Worries Underlie American Express Beat

American Express surged past analysts' third-quarter estimates Monday, despite the credit card company's profit falling by nearly 25% as the economy takes its toll on even wealthy consumers.
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American Express

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surged past analysts' third-quarter estimates Monday, despite the credit card company's profit falling by nearly 25% as the economy takes its toll on even wealthy consumers.

For the three months ending Sept. 30, American Express made $815 million, or 70 cents a share, vs. $1.06 billion, or 90 cents a share in the third quarter of last year. Net income from continuing operations, which excludes its soon-to-be-sold American Express International Deposit Co., fell 23% to $861 million, or 74 cents a share, the company said.

Total revenue inched up just 2% to $6.25 billion in the quarter.

Analysts had predicted the New York card and travel services company would make 59 cents a share on $7.3 billion of revenue, according to Thomson Reuters.

Shares of American Express surged more than 7% in recent after-hours trading after the results were announced.

Still, Chairman and CEO Ken Chenault delivered some pessimistic comments about the company until the economy recovers.

"We saw clear signs earlier this year of a weakening environment and the recent volatility in the financial markets has reinforced our view that consumer and business sentiment is likely to deteriorate further, translating into weaker economies around the globe well into 2009," Chenault said in a statement. "Card member spending is likely to remain soft. Loan growth will be restrained, in part because of the steps we are taking to reduce credit risks, and credit indicators are likely to reflect the continued downturn in the economy and throughout the housing sector."

Profit from the company's U.S. card services business dropped nearly 60% to $244 million for the quarter. Revenue in the company's largest segment fell 4% to $3.5 billion, driven by lower securitization income, but partially offset by higher net interest income and higher card member spending, American Express said.

Charge offs for so-called managed net loans in its U.S. card services arm rose to 5.9% from 5.3% in the second quarter. Managed loans, totaling $64.7 million for the third quarter, include those that were securitized.

The company took a total provision for loan losses of $1.4 billion, up by 51% from a year earlier. The majority of the provisioning related to American Express' card member lending business. The firm had pushed into offering consumer's cards where they could keep a revolving credit with the company as opposed to its traditional charge cards, in which customers had to pay off their balance in full every month.

Chenault said the firm was going ahead with a restructuring plan to reduce expenses and staffing levels. The firm will record a restructuring-related charge for the fourth quarter, he said.

"We remain confident in our ability to emerge from the downturn in a stronger competitive position and continue to see growth opportunities in the payments sector," Chenault said. "For now, though, we plan to be very selective with our investment dollars, balancing near term performance with longer term profitability.

Capital One's

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third-quarter profit of $374.1 million, or $1 a share, narrowly missed estimates.

The McLean, Va.-based company, which reported last week, said in its U.S. card segment charge-offs fell 13 basis points to 6.13% from the second quarter, but rose from 3.85% in the year-earlier quarter. It expects U.S. card charge-offs to rise to around 7% for the fourth quarter, and in the mid-7% range for the first quarter of 2009.

Discover Financial Services

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reported last month that third-quarter profit fell 11% to $180 million, or 37 cents a share. Managed net charge-offs at Discover rose 21 basis points from the second quarter and 154 basis points from the year earlier period to 5.20%..