American Express Q2 income jumps

Source: American Express

American Express Company (NYSE: AXP) today reported second-quarter income from continuing operations of $1.3 billion, up 27 percent from $1.0 billion a year ago.

Diluted earnings per share from continuing operations were $1.07, up 27 percent from $0.84 a year ago.

Net income, which includes discontinued operations, totaled $1.3 billion for the quarter, up 31 percent from a year ago. Per-share, net income was $1.10, up 31 percent from $0.84 a year ago.

Consolidated total revenues net of interest expense were $7.6 billion, up 12 percent from $6.8 billion a year ago. The increase largely reflects higher cardmember spending and higher travel commissions and fees. While net interest income was lower, the decline was less than in previous quarters because lower net interest yield was partially offset by an increase in the company's loan portfolio.

Consolidated provisions for losses totaled $357 million, down from $652 million in the year-ago period reflecting continued improvement in credit quality.

Consolidated expenses totaled $5.5 billion, up 21 percent from $4.6 billion a year ago. The increase reflects the cumulative impact of rewards program enhancements designed to encourage cardmembers to earn and redeem rewards points, along with significant investments in business building initiatives. The company's return on average equity (ROE) was 28.2 percent, up from 23.5 percent a year ago.

During the second quarter, revenue and expense growth rates were approximately 4 percentage points higher due to the translation effects of a comparatively weaker U.S. dollar(3)

The effective tax rate was 27 percent, compared to 36 percent in the year-ago quarter. The decrease in rate is primarily due to the favorable resolution of certain prior years' tax items.

"Strong revenues and excellent credit performance helped us deliver record earnings this quarter," said Kenneth I. Chenault, chairman and chief executive officer, American Express. "Higher revenue growth reflects an attractive return on the investments we've been making to strengthen merchant relationships and enhance cardmemberardmember services.

"Cardmember spending was at an all-time high, growing 18 percent (15 percent adjusted for foreign exchange conversions) and we saw broad-based strength across the consumer, small business and corporate sectors globally. While net interest income was down from last year because of a lower yield on our portfolio, cardmember borrowing rose 2 percent, reversing the pattern of the past couple of years.

"The underlying momentum across the company once again gave us the flexibility to make substantial investments in business building initiatives. Expense levels for the quarter reflected those investments as well as the cost of enhanced rewards programs that strengthen our cardmember relationships and contribute to the overall increase in spending on our network.

"While we're very pleased with today's results, we believe that new technologies will transform the payments industry over time. With that in mind, we are moving aggressively to extend our position as a leader in online commerce and attract new customers beyond our traditional base.

"Over the past few months, we've built a location-based marketplace with Foursquare and upgraded our digital payments platform, Serve. We expanded our relationship with Facebook to deliver coupon-less offers shaped by the unique 'likes' of our cardmembers and their online friends. And, along the same lines, we created a digital marketing tool that helps merchants build their business with customized offers on Facebook and other fast growing social networks.

"As the worlds of online and offline commerce converge, the investments we're making in our digital closed loop should create opportunities to build additional business with merchants and provide cardmembers with customized service, access, offers and experiences that have always been a hallmark of American Express."

Segment Results
U.S. Card Services reported second-quarter net income of $665 million, up 29 percent from $516 million a year ago.

Total revenues net of interest expense increased 4 percent to $3.8 billion from $3.6 billion. Revenues reflect higher cardmember spending, partially offset by lower interest income due to a lower yield on the loan portfolio.

Provisions for losses totaled $228 million, down 56 percent from $519 million a year ago. The decline reflects continued improvement in credit quality.

Total expenses increased 16 percent. Marketing, promotion, rewards and cardmember services expenses increased 20 percent from the year-ago period, primarily reflecting higher volume-related rewards costs and an increase in the ultimate redemption rate as cardmembers took advantage of expanded opportunities to earn and redeem points within our Membership Rewards program. That increase was partially offset by lower marketing and promotion expenses. Salaries and employee benefits and other operating expenses increased 10 percent from year-ago levels, primarily reflecting investments in customer service initiatives and a lower benefit related to accounting for hedging the company's fixed-rate debt than in the year-ago quarter.

The effective tax rate was 26 percent compared to 37 percent in the year-ago quarter.

The decrease in rate is primarily due to the favorable resolution of certain prior years' tax items.

International Card Services reported second-quarter net income of $161 million, up 4 percent from $155 million a year ago.

Total revenues net of interest expense increased 22 percent to $1.4 billion, from $1.1 billion. Revenues reflect higher cardmember spending and the acquisition of Loyalty Partner in the first quarter of this year.

Provisions for losses totaled $78 million, down 13 percent from $90 million a year ago. The decline reflects continued improvement in credit quality.

Total expenses increased 30 percent. Marketing, promotion, rewards and cardmember services expenses increased 31 percent from year-ago levels, primarily reflecting higher volume-related rewards costs. Salaries and employee benefits and other operating expenses increased 30 percent from year-ago levels, reflecting increases in customer service initiatives, technology investments and the sales force. This quarter also includes expenses related to Loyalty Partner.

The effective tax rate was 18 percent compared to 19 percent in the year-ago quarter.

Global Commercial Services reported second-quarter net income of $177 million, up 58 percent from $112 million a year ago.

Total revenues net of interest expense increased 16 percent to $1.2 billion, from $1.0 billion, reflecting increased spending by corporate cardmembers and higher travel commissions and fees.

Provisions for losses totaled $35 million, up 25 percent from $28 million a year ago, primarily reflecting higher receivable balances.

Total expenses increased 17 percent. Marketing, promotion, rewards and cardmember services expenses increased 33 percent from the year-ago period, primarily reflecting increased volume-related rewards costs and higher cardmember rewards redemptions. Salaries and employee benefits and other operating expenses increased 14 percent from the year-ago period, reflecting the cost of reengineering initiatives and an increase in technology investments.

The effective tax rate was 33 percent, compared to 52 percent in the year-ago quarter due to a year-ago charge related to certain non-U.S. tax assets.

Global Network & Merchant Services reported second quarter net income of $324 million, up 24 percent from $261 million a year ago.

Total revenues net of interest expense increased 18 percent to $1.2 billion, from $1.1 billion, reflecting higher merchant-related revenues driven by an increase in global cardmember spending, as well as an increase in revenues from Global Network Services' bank partners.

Total expenses increased 17 percent. Marketing, promotion, rewards and cardmember services expenses increased 2 percent. Salaries and employee benefits and other operating expenses increased 24 percent, primarily reflecting an increase in sales force and technology investments.

The effective tax rate was 33 percent compared to 36 percent in the year-ago quarter.

Corporate and Other reported second-quarter net loss of $32 million compared with net loss of $27 million a year ago, partially reflecting investments in Enterprise Growth Group initiatives. The results for both periods reflect income of $220 million ($136 million after-tax) for the previously announced MasterCard and Visa settlements. 

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