American Express reports 4th-quarter profit dip of 10 percent

NEW YORK -- American Express Co.'s 10 percent profit dip during the fourth quarter shows that setting high standards for prospective cardholders helps guard against some credit problems, but not all of them.

The credit-card issuer -- known for its wealthier, more financially responsible customer base -- wrote off loans in the United States at a rate of 4.3 percent in the fourth quarter of 2007, up from 3.7 percent in the third quarter but below the average. It also saw higher spending by individuals and small businesses, which boosted the fees it gets from merchants.

But those strengths in today's shaky economy were not enough to maintain the profit growth that American Express saw during the earlier part of 2007. Even though the company has not lowered its criteria for creditworthiness, American Express anticipates rising write-offs and much slower profit growth in 2008.

Chief Financial Officer Daniel Henry said in a conference call with analysts Monday that earnings-per-share will likely rise 4 to 6 percent during the year, and that he expects the U.S. lending write-off rate to rise to between 5.1 and 5.3 percent. He added that a significant drop-off in U.S. employment or personal spending could weaken results even more.

American Express, after warning earlier this month that it would, took a $438 million charge to prepare for rising write-off and delinquency rates in U.S. cards. Total provisions for losses and benefits rose 70 percent to $1.52 billion from the prior year.

American Express shares fell 2.9 percent in after-hours trading Monday, having risen $1.96, or 4.3 percent, to close at $47.40 before the results were released. Last Tuesday, its shares dropped to a four-year low.

"The latest earnings report from American Express is a clear indication that even lenders in the premium cardholder segment are not immune from losses in this troubled economy," wrote Red Gillen, analyst with the financial research and consulting firm Celent.

The credit-card issuer said net income dropped 9.9 percent to $831 million, or 71 cents a share, in the three months that ended Dec. 31, from $922 million, or 75 cents a share, in fourth quarter of 2006. Total revenue rose 10 percent to $6.42 billion from $5.84 billion. Excluding interest expense, revenue rose to $7.36 billion from $6.68 billion.

The profit results were in line with the market's expectations, but sales fell short. Thomson Financial analysts had predicted, on average, earnings of 71 cents a share on revenue of $7.85 billion.

The sale a year ago of American Express Bank Ltd. contributed to the tough year-over-year comparison. But the company's fourth quarter 2007 results did get a $1.13 billion pre-tax boost from its settlement with Visa Inc. over Visa's alleged stifling of competition.

For the full year, the company posted net income of $4.01 billion, up 8.1 percent from $3.71 billion in 2006, and revenue of $24.14 billion, up from $22.16 billion in 2006.

Profit in the U.S. card services segment fell to $7 million in the fourth quarter from $473 million in the fourth quarter of 2006. The international card segment lost $68 million, compared with a profit of $99 million.

"While our outlook for 2008 remains cautious, and we continue to expect slower earnings growth in the year ahead, we are not changing our fundamental approach to managing the business," Chairman and Chief Executive Kenneth Chenault said in a statement.

This means, in part, pouring money into efforts to maintain its role as a card issuer for the well-heeled. American Express increased its marketing, promotion, rewards and cardmember services expenses by 57 percent to $2.7 billion in the fourth quarter.