American Express Co. (AXP), the largest credit-card issuer by spending, posted a 7% increase in first-quarter earnings as customers used their cards more and loan quality improved.
The New York-based company, which lends primarily to affluent consumers and businesses, said it earned $1.26 billion, or $1.07 a share, up from $1.18 billion, or 97 cents a share, a year earlier.
Its revenue, net of interest expense, rose 8% to $7.61 billion.
Analysts polled by Thomson Reuters estimated the company would earn $1 a share on revenue of $7.6 billion.
"Higher cardmember spending, excellent credit metrics and disciplined expense management helped us to start 2012 with record first-quarter earnings and revenues," Ken Chenault, chairman and chief executive of American Express, said in a statement Wednesday.
Credit-card issuers have performed well over the last two years as borrowers have been diligent about paying their bills on time while cautiously taking on new debt. Lenders, including American Express, have been just as diligent about purging problem loans from their books through charge-offs.
"Industry asset quality has improved significantly over the past year, and this trend is expected to continue in 2012," Moody's Investors Service said last week in its outlook for the credit-card industry. It said it expects American Express to be the "best performer" when it comes to loan write-offs this year, predicting an average rate of about 2.1% for 2012.
Last month, American Express said it was raising its quarterly dividend 11%, its first increase since 2007, and may buy back up to $5 billion in shares through the first quarter of 2013, after it fared well on the Federal Reserve's stress tests, receiving the regulator's approval for its capital-distribution plans.
American Express's shares are up more than 23% this year. Its shares were down 0.1% at $57.98 after market close Wednesday.
The company said its delinquency rate, which measures late borrower payments, for U.S. card loans was 1.3%, down from 1.4% in the fourth quarter and down from 1.8% a year earlier. Its net charge-off rate, or percentage of loans written off, was 2.3%, flat with the fourth quarter and down from 3.7% a year earlier.
Despite the improvements, loan growth remains a challenge for American Express as well other card issuers. While customers are doing a better job of keeping up on their monthly payments, they are also reluctant to carry balances, crimping the revenue that lenders earn from charging interest.
American Express said it is less reliant on revolving loan balances because it benefits from its customers propensity to use their cards a lot, which generates fees from merchants.
American Express cardholders spent $3,772, on average, in the quarter, up from $3,438 a year earlier. The company said its portfolio of U.S. card loans grew 4% from a year earlier to $51.4 billion.
"We believe the cycle of consumer deleveraging has ended, with the releveraging phase just beginning," analysts at Macquarie wrote in a research note last week. American Express is the "optimal card company to play a rebound in consumer and corporate spending," they wrote.
American Express, as does Discover Financial Services (DFS), lends to consumers and also operates a payments network that helps process transactions for merchants. It competes against Visa Inc. (V) and MasterCard Inc. (MA), which help process transactions for banks but which don't lend or issue cards to consumers.
Loan growth will force lenders to sock away more money to cover future losses, also known as reserves. The release of reserves has helped credit-card issuers boost their earnings in recent quarters, though American Express, J.P. Morgan Chase & Co. (JPM) and other companies have said they expect that trend to dissipate this year.
American Express recorded a loan-loss provision of $412 million, up from $97 million a year earlier and up from $409 million in the fourth quarter.
Expenses have been a concern for American Express investors, especially in anticipation of higher provision expenses this year. The company also will no longer receive payments this year from Visa and MasterCard from a past legal settlement.
The combination of those payments and lower credit losses last year prompted American Express to invest heavily in new areas, such as mobile- and online-payments technology, as well as ramp up marketing to capture new customers. Chenault has said the company is prepared to kick in more aggressive expense controls in anticipation of those benefits disappearing this year.
Its total expenses were $5.4 billion in the quarter, down 2.7% from the fourth quarter but up 4.4% from a year earlier.
American Express has been rolling out new technology services aimed at attracting a broader swath of customers beyond affluent borrowers. It recently disclosed a deal allowing cardholders to synchronize their accounts with the social network Twitter and receive discounts to merchants by "tweeting" specific messages. It offers similar services through Foursquare, a mobile application that lets users check in to places, and Facebook, letting customers receive deals based on their activity.
It also has dived into the prepaid-card market, offering consumers cards that can be pre-funded with a bank account but that don't come with a line of credit or require a credit check. It hopes to attract consumers who may not have qualified for one of its traditional charge or credit cards in the past and potentially get them to move to charge or credit card over time.
-By Andrew R. Johnson, Dow Jones Newswires; 212-416-3214; email@example.com
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