American Express Profit Rises 71%

American Express Co.'s third-quarter profits soared 71% as customers increased their spending by 14%, and receding losses from souring card loans allowed the company to squirrel away less for a rainy day.

AMEX’s results offer an insight into the rising optimism of its borrowers—mostly well-heeled consumers and companies—as the economy stabilize despite stubbornly high unemployment. The company's performance also cements the turnaround in the credit-card industry.

Like many banks that reported earnings recently, American Express is benefiting from fewer losses on bad loans, but struggling with weak demand for new loans that would lift revenue.

Lending volumes "remain below prerecessionary levels as card members continued to manage their finances carefully and pay down outstanding debt," Kenneth I. Chenault, AMEX’s chief executive, said in a statement.

AmEx shares, which were up 54 cents, or 1.4%, to $40.27 in trading on the New York Stock Exchange, fell 0.9% to $39.90 in after-hours trading.

American Express issues charge cards, which must be paid off each month, as well as credit cards that allow customers to carry a balance. Unlike most other card companies, which either lend or process the transactions, AmEx does both. Therefore, a big chunk of its revenue comes from fees it charges banks and merchants, such as grocery stores or gasoline stations, to process card payments.

AmEx reported third quarter net income of $1.09 billion, or 90 cents a share, up from $640 million, or 53 cents a share, a year earlier. Analysts polled by Thomson Reuters forecast earnings of 86 cents on $6.8 billion in revenue.

The company's U.S. card business reported net income of $595 million in the third quarter, up from $158 million a year earlier.

Lower delinquencies, a gauge of future losses, allowed New York-based AmEx to squirrel away $373 million for potential losses, down 68% from last year's third quarter. American Express reduced its reserve for losses by $959 million in the latest quarter, boosting income. For the time being, lower card balances will likely be offset by reduced loan-loss reserves.

For the quarter ended Sep. 30, the company wrote off 5.2% of its U.S. card loans, down from 6.2% in the second quarter and 8.9% in last year's third quarter. Meanwhile, 2.5% of the company's U.S. cardholders were a month behind on their payments, an improvement from 2.7% as of Jun. 30 and 4.1% a year ago.

During the recession, consumer spending slowed, eating into AmEx's transaction fees. The more cardholders charge on their AmEx plastic, the more the company earns by way of fees.

AmEx's revenue rose 17% to $7 billion, aided by the implementation of a new accounting rule requiring companies to bring their off-the-books securitized loans on to their balance sheets in fiscal 2010, and higher cardholder spending. This was offset by lower U.S. card balances, which fell 7% from a year ago to $49.1 billion.