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NEW YORK, July 23 (Reuters) - American Express Co AXP.N, a credit card issuer and network, posted weaker-than-expected second quarter results on Monday, as its funding costs rose and it set aside more money for credit losses.
The company’s shares declined in after-hours trading as investors brushed off a 12 percent increase in net income and focused instead on rising write-downs of bad loans.
Credit card lenders ranging from American Express to JPMorgan Chase & Co JPM.N to Capital One Financial Corp COF.N wrote down more bad loans in the second quarter compared with the same quarter in 2006, in part because losses were unusually low previously and are now moving closer to historical norms.
“We had a completely benign credit environment that was obviously unsustainable,” said Michael Kon, an analyst at Morningstar in Chicago.
American Express, the third largest credit card network after Visa and MasterCard, posted second quarter profit of $1.057 billion, or 88 cents a share, up from $945 million, or 76 cents a share a year earlier.
Excluding a $65 million tax benefit, American Express earned 83 cents a share, or 3 cents a share below analysts’ average estimates, according to Reuters Estimates.
Revenue rose 9 percent to $7.13 billion.
Revenue net of interest expense in the company’s international card and global commercial services unit rose 4 percent to $2.2 billion, reflecting higher spending by corporate and international card holders, as well as higher loan balances. Net income in that unit rose 22 percent to $277 million.
Total cards in force globally rose 10 percent to 82.2 million.
Interest expense rose 44 percent to $1.07 billion, and the company’s provisions for losses rose 36 percent to $993 million.
The company wrote down $473 million of loans to customers, ignoring securitized loans, up from $331 million.
WHAT GOES DOWN, MUST COME UP
A new U.S. bankruptcy law that went into effect in late 2005 made it much more difficult for consumers to file for personal bankruptcy. That spurred many consumers to file for bankruptcy in mid- to late 2005, before the new law went into effect.
That translated to an unusually high number of bankruptcy filings in 2005, followed by an unusually low number for much of 2006.
But even with rising write-offs, American Express “continues to have confidence in the outlook for our business,” said Dan Henry, acting chief financial officer.
American Express has affluent and high spending customers, Henry added.
Morningstar’s Kon estimated the intrinsic value of an American Express share at about $70, based on a discounted cash flow model and assuming double-digit growth in card income for the next five years.
The company’s shares closed at $64.66 on Monday on the New York Stock Exchange and fell to $63.20 in after hours trading after the results were released. At those levels, the company’s shares “are not a screaming value,” Kon said.
American Express shares have risen more than 6 percent so far this year through Monday's close, while the Dow Jones U.S. Consumer Finance index .DJUSSF has risen about 5.5 percent.
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