AmEx beats forecasts but regulatory issues loom

NEW YORK (BestGrowthStock) – American Express Co’s (AXP.N: ) quarterly profit rose a better-than-expected 71 percent as credit quality improved and customers spent more, but regulatory issues cast a shadow of uncertainty over future results.

American Express said it earned $1.1 billion in the third quarter despite “regulatory and legislative changes that are reshaping the industry,” and its chief executive used the occasion of its earnings report to blast the U.S. government on Thursday.

Earnings per share were 90 cents — 4 cents better than the 86 cents per share analysts on average had expected, according to Thomson Reuters I/B/E/S. That compared with a year-earlier profit of $640 million, or 53 cents per share.

American Express, which lends directly to consumers but also competes with Visa Inc (V.N: ) and MasterCard Inc (MA.N: ) to process credit card transactions, this month vowed to fight a U.S. Justice Department antitrust lawsuit over its processing business.

The lawsuit, following on the heels of the Dodd-Frank financial reform law, is the latest regulatory threat to the processing fee revenues that American Express and its competitors once took for granted. Merchants pay the fees to banks and processing networks every time a customer buys something with a credit or debit card.

American Express Chief Executive Kenneth Chenault had sharp words for the U.S. government during a conference call with investors, saying its “intervention” in the company’s business practices will not “lead to a positive outcome.”

Increasingly regulation “clearly reflects the political environment and a turn back toward regulation rather than competition in the banking, financial services, and card industry,” he said.

Chenault called the Justice Department’s case against American Express weak, but said the company is taking the lawsuit very seriously.

Credit and debit card processing fees were largely unregulated in the United States before this year. But the Dodd-Frank law will restrict debit card processing fees, sparking industry concerns about further regulation — and the Justice Department lawsuit didn’t help assuage them.

American Express shares have lost almost 4 percent since the beginning of the month, when the Justice Department filed its lawsuit.

“That’s going to be a continuing overhang. It’s just part of the business now,” said Michael Holland of Holland & Co in New York, which owns American Express shares.

“People in Washington are looking for some scalps,” he said.

SPENDING, NOT LENDING

The lawsuit came as American Express was increasingly turning to its processing business for future profits. The company generally lends to wealthier customers who pay their bills in full every month, and the processing business carries less credit risk than other credit card lending.

Consumers with American Express cards were some of the first to recover from the severe financial recession and increase their spending.

Revenues rose 17 percent from a year earlier to $7.0 billion in the third quarter, the company said.

American Express customers spent 14 percent more in the quarter than they did in the year-earlier period, and its bad loan write-off rate dropped below 5 percent in September for the first time since early 2008.

But like other lenders, the company is struggling with weak loan demand as unemployment remains high and consumers are reluctant to take on more debt.

The company’s lending volumes “remain below pre-recessionary levels,” Chenault said, adding that the company remains “cautious about the economic outlook.”

American Express shares fell almost 1 percent to $39.92 following the earnings report, after closing up 1.4 percent at $40.27 on the New York Stock Exchange.

Investors may have been expecting profit around where American Express reported, Holland said. They “had been expecting a little bit better results (than the forecasts), and they produced it.”

(Reporting by Maria Aspan; Editing by Bernard Orr, Gary Hill)

AmEx beats forecasts but regulatory issues loom