Consumer spending typically lags when the economic cycle changes from expansion to contraction. As discretionary and corporate spending increases, American Express (NYSE: AXP ) Able to report 16% YoY total network growth rate in its first quarter Earnings resultsDriven by 16% growth in billed business followed by 15% growth in processed volumes.
While some specific discretionary spending segments such as restaurant-dining and travel, which includes lodging and other bottom-line spending items, saw slower year-on-year growth in the first quarter of 2023 when interest rates were low and inflation was high. Not showing its ugly face yet; Other divisions such as large corporations drove much of American Express’s growth.
Some investors seem concerned about the rising provisions and total write-offs experienced in the quarter. During financial sector earnings rounds, banks like Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC )And Citigroup (NYSE: C ) A similar trend showed with increasing net Charge off Ratios and elevated provisions for future losses.
Amid this developing concern, shares of American Express are trading down as much as 3.25% in the trading session. While panic and volatility remain, investors and analysts can find comfort by dissecting future management expectations and looking at the origins of reported write-offs.
Figures and statistics
American Express informed Total revenue growth was 12.4% in the year-ago quarter, led by 75.2% growth in net interest income and 18.5% growth in non-interest income. A significant advance in net interest income within the firm resulted in two-fold growth that increased throughout the year; First, the loan balance was $86.8 million in the first quarter of 2022 and then increased to $107.7 million in the first quarter of 2023, equating to a 24% increase in the total balance; Second, interest rates on loans have risen significantly as the FED begins its rate hike cycle in the second half of 2022, further boosting net interest income generated on increased loan balances.
The 18.5% growth in non-interest income can be attributed to a 20% increase in net card fees driven primarily by growth in the premium card portfolio, aided by service fees advancing by 34% due to foreign-exchange costs arising from cross-currency cards. Member expenses, and travel commission fees. Although this growth looks optimistic, one component that pushed the change in non-interest income was the increase in delinquency fees, which was directly linked to the increase in the amount of write-offs.
Provisions for loan losses were reported at $1.1 billion in the first quarter, up from a negative $33 million a year earlier. Nominal negative interest rates negate the need for any loss provisions. However, the growing concern for the bulls and the interest of the bears is a real write-off increase.
Total write-offs in the first quarter of 2022 were $287 million; A year later, they grew 156% to a total of $735 million. It is important to note that charge-offs are generally applied to accounts that have been delinquent for more than 90 days. So the rapid increase in delinquency fees may indicate that more write-off amounts are yet to come because delinquent accounts are still open, which may explain the aggressive increase in total provisions.
Better Horizons
Although some of the figures released seem negative, and regardless of their implications, there are still several sound measures that investors can take and help them get through today’s selloff. While net income on margin and dollar amount declined, from $2 billion to $1.8 billion and from 17.8% margin to 13.7% margin, respectively, the decrease was driven by increased member rewards costs and business development costs.
Increases in reward spending can only be caused by actual increases in reward members and increases in reward points due to increases in volume; Fortunately for investors, American Express saw 3.4 million net new cards in the quarter and a previously reported 16% growth in net volume.
Despite a sour 12% contraction in earnings per share as a result of lower net income figures, management kept the company’s owners (shareholders) in mind by retiring 984 thousand shares from the open market as well as increasing the dividend payout by 15%, which currently yields 1.51% aided by a selloff in the stock. Is going.
Now that most of the expenses, and perhaps write-offs, have been realized in the company, management can focus on a brighter future. Management guidance suggests that American Express will see full-year 2023 revenue growth of 15-17% and an expected EPS range of $11-$11.40, which would translate to a 15-19% upside to current earnings.
American Express Analyst Rating Still stand at a majority “hold” recommendation with a low double-digit upside consensus price target; Investors can brace for a favorable upgrade scenario once guidance and improvement in macro conditions are reflected in analyst sentiment.