American Express Co (AXP.N), a credit card issuer and processing network, reported a steeper-than-expected 38 percent drop in quarterly profit as it set aside more money to cover credit losses and its shares fell sharply after hours.
American Express said that even its best clients were spending less and taking longer to pay bills. With customers weaker, particularly in June, the company said it is no longer on track to boost earnings per share by 4 percent to 6 percent this year.
American Express is often seen as catering to relatively wealthy customers, so difficulties among its customers signal the broader economy could be slowing.
"American Express is a bellwether when it comes to the consumer economy, given its size and the amount of spending on its cards," said Richard Moroney, chief investment officer at Horizon Investment Services in Hammond, Indiana.
The weak results also may be a sign American Express relaxed its standards in pursuit of growth, Moroney said.
"It has expanded in recent years beyond higher-end clientele," Moroney said. "Like many financial companies that did this at the end of the credit cycle, it got burned."
The fourth-largest U.S. card issuer's second-quarter earnings fell to $653 million, or 56 cents a share, from $1.057 billion, or 88 cents a share, in the same quarter last year.
Analysts had on average expected 83 cents a share before items, according to Reuters Estimates. Although it was not clear which items analysts had excluded, Reuters Estimates said the actual results were well below expectations.
American Express set aside $1.889 billion during the quarter to cover losses, nearly double the $977 million it set aside the same quarter last year.
The company is selectively scaling back credit lines from some U.S. customers, and reducing efforts to gain new customers domestically.
But American Express is still focusing on winning customers internationally and among business customers that are purchasing from other businesses.
"Our goal is to stay focused on gaining profitable market share," said Kenneth Chenault, chairman and chief executive, on a conference call with investors.
American Express said in March it was acquiring a commercial credit card and corporate purchasing business from General Electric Co (GE.N) for $1.1 billion.
DIFFICULT TIMES AHEAD
American Express executives were gloomy on the U.S. economy's near term prospects on a conference call with investors.
"We now believe the economic weakness in the US will likely worsen throughout the remainder of the year and negatively impact credit and business trends," said Dan Henry, Chief Financial Officer.
Chenault said in a statement that, until the economy recovers, American Express is unlikely to meet or exceed its long-term growth targets until the economy improves.
Delinquencies on American Express cards have crept higher as the U.S. mortgage crisis has weighed on the ability of some consumers to pay their bills.
Total cards in force globally were 90.1 million, up from 82.2 million a year earlier.
American Express' shares have fallen about 21 percent so far this year through Monday's close, compared with a roughly 14 percent decline in the Standard & Poor's 500 index. (.SPX).
(Additional reporting by Jon Stempel; editing by Carol Bishopric and Andre Grenon)
