American Express Growth Riding On Joyful Consumer Spending

Key Points

• As earnings season kicks off, operators in the financial sector are delivering commonly shared concerns and developments, with growing write-offs within credit businesses alongside increased net interest income amid rising interest rates.
• American Express reported pleasant growth in the first quarter of 2023, signaling a resilient consumer despite inflation creeping in coupled with recession fears. Double-digit growth rates across the business reflect macro and micro tailwinds at play.
• High write-offs and loan loss provisions have caused the stock to sell off today, as investors worry that further losses may still be ahead. 
• Increased expenses only came from increased volumes and member additions; management has returned some cash to shareholders and optimistic full-year 2023 guidance. Analysts may still need to reflect these scenarios in their current price targets.

Consumer spending usually follows close behind when the economic cycle swings from expansion to contraction. As discretionary and corporate spending increases, American Express NYSE: AXP is able to report a total 16% network growth rate annually in its first quarter earnings results, driven by a 16% growth in billed business and a subsequent 15% increase in processed volumes.

While some of the specific discretionary spending segments like restaurant-eating and traveling, which includes lodging and other following expense items, saw slower growth on an annual basis in the first quarter of 2023 relative to a year prior when interest rates were lower and inflation had not yet shown its ugly face; other segments such as large corporation spending pushed the bulk of American Express' growth. 

Some investors seem worried about the increasing provisions and total write-offs experienced in the quarter. During the financial sector earnings round, banks like Bank of America NYSE: BAC, Wells Fargo NYSE: WFC, and Citigroup NYSE: C showcased a similar trend with increasing net charge-off ratios and elevated provisions for future losses.

Amid this developing concern, American Express shares are selling off by as much as 3.25% in the trading session. While panic and volatility reside, investors and analysts may find comfort by dissecting future management expectations and looking at the root of the write-offs reported.

Stats and Figures

American Express reported total revenue growth of 12.4% in the quarter from a year prior, pushed higher by a 75.2% growth in net interest income and an 18.5% growth in non-interest revenue. The significant advance in net interest income within the firm came as a result of a two-fold development that grew larger throughout the year; firstly, loan balances in the first quarter of 2022 stood at $86.8 million and grew subsequently to $107.7 million in the first quarter of 2023 thus equating a 24% increase in total balances; secondly, interest rates on loans increased significantly as the FED initiated its rate hike cycle throughout the second half of 2022, further fueling the net interest income generated on the increased loan balances. 

The 18.5% growth in non-interest income can be attributed mainly to a 20% increase in net card fees driven by growth in premium card portfolios, aided by service fees advancing by 34% fueled by foreign-exchange costs stemming from cross-currency card member spending, and travel commission fees. However optimistic this growth may seem, a component that pushed a change in non-interest revenue was an increase in delinquency fees, directly tied to increasing write-off amounts.

Provisions for loan losses in the first quarter were reported to be $1.1 billion, up from negative $33 million a year prior. Nominally negative interest rates negated the need for any loss provisions. However, a growing concern for bulls and of interest to bears is the rise in actual write-offs.

Total write-offs in the first quarter of 2022 were $287 million; a year later, they rose 156% to reflect a total of $735 million. It is important to note that a charge-off is usually applied to accounts that have been delinquent for over 90 days. Therefore a rapid rise in delinquency fees may suggest that higher write-off amounts are yet to come as delinquent accounts are still open, which can explain the aggressive increase in total provisions.

Better Horizons 

However negative some of the announced figures may seem, and regardless of their implications, there are still plenty of suitable measures investors can live by and help them get through today's sell-off. While net income decreased on a margin and dollar amount, from $2 billion to $1.8 billion and 17..8% margin to 13.7% margin, respectively, decreases were driven by increased member reward expenses and business development expenses.

Increasing reward expenses can only come from an actual increase in reward members and increased reward points due to increased volumes; luckily for investors, American Express saw a net 3.4 million new cards in the quarter and the previously stated 16% growth in net volumes.

Despite a sour 12% contraction in earnings per share as a result of lower net income figures, management kept the company's owners (shareholders) in mind by retiring 984 thousand shares from the open market as well as increasing the dividend payout by 15%, which is currently yielding 1.51% aided by the sell-off in the stock. 

Now that most expenses, and perhaps write-offs, have been experienced within the company, management can focus on a brighter future. Management guidance suggests that American Express will see a full-year 2023 revenue growth of 15-17% and an expected EPS range within $11-$11.40, translating to a 15-19% higher level than current earnings.

American Express analyst ratings still stand at a majority "hold" recommendation along a low double-digit upside consensus price target; investors could be in for a pleasant upgrade scenario once guidance and improving macro conditions reflect on analyst sentiment.