax income and the impact of recurring permanent benefits. The year-ago tax provision included a benefit of $101 million, primarily related to resolution of certain prior years' tax items.

During the second quarter, the translation effects of a comparatively stronger U.S. dollar contributed to lower non-U.S. revenues, provisions and expenses.

Discontinued operations

Discontinued operations for the second quarter generated a loss of $5 million compared with a loss of $7 million during the year-ago period.

Segment Results

U.S. Card Services reported a second-quarter loss of $200 million, compared to a net income of $21 million a year ago.

Total revenues net of interest expense for the second quarter decreased 22 percent to $2.8 billion, driven by reduced cardmember spending, lower loan balances and lower securitization income, net.

Provisions for losses totaled $1.2 billion, a decrease of 22 percent from $1.5 billion a year ago. The decrease reflected lower loan receivables, which were partially offset by higher write-offs and past due loans. On a managed basis4, the net loan write-off rate was 10.0%, up from 8.5% in the first quarter and 5.3% a year ago. Owned net write-offs were 10.3% in the quarter, up from 8.5% in the first quarter and 5.8% a year ago.

Total expenses decreased 9 percent. Marketing, promotion, rewards and cardmember services expenses decreased 18 percent from the year-ago period, reflecting reduced investments in marketing and promotion and lower rewards costs. Salaries and employee benefits and other operating expenses increased 3 percent from year-ago levels. This increase reflected the unfavorable impact of fair value hedge ineffectiveness, higher deposit-related FDIC assessment costs and charges related to staff reductions. Offsetting these items were the benefits of ongoing reengineering initiatives.

International Card Services reported second-quarter net income of $64 million, compared to $115 million a year ago.

Total revenues net of interest expense decreased 13 percent to $1.1 billion, primarily driven by reduced cardmember spending.

Provisions for losses totaled $302 million, an increase of 25 percent or $60 million from a year ago. The increase reflected higher write-offs and past due loans, offset by lower receivables and loans.

Total expenses decreased 21 percent. Marketing, promotion, rewards and cardmember services expenses decreased 29 percent from year-ago levels, reflecting reduced marketing investments and lower volume-related rewards costs. Salaries and employee benefits and other operating expenses decreased 16 percent from year-ago levels, primarily due to the benefits of ongoing reengineering initiatives, partially offset by charges related to staff reductions.

Global Commercial Services reported a second-quarter net income of $71 million, compared to $227 million a year ago.

Total revenues net of interest expense decreased 23 percent to $1.0 billion, reflecting reduced spending by corporate cardmembers and lower travel commissions and fees.

Total expenses decreased 10 percent. Marketing, promotion, rewards and cardmember services expenses decreased 25 percent from the year-ago period, primarily reflecting lower volume-related rewards costs. Salaries and employee benefits and other operating expenses decreased 8 percent from the year-ago period, reflecting in part the benefits from ongoing reengineering initiatives, partially offset by charges related to staff reductions.

Global Network & Merchant Services reported second-quarter net income of $236 million, down 21 percent from $299 million a year ago.

Total revenues net of interest expense decreased 16 percent to $910 million, primarily reflecting lower merchant-related revenues driven by a decrease in global card billed business.

Total expenses decreased 14 percent. Marketing and promotion expenses decreased 37 percent from the year-ago period, reflecting lower brand advertising and reduced investment spending in merchant services. Salaries and employee benefits and other operating expenses decreased 7 percent. This decrease primarily reflected the benefits of ongoing reengineering initiatives and lower merchant related reserves. Offsetting these items were lower litigation-related expenses in the year-ago quarter and charges related to staff reductions this quarter.

Corporate and Other reported a second-quarter net income of $171 million, compared with net loss of $2 million a year ago. The second quarter 2009 results reflected the recognition of $220 million ($136 million after-tax) for the previously announced MasterCard and Visa settlements compared to $70 million ($43 million after-tax) in the year-ago period related to Visa. Results also included the ICBC gain discussed previously, partially offset by reengineering charges incurred during the quarter.

Read the consolidated statements of income here:

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