AmEx Won’t Meet Profit Estimates Unless Economy Improves

American Express Co. said it won’t meet analysts’ estimates this year unless the economy improves in the coming months.

Profit for 2021 would be about $5 a share if the outlook for the macroeconomic environment and credit quality of the card portfolio remains cautious, AmEx said in a presentation Tuesday, well below the $6.90 analysts have been predicting. If those metrics improve, profit could reach $7 a share, the company said.

“We’re trying to at least help investors understand the low-end scenario and the high-end scenario, with the difference between the two for 2021 driven by almost entirely what happens with credit,” Chief Financial Officer Jeff Campbell said in an interview.

AmEx and its rivals had to set aside billions in reserves for souring loans last year as the pandemic roiled the economy and sent unemployment soaring. With many regions still under lockdown and struggling with uneven distribution of vaccines, prospects for a recovery remain cloudy, leaving those reserves locked in place until more signs of a rebound emerge.

AmEx shares slumped 2.7% to $117.94 at 11:22 a.m. in New York.

Reserves Set

By the end of the year, AmEx had added more than $1 billion to its pile of reserves. Campbell acknowledged on a conference call with analysts that the company still has many accounts in forbearance and other forms of financial relief, while noting that the vast majority of those accounts end up doing fine.

“What that should tell you is that our credit reserves assume a fairly conservative economic outlook,” Campbell said. “So you have to see more bad stuff happening in the economy -- small businesses going bankrupt, lots of consumers being laid off -- you have to expect more bad things like that to happen for all of those reserves to be needed.”

And should there be a fairly steady recovery, “we have a lot of excess reserves that you probably are going to release,” he said.

The company also said it now expects to meet its 2020 targets -- next year. AmEx was targeting earnings per share of $8.85 to $9.25 for last year, but that was before the pandemic struck, sending the economy into a free fall and stunting spending on the company’s cards.

Travel Recovers

“We continue to be confident that consumer spending on travel and entertainment will come back to pre-Covid levels -- we just can’t predict right now, how quickly,” Chief Executive Officer Stephen Squeri said on the conference call. “Given this environment we are looking at 2021 as a transition year.”

So far, AmEx’s customers have stayed on top of their bills. Write-off rates and delinquencies both dropped during the fourth quarter. And billings -- a measure of customers’ card usage -- have been slowly improving.

Spending on items unrelated to travel and entertainment climbed 4% on the firm’s proprietary cards during the quarter, AmEx said on Tuesday. Overall spending on the firm’s cards still dropped 15% to $277.5 billion.

AmEx now expects consumer travel to recover to 80% of pre-pandemic levels by the end of the year as vaccines are more widely distributed and lockdowns end. Squeri said he anticipates domestic air travel will resume before things like cruises and long-haul international flights.

“The vaccine right now is what I would call fits and starts -- at the beginning there wasn’t enough places to do vaccine distribution, now they have vaccine distribution points but you don’t have enough vaccine to distribute and its hard to get appointments,” he said. “It will sort itself out over a period of a couple of months not over a couple of years.”

While fourth-quarter profit fell 15% to $1.44 billion, or $1.76 a share, that was still higher than the $1.29 average of adjusted earnings per share that analysts in a Bloomberg survey were calling for. Profit was helped by a $674 million release of reserves the company had set aside earlier in the year to cover souring loans.

AmEx has said in recent months that it’s focused on adding new card holders after severely curtailing those efforts during the early part of the pandemic. Spending on marketing and development costs dropped 5% to $1.86 billion, slightly less than the $1.87 billion analysts estimated.

The firm also shelled out $2.3 billion on rewards in the fourth quarter, a 16% decline from a year earlier, even as consumers continued to take advantage of limited-time credits for streaming and wireless services that the card company rolled out last year. That was more than the $2.22 billion that analysts were expecting.

“We feel really good about that value injection,” Squeri said. “We feel really good about the retention that we saw.”

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