American Express Sees Weaker U.S. Economy Thursday January 10, 4:06 pm ET Will Increase Reserves with Approximately $440 Million Fourth Quarter Charge Company Adopts Cautious Outlook for 2008
NEW YORK--(BUSINESS WIRE)--American Express Company (NYSE:AXP - News) said today that it is seeing signs of a weaker U.S. economy, as Cardmember spending began to slow and delinquencies and loan write-offs trended upward during December. Given the credit-related trends, the Company will take a pre-tax charge of approximately $440 million (approximately $275 million after-tax) for the fourth quarter. This charge will raise worldwide lending reserves to one hundred percent of past-due loans and increase reserves related to the charge card portfolio. Additionally, the Company said it is adopting a more cautious view for 2008.
American Express said it expects to report overall growth in worldwide Cardmember spending of about 16 percent for the fourth quarter (13 percent on a foreign exchange adjusted basis). The growth rate, however, trailed off to 13 percent in December (10 percent FX adjusted) with particular weakness in U.S. billings. The Company also expects to report that delinquencies in the managed U.S. lending portfolio increased to approximately 3.2 percent in the fourth quarter of 2007 from 2.9 percent in the third quarter, and that the write-off rate in this portfolio increased to approximately 4.3 percent from 3.7 percent for the same periods.1
In light of the fourth quarter charge, American Express expects fully-diluted earnings per share from continuing operations to be in the range of $0.70 to $0.72 for the quarter. Those results would compare with fourth-quarter year-ago earnings of $0.73 per share. For the full year 2007, fully-diluted EPS from continuing operations is expected to be in the range of $3.38 to $3.40, an increase of approximately 16 percent from 2006. The Company is scheduled to report fourth quarter earnings on January 28.
Kenneth I. Chenault, Chairman and Chief Executive Officer of American Express Company, said: “While overall Cardmember spending continued to be relatively strong and we benefited from a focus on the affluent sector of the market, we did see some negative credit trends among U.S. consumers during December, particularly in California, Florida and other parts of the country most affected by the housing downturn. Increasing our reserves reflects the most recent credit trends and puts us in an appropriately stronger position for 2008, when we expect those trends to translate into increased write-offs.”
As previously announced, fourth quarter results will also recognize the $1.13 billion ($700 million after-tax) initial payment in the Company’s settlement agreement with Visa, along with a number of significant additional expenses. These expenses include:
Approximately $140 million (approximately $90 million after-tax) of incremental investments in business building initiatives above the level planned for the quarter. $74 million ($46 million after-tax) in litigation-related costs pertaining to the lawsuit against Visa and MasterCard. $50 million ($31 million after-tax) in additional contributions to the American Express Charitable Fund, which supports the Company’s ongoing philanthropic activities. In addition, the Company expects to incur costs of approximately $685 million (approximately $430 million after-tax) related to its previously announced evaluation of enhancements to its method of estimating its liability for Membership Rewards. These enhancements will incorporate an actuarial based approach and reflect recent trends in redemption. The global ultimate redemption rate assumption for current program participants increased to approximately 90 percent. The higher level reflects the Company’s effort to drive further Cardmember usage of the Membership Rewards program, which in turn strengthens customer loyalty and spending on American Express cards.
Outlook for 2008 Financial Results
In light of the weakening U.S. economy, American Express is taking a more cautious view of the environment in 2008.
Based on business and economic trends during December, the Company expects that growth in Cardmember spending will slow in the year ahead. The Company’s 2008 business plan currently assumes worldwide billed business growth of approximately 8 to 10 percent for the full year. While such growth would be higher than industry-wide levels during the recent strong economy, it will still represent a decline from the levels American Express has been generating in recent years. The 2008 business plan also assumes write-off levels in the managed U.S. lending portfolio will average 5.1 to 5.3 percent for the full year.1
“In line with our cautious outlook for 2008, we plan to curtail certain discretionary expenses and hold full-year marketing and promotion expenses somewhat below 2007 levels. Spending at this level should still allow us to capitalize on competitive opportunities and position the Company to continue to gain share over the medium-to-long term,” said Mr. Chenault.
American Express believes that in the current business and economic environment, the flexibility it has built into its business model should generally position the Company to grow earnings per share in the 10 to 12 percent range. However, several significant gains and tax benefits in 2007 will have a negative impact on year-over-year comparisons in 2008. As a result, the Company expects reported earnings per share for 2008 to increase in the 4 to 6 percent range from 2007 levels.
Quarterly results varied during 2007, reflecting significant items that occurred in each period and substantially different levels of spending on marketing and promotion initiatives. Because of these factors, year-over-year EPS comparisons are likely to show significant variances by quarter – with 2008 first quarter earnings below last year’s level in part as a result of the relatively low level of marketing and promotion expenditures in the first quarter of 2007.
American Express reaffirmed its long-term financial targets of 12 to 15 percent EPS growth, at least 8 percent revenue growth and return on equity of 33 to 36 percent, on average and over time.
“Our plans for the coming year assume a moderately weaker U.S. economy with employment levels, consumer spending and market interest rates that do not show significant deterioration from today’s levels. They also assume write-off rates that are above the historic lows of recent years, but still below what we experienced in 2001 and 1991, the last two economic downturns in the United States.
“Since then, we have built a market leadership position with customized products, innovative rewards programs and a high-spending customer base. We are less weighted toward the travel and entertainment sector and have a larger presence in everyday categories where consumers don’t typically reduce their spending during economic downturns to the same extent as they do in T&E spending. Additionally, 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,” added Mr. Chenault.
(20min delay)