American Express Company reported first quarter income from continuing operations of $1.1 billion, up 22 percent from $876 million a year ago. Diluted earnings per share from continuing operations were $0.88, up 26 percent from $0.70. Net income for the quarter also totaled $1.1 billion, up 21 percent from $873 million a year ago, and $0.87 per share, up 26 percent from $0.69. Consolidated revenues net of interest expense rose 10 percent to $6.7 billion, up from $6.1 billion a year ago.
Consolidated expenses totaled $4.2 billion, up 4 percent from $4.1 billion a year ago.
The Company’s return on equity (ROE) was 36.6 percent. Higher revenues, combined with tight controls on discretionary expenses, delivered excellent bottom line results for the quarter,” said Kenneth I. Chenault, chairman and chief executive. Net income for the quarter was a record, exceeding the $1 billion level for the first time since the Ameriprise spin-off in late 2005.
Our strong revenue growth reflects the benefit of multi-year investments in our payments business that are generating across-the-board spending growth from consumer, small business and corporate Cardmembers. Our ability to customize marketing and reward programs for areas with the highest returns helped us to start the year with strong momentum. Our performance was again at the top of the industry, with Cardmember spending up 15 percent and loan volumes up 29 percent. We also added nearly 2 million cards-in-force this quarter. Credit quality was very strong, reflecting our management controls and continued success in the premium sector. Key indicators are returning to a more traditional range compared to the unusually good levels of a year ago.
The first quarter results included:
– An $80 million ($50 million after-tax) gain in connection with the initial adoption of a new accounting standard that requires the Company to record in its Consolidated Statements of Income changes in the fair market value of its retained interest in securitized cardmember loans (these changes in fair market value were previously recorded in shareholders’ equity); – A $63 million ($39 million after-tax) gain related to changes in the Company’s U.S. pension plans; and – A $60 million (pretax and after-tax) reserve established for regulatory and legal exposure at American Express Bank International (a subsidiary of American Express Bank Ltd.). Also included in the quarter was $32 million ($21 million after-tax) of reengineering costs related primarily to restructuring initiatives throughout the Company. Significant items in the year-ago quarter included: – A $112 million ($73 million after-tax) charge associated with certain adjustments made to the Membership Rewards reserve model in the U.S.; – A $72 million ($47 million after-tax) reduction in cardmember lending finance revenue, and securitization income, net, related to higher than anticipated Cardmember completion of consumer debt repayment programs and certain associated payment waivers; and – An $88 million ($40 million after-tax) gain from the sale of an investment in Egyptian American Bank (EAB). Also included in the year-ago quarter was $25 million ($16 million after-tax) of reengineering costs.
In addition, the year-ago quarter results included a favorable impact from lower early credit write offs, in the aftermath of bankruptcy legislation changes and lower than expected costs associated with Hurricane Katrina that had been provided for in 2005. These benefits were partially offset by higher provisions for losses in Taiwan due primarily to the impact of industry-wide credit issues. Discontinued operations Discontinued operations (primarily businesses sold in previous years) reflected a loss of $8 million this quarter compared to a $3 million loss a year ago.
Segment results
As previously reported, the Company had been in discussions with the Securities and Exchange Commission (SEC) regarding its reportable operating segments. The Company recently completed its discussions with the SEC. As a result of those discussions, Travelers Cheques & Prepaid Services (previously reported in U.S. Card Services) and international banking businesses (previously reported in International Card & Global Commercial Services) are now reported in the Corporate & Other segment. The following segment discussion, as well as the selected financial data for all periods presented, reflect these changes.
The following discussion of first quarter results presents all segments on a GAAP basis.
U.S. Card Services reported first quarter net income of $644 million, up 22 percent from $527 million a year ago. Revenues net of interest expense for the first quarter increased 16 percent to $3.4 billion, reflecting higher spending and borrowing by consumers and small businesses. Cardmember lending finance revenue increased 57 percent, reflecting substantial growth in owned loan volume. Securitization income, net, increased 18 percent, primarily due to the initial adoption of a new accounting standard. Revenues in last year’s first quarter were reduced by the previously mentioned costs associated with a higher than anticipated number of Cardmembers completing consumer debt repayment programs. Total expenses decreased 1 percent. Marketing, promotion, rewards and cardmember services expenses decreased 7 percent from the year-ago period, which included a $106 million charge for certain adjustments to the Membership Rewards reserve model. Lower marketing and promotion expenses this quarter were offset by a volume-related increase in rewards costs. Human resources and other operating expenses increased 8 percent, reflecting higher technology costs, professional services and reengineering costs. These items were partially offset by $36 million of the gain from changes to the Company’s U.S. pension plans. Provisions for losses increased 89 percent reflecting higher loan volumes and an increase in write-off and delinquency rates from the unusually low levels that followed the bankruptcy legislation mentioned earlier.
International Card & Global Commercial Services reported first quarter net income of $235 million, up 64 percent from $143 million a year ago. Revenues net of interest expense increased 3 percent to $2.0 billion, reflecting higher spending by corporate and international consumer Cardmembers, as well as higher loan balances. These increases were partially offset by last year’s sale of card-related operations in Brazil, Malaysia, and Indonesia.
Total expenses were flat. Human resources and other operating expenses decreased 2 percent, benefiting from $21 million of the previously mentioned pension gain. Marketing, promotion, rewards and cardmember services expenses increased 7 percent. An increase in volume-related rewards costs was partially offset by lower marketing and promotion expenses.
Provisions for losses decreased 19 percent from year-ago levels, which had reflected industry-wide credit issues in Taiwan.
Global Network & Merchant Services reported first quarter net income of $236 million, up 42 percent from $166 million a year ago. Revenues net of interest expense for the first quarter increased 17 percent to $877 million. The increase reflects continued strong growth in merchant-related revenue primarily resulting from higher company-wide billed business. The increase also reflects higher network partner-related fees.
Spending on Global Network Services cards increased 59 percent from year-ago levels. Cards-in-force issued by bank partners increased 45 percent. These increases also reflect, in part, the completion in 2006 of independent operator agreements in Brazil, Malaysia, and Indonesia. Total expenses increased 10 percent. Human resources and other operating expenses increased 15 percent reflecting increased staffing levels and technology costs. Partially offsetting these increases was a 4 percent decrease in brand-related marketing and promotion expenses. Provisions for losses in the quarter reflect a reduction in merchant-related reserves.
Corporate & Other reported first quarter net expenses of $50 million, compared with net income of $40 million a year ago. Expenses for the quarter included the previously mentioned reserves established at American Express Bank International. The year-ago quarter included an $88 million ($40 million after-tax) gain related to the completion of the sale of the Company’s investment in EAB.
American Express Company (www.americanexpress.com) is a leading global payments, network and travel company founded in 1850.
For more details on American Express’ first quarter performance visit CardData ([www.carddata.com][1]).
[1]: http://www.carddata.com
