American Express, the credit card giant, reported a 34% increase in profits in the first quarter of the year. This was mainly driven by higher cardmember spending and more customers keeping a balance on their cards. The company earned $2.44 billion in the first three months of the year, exceeding Wall Street’s expectations. Revenue for the quarter was $15.8 billion, up 11% from a year earlier, with customers spending $419.2 billion on their cards, a 5% increase from the previous year. AmEx generates revenue by taking a small percentage of each transaction spent on their cards as a fee from merchants.
In addition to its traditional revenue model, American Express is now earning significant interest income from customers who keep a balance and revolve on their accounts. The company earned $5.06 billion in interest income last quarter, a 28% increase from a year earlier. Roughly a third of AmEx’s revenue now comes from interest income, reflecting a shift in their business model. The company added 3.4 million new cardmembers in the quarter, with 70% of them opting for credit cards with an annual fee attached to them. AmEx executives believe that the higher use of fee-based products indicates that customers see value in the card despite the fee.
AmEx’s chairman and CEO, Steve Squeri, stated that the company continues to attract high-spending, high credit-quality customers to the franchise. However, as more customers keep a balance on their cards, AmEx is experiencing an increase in customers falling behind on payments. Post-pandemic, the company’s charge-offs and 30-day delinquencies have been on the rise. Despite this, AmEx’s charge off rates are half of what its competitors like Capital One, Discover, and Chase are currently facing. This indicates a level of resilience in AmEx’s customer base and the company’s ability to manage credit risk effectively.
Overall, American Express’s first-quarter performance reflects a strong financial position, with increased profits driven by higher cardmember spending, interest income from customers keeping a balance, and a growing customer base. The company’s ability to attract high-quality customers and generate revenue from both transaction fees and interest income has contributed to its success. As the economic landscape continues to evolve, AmEx will need to focus on managing credit risk and maintaining customer trust to sustain its growth and profitability in the future.
