American Express Continues To Benefit From Strong Business Model

American Express’ (NYSE:AXP) spend-centric domestic business model impressed once again as the company reported 6% year-on-year revenue growth and a 9%  increase in net income for the third quarter of 2013, helped largely by increased consumer spending in the U.S. ^[1]  Cardmember spending in the U.S. was up 8% from the prior year while loans increased 4%.

However, Amex did not fare as well outside the U.S., with net income from the International Card Services division dropping 13% over the third quarter of 2012. A 36% increase in provisions for losses offset the marginal revenue growth observed by the division. The company is moving away from its closed-loop network for expansion in international markets, with third-party agreements through its Global Network & Merchant Services (GNS) division.

Our $75 price estimate for the company’s stock is in line with the current market price.

See our complete analysis of Amex’s stock here

Improved Performance In The U.S.

American Express accounts for an estimated 4% of the personal consumption expenditures in the U.S. ^[2] and largely targets more affluent demographics, with many credit card products that require the full balance to be paid off each month. The average Amex household earns about $97,000 per year. ^[3].

The U.S. Commerce Department reported a 0.3% increase in consumer purchases in August, the fourth consecutive increase in monthly consumer spending in the country, ^[4] accompanied by a 0.4% increase in wages as the unemployment rate in the country dropped to a four year low of 7.3%. ^[5]  American Express was helped by this trend as average spend per cardmember increased 8% in the third quarter while total cards in force in the country grew 4%.

With improving macroeconomic conditions in the country, we expect the customer base for American Express to expand in the coming years. Improving consumer sentiment will boost average spend per cardmember.

By targeting higher income customers – and keeping shorter term balances – American Express is also reducing the risk of default. The company’s net write off rate (percentage of loans that are considered nonredeemable) is around 1.7% while that for credit card loans for the top 100 banks ranked by assets in the U.S. is around 3.5%. ^[6]

Third-Party Cards To Promote International Growth

American Express’ international propriety cards-in-force remained unchanged from last year, while average cardmember spending increased 2%. In contrast, total Global Network & Merchant Services (GNS) cards-in-force increased 6% to 39.4 million. The division has agreements with third-party financial institutions across the world, whereby American Express invites companies to issue cards carrying the signature American Express logo and also to act as merchant acquirers on the Amex network. This allows the company to enhance its presence in countries where the institutions are already established, and expands its cardmember and merchant base at cost levels that would not have been feasible on its own.

Almost 80% of the American Express branded cards issued outside the U.S. in 2012 were issued through third-party financial institutions. The company is maintaining focus on this strategy and reported a 12% increase (16% on an FX adjusted basis) in card billed business from the GNS division in the third quarter, with particularly strong growth in China and Japan. American Express also recently announced an agreement with Wells Fargo (NYSE:WFC) allowing it to issue credit cards that will be accepted on the Amex network. ^[7] We expect further growth in third-party issued American Express cards in the coming years.

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1. American Express’ Management Discusses Q3 2013 Results – Earnings Call Transcript [↩]
2. Personal Consumption Expenditures, U.S. Department of Commerce: Bureau of Economic Analysis [↩]
3. Spending by affluent helps Amex to strong quarter, Yahoo News, April 18^th, 2012 [↩]
4. U.S. consumer spending rises as wages boost family income, Reuters [↩]
5. U.S. Department of Labor, Labor Force Statistics from the Current Population Survey [↩]
6. Charge-Off Rate On Credit Card Loans, Top 100 Banks Ranked By Assets, Board of Governors of the Federal Reserve System [↩]
7. American Express Company : Wells Fargo and American Express Announce Credit Card Issuing Partnership, Press Release [↩]