The Wall Street Journal-20080111-American Express to Take Big Charge as Loans Sour
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American Express to Take Big Charge as Loans Sour
American Express Co., known for its creditworthy customer base, said that cardholder spending is slowing down and delinquencies are rising.
As a result, the card company said yesterday that it would take a $440 million pretax charge against fourth-quarter earnings as it sets aside more money to cover soured loans. The company's stock fell 6.9% in after-hours trading last night after the announcement.
Though the problems so far aren't as bad as AmEx has experienced in prior economic downturns, the news suggests a new set of problems could be building for other big financial institutions already beset by mortgage troubles.
Bank of America Corp., J.P. Morgan Chase & Co. and Citigroup Inc. are all big issuers of credit cards. The AmEx news also comes on the heels of an announcement yesterday from Capital One Financial Corp. that its results were being hurt by a rise in problem-plagued loans among its cardholders.
The economy depends heavily on the health and growth of consumer spending to produce jobs. Economists worry that overstretched consumers might pull back, creating ripple effects that push the economy into a more severe slowdown or recession. The Labor Department said last week that the December unemployment rate jumped to 5% from 4.7%.
In a statement, AmEx Chairman and Chief Executive Kenneth Chenault said business worsened in December, particularly in California, Florida and other regions most affected by the housing downturn.
In a conference call yesterday afternoon, Daniel Henry, chief financial officer of AmEx, said the troubles were broad-based and sudden. Most of the problems came from consumer and small-business customers. "We have seen it across all [card] products and across all merchant categories, except for oil," Mr. Henry said.
Fourth-quarter loans that were at least 30 days past due amounted to 3.2% of its U.S. loan portfolio outstanding, up from 2.9% in the third quarter. Its fourth-quarter rate of loan write-offs rose to 4.3% of loans outstanding, compared with 3.7% in the third quarter.
AmEx now expects write-offs in the U.S. lending business to average 5.1% to 5.3% for the year. Mr. Henry stressed that those figures are still significantly better than previous economic downturns. Write-off rates were 6% in 2001 and 9% in 1991, he said.
"Our focus on the prime and affluent sectors should help us weather the current conditions better than many competitors, although clearly we are not immune from further deterioration in the overall economy and credit environment," Mr. Chenault said in the statement.
AmEx has long been the darling of the credit-card industry. In recent months, however, investors and analysts have expressed concern about the company's strong loan growth.
Once known for pitching cards to the nation's most affluent customers who were required to pay off their purchases every month, AmEx now lets many of its consumers keep a balance that charges interest. The company also has been aggressively pitching cards to younger consumers in the past couple of years. Mr. Henry said that newer card accounts performed slightly worse than the accounts that have been opened for a number of years.
AmEx said it is seeing a slowdown in cardholder spending, one of its most important business metrics. Although the company said fourth- quarter world-wide spending grew 16% in the fourth quarter, it said that the growth rate slipped to 13% in December, with particular weakness in the U.S. The company's billed business -- a key measure of transaction volume -- is expected to be 8% to 10% in 2008, down from the midteens in the past few years.
The company is expected to post fourth-quarter earnings on Jan. 28. It now expects to report operating earnings of between 70 cents a share and 72 cents a share compared with 73 cents a share in the year- earlier period.
The company also scaled back expectations for 2008, saying that it expects cardholder spending to continue to slow. The company plans to scale back certain discretionary expenses and keep full-year marketing and promotion expenses somewhat below 2007 levels.
AmEx reported the news after 4 p.m, when its shares were down 16 cents to $48.92 in 4 p.m. New York Stock Exchange composite trading. In the after-hours session the shares fell $3.39 to $45.53.
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David Enrich contributed to this article.
