American Express(NYSE:AXP) second-quarter earnings grew 21% year over year to $1.62 billion, helped by lower taxes and double-digit growth in card member spending and borrowing.

Here's what you need to know about its second-quarter results.

American Express' second quarter: By the numbers

Metric

Q2 2018

Q2 2017

Year-Over-Year Change

Net revenue

$10.0 billion

$9.2 billion

9%

Net income

$1.6 billion

$1.3 billion

21%

Diluted EPS

$1.84

$1.47

25%

Data source: American Express.

What happened with American Express this quarter?

Large card issuers rarely excite investors during earnings season, but it's important to keep a close eye on the moving pieces that together affect their profitability. Here are the notable figures and developments at American Express in the second quarter.

  • Loan growth continued. Higher loan balances drove a 19% year over year increase in net interest income. The company reported period-end card member loans of $75.4 billion, up 3.6% sequentially and 14% year over year. Average loans grew 1.9% sequentially and 14% year over year in the second quarter.
  • Increased spending lifted fee income. Total billed business increased to $296.5 billion, up 10% from the year-ago period (9% when adjusted for currency fluctuations). Increased spending helped drive discount revenue AmEx earns on every swipe of its cards up 8% to $6.2 billion during the second quarter. Known for its "spend-centric" business model, discount revenue accounted for 62% of net revenue this quarter. 
  • Loan losses rose...again. Fast loan growth doesn't come without its costs. American Express charged off loans at an annualized rate of 2.6% in the second quarter, up from 2.4% last quarter, and 2.1% in the year-ago period. In prepared remarks on the conference call, management suggested that higher write-offs this quarter were partially related to loans that soured because of last year's hurricanes.
  • Provisions weighed on profits. Total provisions grew 38% year over year to $806 million in the second quarter. AmEx previously said that it expected provisions to grow "in the mid-30% range" in 2018 as it targets customers who are more likely to carry a balance. In the first six months of 2018, AmEx has set aside about 37% more for loan losses than in the same period a year ago, though loan growth is also trending higher than it expected. On the conference call, management said its provisions were in line with its earlier expectations given the swelling size of its loan book.
  • American Express introduced a new card in partnership with Wells Fargo. It also inked an agreement with Amazon to issue a credit card for small-business owners, a noteworthy win considering the e-commerce giant already has partnerships with Synchrony Financial and JPMorgan Chase for consumer cards.

What management had to say

The second-quarter conference call yielded some interesting discussion surrounding certain AmEx products. Management was particularly pleased with its Platinum Card, which is designed for high-income, high-spending households. Jeff Campbell, executive vice president and chief financial officer, said that over half of new Platinum users are millennials, a coveted cohort among credit card companies.

Close-up shot of a credit card.

Image source: Getty Images.

The Platinum Card is also winning favor from merchants. AmEx recently added a new feature for Platinum cards, giving its card members $100 in annual credits for shopping at luxury department store Saks Fifth Avenue. Essentially "free money" for the card member, Campbell said that Saks Fifth Avenue picked up the cost of the promotion, believing that it could make up for the $100 credits by driving more sales volume from high-end card users. Notably, rewards expense increased 11% year over year, just slightly outpacing the 10% increase in total billed business. 

AmEx remains focused on driving spending and growing its network acceptance at smaller merchants. "I mean last year, we signed over 1 million merchants in the United States and what's happened is that gives us an opportunity to go after a higher share of wallet with our existing card members, and it's also a very good way to attract new card members," Campbell said.

Looking ahead

American Express reaffirmed earlier guidance, calling for full-year earnings at the high end of its previously given range of $6.90 to $7.30 per share. Barring substantial changes in loan performance or expense growth, AmEx is on track to hit its guidance, having earned $3.70 per fully diluted share in the first six months of 2018.

Credit quality remains a persistent question mark. After years of spectacular credit performance, card issuers are broadly reporting an uptick in losses. AmEx's write-off ratio has increased in each of the last three quarters, a trend that investors would hope soon reverses course.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jordan Wathen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN. The Motley Fool has a disclosure policy.