American Express third quarter earnings beat analyst estimates while delinquencies | PaymentsSource

UPDATE: This article includes commentary from Amex’s leadership and analysts.

Signs of weakness in American Express’s consumer base tempered an otherwise positive earnings report on Friday.

“Organic spending is not as robust,” CEO Steve Squeri said during the credit card lender’s earnings call. “Our cardholders will pull back slightly if they lose confidence, but they will continue to pay their bills.”

American Express posted its 10th consecutive quarter of record revenue and raised its guidance for 2024, but the company also noted a recent uptick in late card payments.

For the third quarter, Amex reported earnings per share of $3.49, up 6% from a year ago and beating consensus analysts estimates of $3.29. Net income was $2.5 billion, up 2% from the prior year.

Revenue rose 8% from the prior year to $16.6 billion, in line with analyst projections of $16.65 billion, according to Seeking Alpha.

 Amex raised its full year EPS guidance to $13.75-$14.05, from $13.30-$13.80 previously. Amex is expecting full-year revenue growth at the low end of the 9%-11% guidance range it set at the start of the year. 

Third-quarter billings were higher, up 6% from the year-ago quarter to $387 billion, but the percent of net write-offs for card payments that were 30 days or more past due edged higher to 1.3% from 1.2% a year ago. 

The uptick in late payments is in line with signs of consumer softness that some financial institutions have also reported in the third quarter. Investors have been looking for signs that consumer spending is declining and charge-offs and delinquencies are rising due to the spike in inflation over the past two years.

Amex on Friday reported the consumer net write-off rates for the third quarter was 2.2%, down from 2.4% in the second quarter. The year-to-date write-offs were 2.3%, up from 1.9% in the first three quarters of 2023. The consumer credit card delinquency rate was 1.3% for the third quarter, up from 1.2% in the second quarter. 

The company’s delinquency rate was 1.3% in September 2023 and 1.55% in September 2019. (Credit card companies in recent years have listed 2019 performance as a way to measure the impact of the COVID-19 pandemic and subsequent recovery.)

And Amex’s net charge-offs were 1.9% in September, from 2.2% in August. Net charge-offs were 1.7% in September 2023 and 2% in September 2019. Consumer loans outstanding declined to $86.8 billion in September from $87.3 billion in August.

“Our customer base is reliant,” Squeri said. “We’re not seeing anything that would indicate our credit metrics [are declining].”

Amex has aggressively developed payment and financial service products for small businesses, boosted by its acquisition of small business lender Kabbage in 2020. Managers have stressed the investment in small businesses is long term and said Amex is agnostic to cyclical declines in economic conditions for businesses.

 Small-business acquisition is good and retention is good, but organic spending is down, Squeri said, contending that would improve as economic conditions advance.

On the consumer side, Amex in recent quarters has suggested it is well-positioned to ride out economic weakness because its high-income customers are more insulated from prices than other card issuers and lenders. Amex’s share price has climbed from about $149 a year ago to about $286 on Thursday.

 Amex also noted a “bit of a deceleration” in restaurant spending in the third quarter. “But we’re not really concerned about that…we’re bullish on the restaurant industry,” Squeri said.

 Amex has made restaurants a major part of its strategy, with Squeri on Friday saying it’s the company’s fastest growing travel and entertainment category.

Amex in 2019 acquired reservation platform Resy. Amex has registered 50 million users since the acquisition, and Resy provides a pool of consumer prospects that spend at higher-end restaurants but do not yet have an Amex card, according to Squeri. Amex earlier this year acquired reservation and event management firm Tock. It also purchased Rooam, a mobile payment company that specializes in restaurant and entertainment venues.

 Restaurant spending is expected to top $1 trillion in the U.S. for the first time in 2024, according to the National Restaurant Association.

“Competition is fierce in the dining space, but we believe our model positions us well,” Squeri said.

In the long term, high-end restaurants are a natural place for Amex to try to enhance its offerings for cardholders and restaurants, said Eric Grover, a principal at Intrepid Ventures.

“Amex can’t control the macro-economic environment,” Grover said. “But given the relative maturity of the U.S. electronic payment market, to buoy long-term growth, to have prospects of sustainable double-digit growth, Amex has strengthened its position abroad.”

But that’s easier said than done, Grover said. “Amex has network critical mass in its biggest market, the U.S.,” he said. “It isn’t a major payment network in any countries abroad. Getting there even in a handful of countries will be a daunting challenge.”

 In a research note posted after Amex’s earnings announcement, Jeffries wrote that the lender’s billed business was modestly weaker than expectations, with international showing the best results and younger cohorts continuing to decelerate. Amex contends Gen Z and millennials will provide a tailwind for growth in the future, noting the two groups have twice the lifetime value as other age groups.

 “Given this and strong performance into [third-quarter] results, shares could see modest weakness near term,” Jeffries said. “[Amex] guided higher on EPS, beat but to the low end of [projections], consistent with the prevailing narrative of decelerating billed business volumes.”

William Blair was more bullish. In a post-earnings report, the analyst said Amex’s “expectations were elevated, but we believe the growth opportunities remain large and the valuation remains attractive.”

 Jeffries affirmed its outlook for Amex’s shares as hold, noting the lender’s management has projected slower loan growth for the next few quarters and the delinquency and chargeoff rates were manageable.

 BTIG recently downgraded Amex to sell from neutral, contending that the company’s fundamentals are going to get worse despite Amex’s projections of strong growth. HSBC downgraded Amex from buy to hold, saying the stock price does not have a lot of room to grow even as the company posts strong earnings.

Among other payment companies, Visa reports earnings Oct. 29 and Mastercard reports Oct. 31.  Visa and Mastercard have both stressed that payment volume has remained strong through the past two years, though Mastercard announced layoffs shortly after its last quarterly earnings report.

 Synchrony and Discover this week both reported higher revenue while cautioning on weaker consumer performance as the economy emerges from a period of high inflation and interest rates.