American Express 2Q profit falls 33 per cent, due to Costco

Credit card company American Express said its second-quarter profit fell 33 per cent, largely due to the fact that it had a significant one-time gain last year tied to the winding down of its business relationship with Costco.
The New York-based company earned USD 1.31 billion in three-month period ending June 30, or USD 1.47 a share, compared with a profit of USD 1.98 billion, or USD 2.10 a share, a year earlier. The results beat the expectations of analysts who according to FactSet were looking for AmEx to earn USD 1.43 a share.
American Express' results for the quarter were distorted by the fact that in the second quarter of 2016, the company ended its relationship with Costco.

The results last year include a one-time gain of USD 1.1 billion from AmEx selling the Costco credit card portfolio to Citigroup. The company's expenses rose sharply compared to a year ago, due to the tax treatment and restructuring charges AmEx had to book when the Citi deal closed.
AmEx's US consumer card business reported a profit of USD 440 million, down 59 per cent from a year ago, again because of the sale of the Costco portfolio.
Looking past the effect of the end of the Costco relationship, AmEx is showing signs of recovering from losing a significant part of its business. This is also the last quarter that will contain all the adjustments AmEx has had to do following the transfer of the Costco portfolio.

"We've been focused on emerging from the transition with a stronger, more diversified mix of businesses," AmEx Chairman and CEO Kenneth Chenault said in a statement.

The number of cards AmEx has issued grew both in the US and globally. The average amount spent on an AmEx card grew, and more customers were keeping a revolving balance on their cards.
AmEx makes most of its money by taking a small percentage of each transaction that runs on its network, so the more money that is spent on its cards, the more revenue AmEx earns.
Historically, most AmEx cards have needed to paid in full at the end of each billing cycle, but the company recently has been encouraging customers to keep a balance, even among its traditional green, Gold and Platinum Card members. This allows AmEx to earn interest on those balances; along with the fees it collects from merchants to accept the cards.

"It gives us a unique opportunity -- people we know really well, our existing customers -- and try to get more of their borrowing behavior," Jeffrey Campbell, the company's chief financial officer, said during a call with analysts.
But allowing more customers to carry a balance comes with the risk that customers may default or get in over their heads. AmEx had to write off more loans this quarter.
In total, AmEx had revenue of USD 8.31 billion in the period, also topping Street forecasts. The company also said it expects full-year earnings to be USD 5.60 to USD 5.80 per share.

AmEx shares fell 1.4 per cent in after-market trading to USD 84.75.