American Express Earnings: Strong Retail Spending and Lending Results Drive Growth

Wide-moat-rated American Express AXP reported strong third-quarter earnings as strong consumer spending volume and a jump in net interest income more than offset meager commercial spending growth. Net revenue increased 13% from last year and 2.2% from last quarter to $15.4 billion. Earnings per share rose 33% to $3.30, though the company did benefit from its effective tax rate falling to 20.9% from 23.6%, which translates to a return on equity of 36.3%. As we incorporate these results, we do not plan to change our $178 fair value estimate, and we see the shares as modestly undervalued.

Discount revenue, the transaction fees American Express charges merchants when they accept its cards, increased 9% from last year to $11.9 billion. International and U.S. consumer spending volume rose 17% and 10%, respectively, as retail sales remain resilient despite economic concerns. On a less-positive note, spending on American Express’ commercial cards, which are responsible for around 30% of total volume, only increased 1% from last year. We see the slow growth here as being primarily driven by macroeconomic factors, as average spending per card decreased 4.7% from last year while the number of commercial cards outstanding increased 5.4%.

Net interest income increased 34% year over year and 10.9% sequentially to $3.4 billion, driven by loan growth and wider net interest margins, with period-end cardmember loans increasing 19% year over year to $118 billion. Unlike other credit card issuers, American Express is a payment network first and lender second, as noninterest income typically makes up around 80% of its total revenue. That said, changes in the structure of many of its cards to offer more lending and a shift toward a younger cardholder base have allowed the firm to enjoy a period of accelerated loan growth. We continue to expect loan growth to moderate in the future, but the firm’s net interest income growth should lead its peers in the near term.