American Express 2Q earnings jump, helped by Costco sale

NEW YORK, N.Y. – American Express said Wednesday that its second-quarter profit jumped 37 per cent, helped by the sale of its Costco credit card portfolio and increased spending on its namesake cards.

AmEx sold the Costco portfolio to Citigroup, providing one-time after-tax gain of $677 million for the April-June quarter.

The New York-based credit card company said it earned $2.02 billion in the period, or $2.10 per share. That was up from $1.47 billion, or $1.42 per share, in last year’s second quarter.

The results topped estimates from Wall Street analysts, who were looking for AmEx to earn $1.96 per share, according to FactSet. Total revenue in the quarter was $8.24 billion, down 1 per cent from the same period a year earlier but also topping estimates.

The sale of the Costco credit card portfolio ended a 16-year chapter in American Express’ history. Costco announced in early 2015 it was ending its relationship with AmEx, adopting Visa as its exclusive network for processing credit cards and announcing Citi as the new bank issuer for its popular cash-back credit card.

The loss was a major blow to AmEx since the Costco card equated to roughly 10 per cent of its cards in force and 8 per cent of the company’s billed business at the time of the announcement.

To fight back, AmEx has been aggressively spending and marketing to existing Costco cardholders before and after the switch. AmEx has also undergone a heavy cost-cutting campaign, which has resulted in roughly 4,000 job losses at the company. It has also increased fees on some its cards to raise additional revenue.

“We’re encouraged by progress so far this year and plan to continue spending at elevated levels during the remainder of 2016 in order to capitalize on the opportunities we see in a very competitive marketplace,” said American Express Co. Chairman and CEO Kenneth Chenault, in a statement.

There are signs that the strategy is working. AmEx customers spent $269.3 billion on their cards in the quarter, up slightly from $262 billion in the same period a year earlier. Investors keep a close eye on card spending since AmEx makes most of its profit from taking a per cent of each transaction used on its network. AmEx’s average discount rate, or the rate it charges merchants to accept the cards, stood at 2.43 per cent at the end of the quarter, down from 2.49 per cent a year ago.

The number of cards AmEx has issued in the U.S. dropped 14 per cent in the second quarter to 37 million, largely due to the Costco credit cards being transferred to Citi.

Chenault now says he expects the company’s full-year 2016 earnings to be at the high-end of the previously disclosed range of $5.40 to $5.70 per share. Analysts are expected $5.57 a share, according to FactSet.

After initially rising following the earnings report, Amex’s stock was down $1.80, or almost 3 per cent, to $62.68 in after-market trading. Through the close of regular-session trading Wednesday, it is down about 19 per cent in the past 12 months.