July 19, 2017 / 8:18 PM / 2 years ago

AmEx profit dips as it splurges on customer rewards

(Reuters) - American Express Co’s profit declined 33 percent 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.

The logo of Dow Jones Industrial Average stock market index listed company American Express (AXP) is seen in Los Angeles, California, United States, April 25, 2016. REUTERS/Lucy Nicholson

Shares of the company, up 16 percent so far this year, dipped 1.2 percent to $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 $1.93 billion on card member rewards in the second quarter ended June 30, up 9 percent from a year earlier. That increase was the highest since late 2014.

As a result, total expenses soared 21 percent to $5.77 billion, denting profit, which declined but beat analysts’ forecasts.

Net income attributable to shareholders plunged 33 percent to $1.31 billion, or $1.47 per share, partly reflecting the loss of a longtime partnership with warehouse club retailer Costco Wholesale Corp 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 $1.43 per share, according to Thomson Reuters I/B/E/S.

Total revenue, net of interest expense, inched up 0.8 percent to $8.31 billion, beating analysts’ estimates of $8.20 billion.

The better-than-expected results came as adjusted card member spending rose 8 percent 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 $4.82 billion.

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

Reporting by Pallavi Dewan and Nikhil Subba in Bengaluru; Editing by Sai Sachin Ravikumar

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