(Adds comment from company's discussion on third-quarter results, updated stock price and additional details, starting in fourth paragraph.)
By Aparajita Saha-Bubna
Of DOW JONES NEWSWIRES
American Express Co. (AXP) said customers reduced their spending by 11% in the third quarter, sending the company's quarterly net income down 21% as consumers buckle under the recession.
Still, the quarterly results underscore improvements in several important measures: The pace of decline in the amount AmEx cardholders spend is slowing, and the volume of souring card loans, although at still historically high levels, fell from the earlier quarter. Furthermore, consumers at least a month behind payments -- a key gauge of future losses -- also fell from the second quarter.
"Today, while there is still reason to be cautious about high unemployment levels, we are seeing broad-based improvements in credit quality, the trends in cardmember spending are encouraging and there are signs that the recession may be approaching an end," Kenneth I. Chenault, AmEx's chairman and chief executive, said in a statement.
Decelerating growth in delinquencies and a shrinking card portfolio as the New York firm reins in credit allowed AmEx to squirrel away 13% less for potential losses than in last year's third quarter. As of Sept. 30, the company's provision for losses totaled $1.2 billion.
AmEx said it would invest a portion of funds in its loss reserve to grow business -- instead of adding the funds back to its bottom line -- as the quality of its credit card loans improves. The company plans to use these funds "to invest in long-term growth of the franchise," said Dan Henry, AmEx's chief financial officer, during a discussion of the company's third-quarter results Thursday evening.
AmEx shares, which closed up 3.82% at $36.44 in regular trading on the New York Stock Exchange, recently traded down nearly 0.8% at $36.15 in after-hours trading.
Like other card issuers, AmEx is being hurt by cutbacks in spending and customers who are falling behind on their bills. Unlike other card companies, AmEx both issues cards and processes transactions. It issues both charge cards requiring a monthly payoff and credit cards on which customers can carry a balance. Therefore, a big chunk of its revenue comes from fees it charges banks and merchants, such as grocery stores or gas stations, to process card payments. But as economic woes and unemployment grow, consumer spending slows, eating into the fees that AmEx earns from transactions.
As a result, the company reported third quarter net income of $640 million, or 53 cents a share, down from $815 million, or 70 cents a share, a year earlier. Total revenue stood at $6.02 billion, a 16% drop from a year earlier.
The results beat analysts' expectations of 38 cents per share on revenue of $5.92 billion, according to Thomson Reuters.
Average spending by AmEx card customers fell 3% from a year ago to $2,851 in the latest quarter. But the decline was much smaller than the 12% drop seen in the second quarter, suggesting a steep downturn in spending earlier this year could be moderating.
For the quarter ended Sept. 30, the company wrote off 8.9% of its U.S. card loans, down from 10% in the second quarter and up from 5.9% in last year's third quarter. Meanwhile, about 4.1% of the company's U.S. cardholders were a month behind on their payments, an improvement from 4.4% as of Jun. 30. The company's book of U.S. card loans has shrunk 19% from a year ago to $51.9 billion, as it tightened lending amid the economic slump.
To offset weaker spending trends and losses from souring card loans, AmEx cut expenses by 17%, partly through a smaller workforce and reducing marketing spending, and bulked up its retail deposit base by selling certificates of deposit.
The company's U.S. card business reported income of $109 million in the third quarter, down from income of $244 million a year earlier.
-By Aparajita Saha-Bubna, Dow Jones Newswires; 617-654-6729; aparajita.saha-bubna@dowjones.com
(John Kell contributed to this article.)