The Wall Street Journal-20080129-AmEx-s Debt Provisions Trim Earnings

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AmEx's Debt Provisions Trim Earnings

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American Express Co.'s fourth-quarter profit dropped 9.9%, as the company set aside more money to cover loan losses amid what it called clear signs of a weakening economy and business environment.

Shares of the New York company, which reported results after the close of regular trading, fell 2.9% to $46.03 in after-hours trading.

The credit-card and travel-services giant said write-offs for bad loans will continue to mount in 2008, and it expects to continue to pay more for borrowed funds, as difficult credit market and economic conditions persist. "It's clear the environment will be more difficult," Chief Financial Officer Daniel Henry said on a conference call with analysts.

The company said first-quarter profit will fall below the level of the same period a year ago, while 2008 per-share earnings will grow by 4% to 6%, below Amex's long-term target of 12% to 15%. Conditions in January "are dimensionally the same" as they were at the time of a Jan. 10 outlook, Mr. Henry said.

The latest results included a $438 million pretax credit-related charge as the company set aside more money to cover soured loans in its U.S. card-services business and a $685 million charge related to a change in its method of estimating liabilities from its membership- rewards program. The company also recognized a $1.13 billion pretax gain from its settlement agreement with Visa.

Return on equity, an important measure of profitability at financial concerns, was 37.3%, up from 34.7% a year ago. The company's return- on-equity target is 33% to 36%.

Total provisions for loan losses rose 70% to $1.52 billion.

The company issued almost 8.5 million new credit cards last year, and average card-member spending rose 8%, or 6% excluding currency fluctuations.

Credit conditions have deteriorated the most in areas where housing markets have weakened sharply, such as California and Florida, Mr. Henry said. Amex is tightening credit to borrowers in those regions and in industries that have seen downturns.

"We're being very focused," Mr. Henry said.