AmEx's Customers Leave Cards at Home

Net Tumbles 56% as Slumping Economy Hits High-End Consumers; More Job Cuts Planned By APARAJITA SAHA-BUBNA American Express Co.'s customers reduced spending by 16% in the first quarter, sending the company's quarterly net income down 56%. In addition to cutbacks in spending, American Express also is being hit hard by rising delinquencies as higher unemployment and a slumping U.S. economy take their toll on even the company's high-end customers. Rapidly souring credit-card loans forced the company to increase its loss reserve by 49%. Kenneth Chenault American Express reported first-quarter net income of $437 million, or 31 cents a share, down from $991 million, or 85 cents a share, in the year-earlier period. The results are a stark reminder of how the on-going economic crisis, initially triggered by cash-strapped homeowners with poor credit, has spread to even well-heeled consumers as joblessness and economic insecurity surge. Investors, who had driven up American Express shares by 7.93% to $20.97 at the close of regular trading Thursday on the New York Stock Exchange, pushed the shares up a further 6% in after-hours trading. The company reported rising delinquencies and write-offs. American Express set aside $1.8 billion to cover credit losses, up 49% from $1.21 billion in the year-earlier period. "Spending levels reflected the severe recessionary environment, but remained fairly consistent throughout the quarter," Chief Executive and Chairman Kenneth Chenault said in a statement. The company expects the U.S. unemployment rate to rise to 9.7% by the end of 2009 from the current 8.5%, the highest level since 1983. Revenue dropped 18% from a year ago to $5.9 billion, falling short of analysts' estimates of $6.45 billion, according to Thomson Reuters. The company's U.S. card business reported a loss of $25 million in the first quarter, down from $523 million a year earlier. The company wrote off 8.5% of its loans, up from 6.7% in the fourth quarter and 4.3% in the year-earlier period. Compared to the first quarter, American Express estimates losses on card loans could increase by as much as 2 percentage points to 2.50 percentage points in the second quarter, and another half-percentage point in the third quarter, before leveling off in the fourth quarter. To offset losses from souring card loans, American Express plans to further reduce expenses. This would include another round of job cuts. In October, the company shaved off 10% of its work force, cutting 7,000 jobs, as part of an attempt to rein in spending. Total expenses declined by 15% in the first quarter. American Express is more vulnerable to the credit-card industry than some of its big-bank competitors that make other kinds of loans and provide basic banking services to their customers. American Express issues charge cards, which must be paid off each month, as well as credit cards that allow customers to carry a balance. Unlike other card companies, which either issue plastic or process the transactions, American Express does both. Therefore, a big chunk of its revenue comes from fees it charges banks and merchants such as grocery stores or gasoline stations, to process card payments. But as economic woes broaden, consumer spending slows, eating into the fees that American Express earns from transactions. Write to Aparajita Saha-Bubna at Aparajita.Saha-Bubna@dowjones.com