UPDATE 4-American Express profit falls, but beats estimates

* Posts higher-than expected earnings

* Sets aside more money for credit losses

* Shares rise 6.5 percent after hours (Adds executives' comments, updates share price)

By Juan Lagorio

NEW YORK, Oct 20 (Reuters) - American Express Co (AXP.N) said on Monday third quarter earnings fell more than 20 percent as it set aside more money to cover growing losses in its credit card business, but operating earnings beat analysts' estimates and there was a sigh of relief from investors as results were not as bad as some had expected.

The company's shares rose 6.5 in trade after the bell closed.

But American Express offered a gloomy outlook for the future, noting that economies globally are likely to be weaker well into next year and cardholder spending is likely to stay soft, and estimated loan losses would increase in the coming quarters.

But it also said it is taking steps to reduce its credit risk, cut costs and decrease investments in marketing.

"I was expecting such a bad quarter. There's a sense of relief now," said Andrew Boord, an equity research analyst covering financial stocks at Fenimore Asset Management, which owns American Express shares.

American Express's third-quarter earnings from continuing operations fell to $861 million from $1.1 billion in the same quarter last year.

Diluted earnings per share from continuing operations fell to 74 cents from 94 cents in the same quarter last year. Analysts had on average expected 59 cents a share before items, according to Reuters Estimates.

Third-quarter net income, which includes results from discontinued operations, fell 24 percent to $815 million.

The results were helped by the fact that American Express, a Dow Jones industrial average .DJI component, set aside less money for bad loans in the third quarter than in the second quarter, even though loss expectations have risen.

The company set aside $1.37 billion for bad loans, a decline of more than 25 percent from the second quarter, despite delinquencies having risen as the financial crisis has weighed on the ability of some consumers to pay their bills.

Loan loss provisions increased 51 percent from a year earlier.

The company is selectively scaling back credit lines from some U.S. customers, cutting expenses and reducing efforts to gain new customers domestically.

"In this economic environment, we want to be cautious," Kenneth Chenault, American Express' chairman and chief executive, said in a conference call with analysts.

American Express's shares rose to $25.92 in after-market electronic trading, after closing at $24.35.

FALLING LOAN VOLUME

American Express' total global outstanding loans fell 9 percent from the same quarter last year to $45.8 billion.

"Cardmember spending is likely to remain soft. Loan growth will be restrained, in part because of the steps we are taking to reduce credit risks, and credit indicators are likely to reflect the continued downturn in the economy and throughout the housing sector," Chenault said.

Dan Henry, American Express' chief financial officer, estimated loan losses would increase in the fourth-quarter and in the first quarter of 2009, boosted by higher unemployment, but he declined to give more precise details.

"Our assumption as we do our planning for next year is that unemployment will increase reasonably substantially in 2009," Henry said.

American Express U.S. net charge-offs -- a measure of cardholder defaults -- jumped to 5.9 percent in the third quarter of 2008 from 3.0 percent a year earlier. Analysts have estimated net charge-offs rates could increase to close to 7 percent by the end of next year.

Amid the difficult environment, Moody's Investors Service cut American Express' debt ratings one notch to "A2" from "A1," which could lift the company's borrowing costs.

The cost of protecting the company's debt against default immediately after the results came out fell to 580 basis points, or $580,000 per year for every $10 million of principal insured, from 615 basis points before the release.

FUNDING NEEDS

American Express is more dependent on short-term capital markets to fulfill its funding needs, but the company said it was looking to expand its funding sources and said it wanted to rely more on deposits, as some of its bigger rivals do.

The company has been hurt by higher global interest rates in the last few weeks as credit markets froze in the worse financial crisis in decades.

Chenault said American Express had access to liquidity to cover its funding needs for at least 12 months under severe market conditions and said he was comfortable of the company's funding position.

American Express has a further $20 billion in debt expiring in 2009.

American Express shares have fallen about 53 percent so far this year through Monday's close, compared with a roughly 33 percent decline in the Standard & Poor's 500 index .SPX.

(Additional reporting by Dan Wilchins, Editing by Andre Grenon and Bernard Orr)