A mere six weeks ago, it looked like credit card companies were rolling in the clover. Delinquencies were down, interest rates were up, and a survey of users showed that consumers were happier with their cards than they had been in a long time -- due in part to laws such as the Credit CARD Act of 2009, which kept card issuers from changing fees and rules without proper notice. The company with the highest satisfaction score? American Express (AXP 0.04%).
Apparently, consumer satisfaction doesn't necessarily jibe with consumer use: American Express' Q3 earnings report notes an increase in spending by consumers since last year, though the rate of the increase has actually slowed from its year-ago earnings report.
Rates of consumer use increased, but at a less robust pace
Consumer spending increased 8% over last year, which the company acknowledged was less than the increases it has seen previously. Last year saw an increase of 12% over 2010 levels, though expenses were higher.
This year, expenses are down a bit, but that's because of corporate cuts such as reduced salaries, benefit costs, and expenses associated with rewards programs. While revenue did increase 4%, it wasn't too impressive -- particularly when compared with the 9% rise reported last year.
Another aspect that appears worrying at first is the fact that the company's increased provisions for losses nearly doubled, up 92% from one year ago. The company noted that reserve releases for this purpose were higher last year, however, which adds perspective. Further, when taken in context of the company's provisions in the past, the third quarter's provisions look very reasonable. Management also notes that write-offs of uncollectible debts were lower in Q3, another improvement from earlier quarters.
American Express has historically served a more upscale clientele than other credit card issuers, and AMEX officials have noted that the consumer spending slowdown is apparent throughout the industry. This doesn't bode well for Capital One (COF 0.58%), which reports earnings today, or Visa (V 0.85%) and MasterCard (MA 0.11%), who report later this month. In addition, Capital One may show reverberations from its recent $210 million settlement with the Consumer Financial Protection Bureau regarding their sales tactics for credit protection services, while Visa and MasterCard may have higher expenses related to its non-starter settlement with merchants this past summer.
Of course, it wasn't only a slowing of consumer spending that hit AMEX hard. A decrease in spending by big business has also hurt its bottom line, as corporations cut back on non-essential items such as travel and entertainment.
A new-ish product may help AMEX pick up the pace
There is one particular bright spot on American Express' horizon, however. The card issuer and Walmart (WMT 1.54%) have recently reintroduced the Bluebird reloadable prepaid debit card, a product aimed at a less well-heeled customer base. The card had a limited trial run in 2011, and the company took consumer feedback to heart as it reworked the product. Now, the card has very few fees, which should help it attract the new clientele AMEX is looking to serve.
If the entire industry really is stuck in gear right now, this blip on American Express' quarterly report may be a temporary setback, sure to be overcome once the holidays get into full swing and the economic picture brightens. If the situation is something company-based, that's another matter entirely, but I don't think this will become apparent until more credit companies report. I'll be keeping an eye on further developments, and savvy investors would be wise to do the same.
