SAN FRANCISCO (MarketWatch) -- Shares of credit-card giant American Express shed more than 10% early Tuesday as investors balked after the company warned that a deteriorating economy is choking off earnings growth.
Late Monday, New York-based American Express AXP reported a 38% drop in second-quarter earnings Monday and warned that it won't be able to meet long-term financial targets until the economy improves.
Ahead of the Wall Street open, American Express shares, which are part of the Dow Jones Industrial Average, shed 11%, to $36.50.
The company said that even its most creditworthy, long-standing customers felt the effects of the economic slowdown currently sweeping the U.S.
Without giving specifics, AmEx said it plans to cut staff and reduce other costs, noting that the resulting charges will will hit results in the second half of 2008.
"With bad debt occurring even in the superprime card segment, AmEx's earnings clearly show that the credit crisis is going upscale, which does not bode well for the U.S. economy," Red Gillen, senior analyst at consulting firm Celent, commented via an email exchange.
American Express is known for catering to wealthier customers, so some investors expected the company to withstand the economic slowdown relatively well.
However, Gillen noted that richer clients were often given cards with bigger credit lines. Now that some of these customers are missing payments, the losses are bigger, he said.
American Express said second-quarter net income came in at $653 million, or 56 cents a share, down from $1.06 billion, or 88 cents, earned in the same period a year earlier.
The latest results include $600 million that the company added to reserves to cover bad loans in the U.S., the company said. There was also a separate $136 million charge and a tax benefit of $101 million.
American Express had been expected to make 83 cents a share, according to the average estimate of 16 analysts in a Thomson Reuters survey.
"We do not expect to meet or exceed our long-term financial targets until we see improvements in the economy," said Kenneth Chenault, chief executive of American Express, in a statement.
The company had previously forecast earnings-per-share growth of 4% to 6%, but that was based on business and economic conditions at the start of 2008.
"The environment has weakened significantly since then, particularly during the month of June," Chenault added.
The company said it wrote off 5.3% of loans during the second quarter, up from 4.3% in the first quarter and 2.9% in the second quarter of 2007. That's a net rate on a managed basis, which includes loans kept on American Express's balance sheet and other loans that were sold on to investors in securitizations.
Credit-card companies are being hit as slumping house prices, slowing economic growth and rising unemployment limit the ability of some customers to pay back debts racked up on their cards.
In June, American Express warned that indicators of credit were continuing to deteriorate beyond its expectations. See full story.
Rival Discover Financial Services DFS said soon after that it expected higher charge-offs later this year. See full story.
Last week, Capital One Financial COF, another big credit-card company, reported a 40% drop in second-quarter net income. See full story.
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