June 25 (Bloomberg) — American Express Co., the biggest U.S. credit-card company by purchases and cash advances, said customers are falling further behind on their debt, signaling the economy is worsening.
“Business conditions continue to weaken in the U.S. and so far this month we have seen credit indicators deteriorate beyond our expectations,” Chief Executive Officer Kenneth Chenault said in a statement today announcing the company would receive as much as $1.8 billion in a settlement with competitor MasterCard Inc.
American Express and rivals Capital One Financial Corp. and Discover Financial Services have fallen by more than a third in the past 12 months in New York trading as consumers absorb the housing slump, rising unemployment and higher food and fuel bills. New York-based American Express adopted a “cautious view” for the year in January after cardholder spending slowed and overdue payments rose in December.
“If you look at the employment situation, clearly that’s deteriorated, and consumer confidence is down as well,” said Sanjay Sakhrani, an analyst with KBW Inc. in New York who has a “market perform” rating on the stock. “Both play a key role in the credit-card industry.”
The Federal Reserve today left its benchmark interest rate at 2 percent, saying “uncertainty about the inflation outlook remains high.” Consumer prices rose 4.2 percent in the 12 months ended in May, the fastest pace since January, while the unemployment rate rose by the most in more than two decades.
Confidence among Americans dropped to the lowest level in 16 years, the Conference Board said yesterday.
American Express declined $1.16, or 2.8 percent, to $40.94 at 4:15 p.m. in New York Stock Exchange composite trading.
First-quarter loss provisions in the company’s U.S. card business rose 52 percent to $881 million as net income declined 11 percent to $974 million. The company will probably post adjusted earnings per share of 83 cents in the second quarter, compared with 88 cents a year earlier, according to 15 analysts surveyed by Bloomberg.
American Express’s affluent customers help shelter the company from problems of borrowers with the riskiest credit histories, Chenault said June 4.
Today’s statement didn’t specify the types of customers having the most trouble repaying loans, and spokesman Michael O’Neill declined to discuss who had the worst payment rates.
Defaults by cardholders worsened most in areas where U.S. home prices dropped by more than 5 to 10 percent, Chief Financial Officer Daniel Henry said in April in a conference call.
American Express said in March it was buying General Electric Co.’s corporate charge-card unit for $1.1 billion to add business customers as consumers struggle to pay back loans.
The company has dropped 34 percent in the past 12 months, compared with the 48 percent slide at Capital One and 54 percent plunge at Discover.
MasterCard, which runs a network and doesn’t extend loans to consumers, gained $9.42, or 3.4 percent, to $289.79. The company has climbed 79 percent over 12 months.
The legal accord is “an overhang that’s eliminated,” said Sakhrani. “The amount of the settlement is not ideal, but it’s a manageable amount.” MasterCard had net income of $446.9 million in the first quarter.
MasterCard will pay as much as $1.8 billion in quarterly payments over three years to settle the complaint that it blocked banks from issuing American Express cards. The agreement will cost Purchase, New York-based MasterCard about $1 billion after taxes.
Bad News `Accelerating’
“The settlement came in a bit higher than we expected,” said Patrick Schumann, an analyst with Edward Jones & Co. who advises clients to buy the shares. “It’s likely in coming quarters that the bad news about losses accelerating will be met with the increased payments from Visa and MasterCard.”
American Express sued competitors MasterCard and Visa Inc. in November 2004 after the U.S. Supreme Court ruled they violated antitrust laws by preventing member banks from offering rival cards. Citigroup Inc. and Bank of America Corp., the two biggest U.S. banks, later agreed to offer American Express services.
Visa settled in November for $2.25 billion.
Last Updated: June 25, 2008 16:24 EDT
By Erik Holm