The American Express Company, one of the world's flagship credit card issuers, reported sharply lower quarterly earnings Monday, offering fresh evidence of the financial distress that many American consumers are experiencing.
Profit from continuing operations in the three-month period that ended June 30 was $655 million, or 56 cents a share, down from year-ago earnings of just over $1 billion, or 86 cents a share. That 37 percent decline came despite a healthy gain in postinterest revenue, which was $7.5 billion, up from $6.9 billion a year ago.
American Express stock plummeted on the news. It fell more than 3 percent, to $40.90 a share, during the trading day but plunged 11 percent, to $36.40 a share, in after-hours trading.
The explanation for the disappointing results was simple and stark: more people are defaulting on their credit card loans.
''Credit indicators deteriorated beyond our expectations,'' the chairman and chief executive, Kenneth I. Chenault, said. The economic environment confronting the company had weakened significantly since January and grew sharply worse in June, Mr. Chenault continued.
Moreover, he warned that the company expected that loan write-offs would continue to climb for the rest of the year, requiring it to set aside more money to cover those potential losses.
Recognizing the worsening state of consumer finances, the company added $600 million to its credit reserves for domestic lending. It also cut its estimate of the fair market value of its stake in credit card loans that have been packaged and sold as asset-backed securities, trimming $136 million from prior estimates.
Mr. Chenault offered a bleak assessment of the current situation, saying that the fallout from a weaker domestic economy ''accelerated during June, with consumer confidence dropping, unemployment rates moving sharply higher and home prices declining at the fastest rate in decades.''
But the addition to the company's lending reserves -- which slashed the quarterly domestic credit-card profit to just $21 million from $580 million a year ago -- also leaves the company with the strongest cushion for loan defaults it has had in the last three years, he said. Total loan-loss reserves are now $1.9 billion, up from $977 million a year ago.
Mr. Chenault had warned late last month that the company would not meet previous earnings estimates because its credit card business was deteriorating more than expected.
The extent of that deterioration is significant. Applying industry standards, the company reported that its net loan write-off rate was 5.3 percent in the quarter, up from 4.3 percent in the first three months of the year -- and steeply higher than the 2.9 percent of a year ago.
Those numbers reflect the impact of packaging those loans for sale as asset-backed securities. Eliminating that adjustment, as generally accepted accounting rules require, the quarterly rate was 7.1 percent, up from 5.5 percent in the previous quarter and 3.7 percent a year ago.
PHOTOS: The chairman, Kenneth I. Chenault, at the Allen & Company conference in Idaho. (PHOTOGRAPH BY DANIEL ACKER/BLOOMBERG NEWS); (PHOTOGRAPH BY MATTHEW STAVER/BLOOMBERG NEWS)
July 22, 2008, TuesdayÂ Â Â Â Late Edition - FinalSection: CÂ Â Â Â Page: 3Â Â Â Â Column: 0Â Â Â Â Desk: Business/Financial DeskÂ Â Â Â Length: 560 words