American Express Q3 net income jumps

The rewards expense helped lift the company’s overall costs excluding interest and credit by 13 per cent,outpacing its 9 per cent revenue growth,after interest expense.

But the company’s investments in rewards programs may be boosting customer spending on American Express cards.

The number of American Express cards worldwide rose 8 per cent and customers charged 12 per cent more to those cards than last year. The total number of cards rose to 95.8 million from 89 million a year prior,and average spending per card rose 12 per cent to $3,739.

The revenue growth was strong and credit did well,but expenses were up,said Sanjay Sakhrani,an analyst with Keefe,Bruyette & Woods Inc. When they have excess earnings power,they tend to reinvest for the future,and I think that’s what you’re seeing this quarter.

Chief Financial Officer Daniel Henry said the company plans to rein in expenses in the coming quarters and the company has focused its expenditures in areas that generate revenues.

The New York-based company said third-quarter net income rose to $1.2 billion,or $1.03 per share,from $1.1 billion,or 90 cents per share,a year ago.

That was above analysts’ average estimate of earnings of 96 cents per share on a net basis,according to Thomson Reuters.

Total revenue,net of interest expenses,rose 9 per cent to $7.57 billion.

But membership rewards costs rose 24 per cent to $1.57 billion,bringing total expenses to $5.61 billion,up 13 per cent from the same quarter last year.

The redemption rate for rewards remained steady at 92 per cent,Henry said,remaining steady for the last three quarters. But he characterised the quarter as a rounding down on the redemption rate and that it was trending towards 93 per cent.

Compensation also jumped,rising 18 per cent to $1.6 billion.

Henry said American Express was hiring additional people,but the rising quarterly compensation also included merit and incentive pay increases.

The company’s return on average equity,a measure of how well it wrings profit from its equity,was 27.8 per cent during the quarter,up from 25.9 per cent in the same quarter last year. Many big Wall Street banks are generating returns on equity in the mid-teens,or below.

The increases in expenses,however,were offset by a drop in credit costs and rising revenues.

American Express’ provision for loan losses dropped 33 per cent year-over-year to $249 million,as the company set aside 82 per cent less for card member loans from a year prior.

The company’s writeoffs are now near historic lows,Henry said,and that will likely rise in coming quarters.

Henry said the company is not managing to minimize losses,but instead focused on the optimal return from its card business.

He noted writeoffs will increase over time from their current level of 1.8 per cent.

With the enactment of the Durbin amendment’s cap on debit card fees on Oct. 1,some banks have introduced debit card fees that some analysts have speculated would lead to customers using credit and prepaid cards more.

Henry said it was too soon to note whether customers were using their credit cards more for purchases due to debit fees,or whether American Express’ prepaid cards were seeing more activity.

American Express’s shares fell 1 per cent to $45.65 in after hours trading compared with their close of $46.13.