Eileen Kinsella
Weak first-quarter profits came as no surprise at American Express (AXP Quote - Cramer on AXP - Stock Picks), but rising problem loans and a sharp slowdown in corporate spending hint at even rougher times ahead.
For the past few months, weak results at the financial giant's advisers unit have been offset by robust growth in its cards business. But now there are signs the weakening economy is weighing on the cards business as well. American Express posted first-quarter net income of $538 million, or 40 cents a diluted share, down from $656 million, or 48 cents, in the year-ago period. Amex chalked up the drop in profits to the "generally weaker economy and equity markets." As expected, the company took a pretax loss of $182 million to write down and sell high-yield securities in its financial advisers arm. Net income at AEFA fell 79%. But Amex's brokerage unit isn't the only business segment under pressure from an economic slowdown. Growth in corporate spending on travel and entertainment, included under the umbrella of travel-related services, has also been slipping. In the latest quarter, Amex said net revenue increased 8%, as so-called billed business growth "was slower than in recent periods." On a conference call Monday with analysts and investors, Amex said the growth in corporate billed business has slowed to the mid-single digits, down from the fourth quarter's 12% gain and the third quarter's 17% rise, notes Brad Berning, an analyst with U.S. Bancorp Piper Jaffray. (He rates Amex a strong buy, and his firm has no underwriting relationship with American Express.) Prudential analyst Brad Ball is focusing on the fact that the spending slowdown became more "acute" toward the latter part of the quarter, possibly portending further slowing ahead. "I think it's fair to say things are worse than they expected" when Amex delivered a forecast at the end of last year, says Ball. (He rates the stock a hold, and his firm has no underwriting relationship with the bank.) Traditional consumer credit card companies haven't seen a sharp falloff in credit quality or spending. But Amex's report offers another example of a slowdown in corporate America. Corporations often pull back faster and more sharply than consumers do amid weakening economic conditions. And credit quality could be the next issue on the Amex plate, judging from the latest quarter's results. While the provision for losses on charge card products was 2% above that of last year, the lending provision for losses (which includes small business loans) was a hefty 49% above year-ago levels. American Express has had "high growth in the lending business over the last couple of years," says Berning. "Now we're starting to see some of those losses mature." That said, Berning thinks corporate spending levels are "close to a bottom" and that the worst is behind Amex. But trends in the latest report don't necessarily tell the same story.
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