American Express Q2 net income falls 38%

Diluted earnings per share from continuing operations were $0.56, down 35 percent from $0.86 a year ago.

Net income totaled $653 million for the quarter, down 38 percent from a year ago. On a per-share basis, net income was $0.56, down 36 percent from $0.88 a year ago.

Consolidated revenues net of interest expense rose 8 percent to $7.5 billion, up from $6.9 billion a year ago.

Consolidated expenses totaled $4.8 billion, up 6 percent from $4.6 billion a year ago.

The Company's return on equity (ROE) was 31.1 percent, down from 37.5 percent a year ago.

The second quarter results included a $600 million ($374 million after-tax) addition to U.S. lending credit reserves that reflects a deterioration of credit indicators beyond our prior expectation, and a $136 million ($85 million after-tax) charge to the fair market value of the Company's retained interest in securitized Cardmember loans. The second quarter also included a tax benefit of $101 million primarily related to resolution of certain prior years' tax items.

Year-ago results included a $65 million tax benefit from the IRS related to the treatment of certain prior years' card fee income.

"Fallout from a weaker U.S. economy accelerated during June with consumer confidence dropping, unemployment rates moving sharply higher and home prices declining at the fastest rate in decades," said Kenneth I. Chenault, chairman and chief executive officer. "Consumer spending slowed during the latter part of the quarter and credit indicators deteriorated beyond our expectations.

"In light of the weakening economy, we are no longer tracking to our prior forecast of 4-6 percent earnings per share growth. That outlook was based on business and economic conditions in line with, or moderately worse than, January 2008. The environment has weakened significantly since then, particularly during the month of June.

"The scope of the economic fallout was evident even among our longer term, superprime Cardmembers," Mr. Chenault said. "Newer Cardmembers -- whose write-off levels are typically higher than the total portfolio -- are also feeling the impact, but we are confident that the relationships we've built during the last several years will generate attractive economics over their life cycle.

"Despite the weakness in our bottom line, revenue grew a strong 8 percent and many of our key business metrics performed very well as we benefited from the strength of our international consumer and Global Business-to-Business operations.

"While we are obviously disappointed in the impact that the higher reserves had on earnings, our coverage levels are now substantially higher than at any point during the last three years. The current reserves reflect our expectation that write-offs will continue to rise in the remainder of 2008.

"We remain focused on gaining profitable share but, as you would expect in this environment, we will be very selective with our investment dollars. While we continue to scale back some card acquisition efforts and reduce credit lines selectively, we also plan to take advantage of growth opportunities in the marketplace.

"Our reengineering efforts over the past decade have resulted in a well controlled expense base, but in order to give us greater flexibility to invest in the business, we are accelerating those efforts. Our aim is to free-up resources by reducing overall costs and staffing levels. While we have not yet quantified the impact of these activities, we expect them to result in restructuring-related charges during the second half.

"While we have been able to generate substantial earnings and returns relative to many in the financial sector, we do not expect to meet or exceed our long-term financial targets until we see improvements in the economy.

"We do not know the extent of the current downturn, but the position of our company today is financially sound and competitively strong. We've lowered our risk profile by divesting some businesses and we are well-positioned to execute against growth opportunities in a manner that continues to appropriately balance our short, medium and long-term objectives."

Discontinued operations

Discontinued operations for the second quarter reflected a loss of $2 million compared with income of $17 million during the year-ago period, which included results of American Express Bank Ltd.

Segment Results

U.S. Card Services reported second-quarter net income of $21 million, down from $580 million a year ago.

Revenues net of interest expense for the second quarter increased 1 percent to $3.6 billion, reflecting higher Cardmember spending and borrowing. This benefit was partially offset by lower securitization income, net, which reflected the $136 million charge noted above, and lower net interest income.

Total expenses increased 2 percent. Marketing, promotion, rewards and Cardmember services expenses decreased 2 percent from the year-ago period reflecting lower investments in marketing and promotion, which were partially offset by increased rewards costs. Human resources and other operating expenses increased 9 percent from the year-ago period driven by volume-related operating expenses, including increased credit and collection costs.

The net loan write-off rate on a managed basis(1) and adjusted to conform to the industry standard of excluding fees and interest was 5.3 percent, up from 4.3 percent in the first quarter and 2.9 percent a year ago. Including fees and interest, the managed net write-off rate was 6.5 percent, up from 5.3 percent in the first quarter and 3.7 percent a year ago.

Provisions for losses increased significantly to $1.5 billion, up from $640 million a year ago. This reflected the previously-mentioned $600 million ($374 million after-tax) addition, increased write-off and delinquency rates and also the higher level of loans and business volumes compared to the year-ago period.

The 2008 and 2007 results reflect a tax benefit due to the resolution of certain tax items from previous years, as mentioned above.

International Card Services reported second-quarter net income of $115 million, down 2 percent from $117 million, reflecting substantially higher investment levels compared to the year ago period.

Revenues net of interest expense increased 20 percent to $1.3 billion, reflecting higher Cardmember spending and borrowing.

Total expenses increased 26 percent. Marketing, promotion, rewards and Cardmember services expenses increased 38 percent reflecting significantly increased marketing and promotion expenses and higher volume related rewards costs. Human resources and other operating expenses increased 19 percent from year-ago levels due to increased employee levels and higher professional services costs.

Provisions for losses rose to $242 million, from $211 million a year ago reflecting growth in the loan portfolio and business volumes.

Global Commercial Services reported second-quarter net income of $227 million, up 40 percent from $162 million a year ago.

Revenues net of interest expense increased 21 percent to $1.3 billion, reflecting higher spending by corporate Cardmembers and increased travel commissions.

Total expenses increased 14 percent. Marketing, promotion, rewards and Cardmember services expenses increased 19 percent from the year-ago period reflecting higher volume-related rewards costs. Human resources and other operating expenses increased 13 percent from the year-ago period.

Both the revenue and expense growth rates were affected by the acquisition of Corporate Payment Services, General Electric Company's commercial card and corporate purchasing unit, in March 2008.

Global Network & Merchant Services reported second-quarter net income of $299 million, up 12 percent from $266 million a year ago.

Revenues net of interest expense for the second quarter increased 12 percent to $1.1 billion. The increase reflected continued strong growth in merchant-related revenue, primarily from higher company-wide billed business.

Spending on Global Network Services cards increased 42 percent from year-ago levels, reflecting continued growth in spending on cards issued by bank partners. Cards-in-force issued by bank partners increased 28 percent.

Total expenses increased 6 percent, reflecting higher human resources costs driven in part by an expansion of the merchant sales force and gains related to the sale of merchant-related operations in Russia in the year-ago period, partially offset by lower litigation-related expenses in the current period.

Provision for losses increased $48 million due to greater merchant-related provisions in the second quarter of 2008 compared to a year ago.

Corporate and Other reported a second-quarter net loss of $7 million, compared with a net loss of $85 million from a year ago reflecting the recognition of $70 million ($43 million after-tax) for the previously announced Visa settlement.

American Express Company is a leading global payments and travel company founded in 1850. For more information, visit www.americanexpress.com.

(1) The "managed basis" presentation includes on-balance sheet Cardmember loans and off-balance sheet securitized Cardmember loans. The difference between the "owned basis" (i.e., GAAP) information and "managed basis" information is attributable to the effects of the Company's securitization activities. Owned net write-offs, including write-offs of accrued interest and fees, were 7.1 percent in the quarter, up from 5.5 percent in the first quarter and 3.7 percent a year ago.