American Express Co. turned sharply away from riskier customers during the recession, and that strategy is beginning to significantly reshape its card portfolio.
A growing proportion of Amex customers are paying off their balances in full each month and are not revolving a balance, Dan Henry, Amex chief financial officer, told analysts on Oct. 19.
Amex for the first time in several years reported a decline in overall net interest income for the third quarter ended Sept. 30 because of slow overall loan growth, Henry said during the conference call to discuss earnings. Overall net interest income fell 1.8%, to $1.65 billion from $1.68 billion a year earlier.
The New York-based card issuer’s recent strategy of promoting charge cards and “premium lending,” while moving away from promotional balance-transfer offers, also is contributing to lower interest income, Henry said.
“Transactors,” or consumers who pay off their balances in full each month, now represent about 29% of Amex’s total lending portfolio, up from about 16% in 2008, Henry said. Amex’s goal for the foreseeable future is to focus on “customers who spend and occasionally revolve (a balance),” he said.
Net card fees for the consolidated company rose 5.5%, to $556 million from $527 million, reflecting a shift in Amex’s mix to “higher fee cards and slightly higher proprietary cards-in-force,” Henry said.
Individual cardholders also spent more than a year ago. Average cardholder spending in the U.S. during the third quarter was $3,854, up 10.6% from $3,485 a year ago, while average cardholder spending outside the U.S. was $3,450, up 17.1% from $2,946.
Asked how Amex has weathered the loss of a cardholder rewards partnership with Continental Airlines as a result of the United Airlines-Continental merger (
That prompted an analyst to suggest the industry might be “paying too much” for certain cobranded airline card programs.
Henry countered that, despite the higher cost of funding cobranded card rewards programs, customers with cobranded cards “tend to spend at a higher level,” and losses tend to be lower. “So the economics with cobrand products are good,” he said.
As for whether Amex might benefit from consumers possibly fleeing from debit cards as banks add fees to offset new debit-interchange pricing rules, Henry suggested it might. “To the extent that banks push customers more towards credit, we think that that would be an opportunity for us to grow our (credit and charge card) business as well,” he said.
Cardholder spending rose across the board compared with a year ago.
Amex’s U.S. Card Services unit produced net income of $733 million during the quarter ended Sept. 30, up 23.2% from $595 million a year earlier. Revenue in the unit rose 8.8%, to $3.7 billion from $3.4 billion. Total billed business rose 12.2%, to $106.8 billion from $95.2 billion, while the number of total cards in force rose 2%, to 40.7 million from 39.9 million.
The provision for losses declined 47.8%, to $143 million from $274 million. The charge-off rate on credit cards fell 260 basis points, to 2.6% from 5.2% a year ago.
U.S. cards in force reached 50.2 million at the end of September, up 4.4% from 48.1 million a year earlier.
The International Card Services unit generated net income of $221 million, up 53.5% from $144 million, with revenues up 13.6%, to $1.25 billion from $1.1 billion.
Billed business in the international unit rose 16.6%, to $31.6 billion from $27.1 billion.
Amex’s Global Commercial Services unit produced net income of $197 million, up 31.3% from $150 million, while revenues rose 4.5%, to $1.15 billion from $1.1 billion. Total billed business for the unit was $38.7 billion, up 16.6% from $33.2 billion.
The Global Network and Merchant Services unit generated net income of $332 million, up 31.7% from $252 million. Total revenues reached $1.2 billion, up 9.1% from $1.1 billion. Total global card billed business was $207.7 billion, up 15.8% from $179.3 billion.
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