By Hugh Son
April 23 (Bloomberg) -- American Express Co., the biggest U.S. credit-card company by purchases, beat analysts’ profit estimates and said that it intends to repay the government’s rescue-fund investment. The bank rose in late New York trading.
Profit from continuing operations in the first quarter declined 58 percent to $443 million, or 32 cents a share, from $1 billion, or 89 cents, a year earlier as consumers defaulted on more loans, the New York-based company said today in a statement. Results beat the 13-cent average estimate of 20 analysts surveyed by Bloomberg.
“At a time when some parts of the card industry were incurring substantial losses, we remained solidly profitable,” Chief Executive Officer Kenneth Chenault said in the statement. “If permitted by our supervisors and if supported by the results of the stress assessment, we intend to repay the government investment of preferred shares and warrants.”
The company has posted profits and set aside more reserves for failed loans this year as surging U.S. unemployment makes it harder for customers to repay debt. The jobless rate reached 8.5 percent last month, a 25-year high, and American Express said today that it expects the rate to reach 9.7 percent in December. Consumers also spent less, charging an average of $2,391 in the quarter, 16 percent lower than a year earlier.
American Express rose 7.5 percent to $22.55 at 5:57 p.m. in New York trading following the announcement. It had declined about 53 percent this year by the close of regular trading.
Card issuers sought status as bank holding companies to tap the government’s Troubled Asset Relief Program. American Express got $3.39 billion in January and rival Discover Financial Services received $1.2 billion in March.
American Express’s expenses fell 22 percent to $3.6 billion, partly because of a reorganization announced in October. American Express said then it would slash about 7,000 jobs, or 10 percent of its workforce, and today it announced “additional reductions in staff” for the second quarter.
American Express’s U.S. card unit posted a $25 million loss in the first quarter, compared with net income of $523 million a year ago. The company boosted loss provisions by 57 percent to $1.4 billion from a year earlier. Charge-offs, or loans deemed uncollectible, surged to 8.5 percent in the quarter, from 4.3 percent a year earlier.
The charge-off rate will climb 2 percent to 2.5 percent in the second quarter and another 0.5 percent in the third quarter, Chenault said, and may level off in the fourth quarter.
Net income fell 56 percent to $437 million, American Express said today. Discontinued operations in the quarter resulted in a loss of $6 million, narrowing from a $53 million loss a year ago.
The firm raised $3.5 billion in new deposits and plans to use consumer deposits as its main source of funding.
Defaults will probably set records this year as more delinquent accounts are turning into losses for lenders, Fitch Ratings said in a November report. American Express said this month that March defaults rose to 8.8 percent from 8.6 percent in February, and the rate would have been worse if the company hadn’t sold loans that had been written off.
Lenders are cutting jobs, closing unused accounts and scaling back credit lines to insulate against further losses as the Federal Reserve approved rules last year to curtail interest-rate increases and late fees.
Meeting With President
Managers from 13 credit-card firms, including Lawrence Sharnak, head of American Express’s U.S. lending, met with President Barack Obama today to discuss proposed legislation intended to make their loans more transparent. Industry representatives have said that the pending Fed rules, which take effect next year, are sufficient and further regulation will raise consumer costs and limit the availability of credit.
“In this kind of an environment with this kind of administration, there’s certainly the risk of more credit-card regulation,” said Claire Gruppo, managing director of Gruppo, Levey & Co., a New York investment banking firm.
Capital One Financial Corp., the Mclean, Virginia-based credit-card company, posted a $111.9 million first-quarter loss this week as it set aside more for loan defaults. The bank said its previous estimate of $8.6 billion in failed 2009 loans was too low and declined to update the guidance.
Capital One said charge-offs in its U.S. card business reached 8.4 percent in the first quarter, exceeding the 8.1 percent estimate given last year. The rate will “cross 10 percent in the next couple of months,” Chief Executive Officer Richard Fairbank said in a conference call.
Bank of America
Bank of America Corp., the largest U.S. lender by assets, reported a $1.77 billion first-quarter loss in its credit-card services unit, compared with an $867 million gain a year earlier. Charging off bad credit-card loans and increasing reserves for expected defaults cost $8.2 billion, up from $4.3 billion a year earlier.
Discover, the Riverwoods, Illinois-based lender that also runs the fourth-largest credit-card network, said last month that first-quarter earnings from continuing operations fell 50 percent to $120 million. The firm tripled its provision for loan losses to $937.8 million from $305.6 million a year earlier.
American Express was ranked first by the total value of purchases and cash advances to U.S. cardholders in the first half of 2007, according to the Carpinteria, California-based Nilson Report, a trade publication. JPMorgan Chase & Co. and Bank of America Corp. were ranked second- and third-largest.
Billionaire Warren Buffett’s Berkshire Hathaway Inc. owns the largest American Express stake with 151.6 million shares, 13 percent of outstanding stock, according to Bloomberg data.
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