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Jul 19, 2017

American Express profit dips amid higher spending, loss of Costco partnership

American Express

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American Express Co's (AXP.N) profit declined 33 per cent in the second quarter, hurt partly by higher expenses, as the card company spent heavily on rewards to woo customers amid intense competition from big U.S. banks.

Shares of the company, up 16 per cent so far this year, dipped 1.2 per cent to US$84.87 in after-market trading.

New York-based AmEx has increased spending on rewards to prevent its generally affluent clientele from switching to JPMorgan Chase & Co and Citigroup Inc, which have rolled out lucrative rewards in an effort to boost their own credit card businesses.

For JPMorgan and Citi, post-financial crisis regulations have made the credit card business more profitable than businesses such as mortgages and capital markets trading.

Both the major banks reported upbeat results at their card businesses in their earnings last week.

AmEx said it spent US$1.93 billion on card member rewards in the second quarter ended June 30, up nine per cent from a year earlier. That increase was the highest since late 2014.

As a result, total expenses soared 21 per cent to US$5.77 billion, denting profit, which declined but beat analysts' forecasts.

Net income attributable to shareholders plunged 33 per cent to US$1.31 billion, or US$1.47 per share, partly reflecting the loss of a longtime partnership with warehouse club retailer Costco Wholesale Corp (COST.O) as well as a $1 billion gain in the year-ago quarter on the sale of a related loan portfolio.

Analysts on average had expected a profit of US$1.43 per share, according to Thomson Reuters I/B/E/S.

Total revenue, net of interest expense, inched up 0.8 per cent to US$8.31 billion, beating analysts' estimates of US$8.20 billion.

The better-than-expected results came as adjusted card member spending rose eight per cent and AmEx added 2.7 million proprietary card members globally.

"The work is not complete, but we're now moving forward with a stronger foundation," Chief Executive Kenneth Chenault said in a statement.

Discount revenue, which makes up the bulk of AmEx's total revenue and represents fees paid by merchants to the company, was flat at US$4.82 billion.

AmEx also backed its forecast for full-year earnings of US$5.60 to US$5.80 per share and said it was on track to remove US$1 billion from its expenses this year.

The company's shares slipped in after-hours trading as investors were probably disappointed that AmEx did not lift its earnings forecast after reporting a better-than-expected profit, KBW Inc analyst Sanjay Sakhrani said.