American Express gave investors a clean read on one of the more important questions in consumer finance: affluent cardholders are still spending, but the cost of keeping them loyal is rising. The company reported second-quarter results on Friday that showed stronger earnings, faster card-member spending and better revenue guidance. The stock still fell, a useful reminder that in premium credit cards, growth is only half the test. The other half is whether rewards, marketing and technology spending can translate that growth into durable profit.
The numbers were strong on their face. American Express reported net income of $3.1 billion for the quarter ended June 30, up from $2.9 billion a year earlier. Diluted earnings per share rose 11 percent to $4.53 from $4.08, while total revenue net of interest expense increased 10 percent to $19.6 billion. Billed business reached $455.8 billion, up 9 percent on a foreign-exchange adjusted basis, which the company said was its fastest card-member spending growth in three years.
That makes American Express a useful counterpoint to the weaker consumer story that often dominates credit headlines. Its customer base is tilted toward higher-income households and business users, a mix that continued to support spending during the quarter. The Associated Press reported that the average American Express customer spent $6,759 on cards in the quarter, compared with $6,393 a year earlier. The company also added 3 million new customers, with roughly three-quarters choosing cards that carry annual fees.
The tension is that those customers are increasingly expensive to attract and retain. Consolidated expenses rose 12 percent to $14.5 billion, driven by higher customer engagement costs, the U.S. Platinum Card refresh, greater use of card benefits and higher operating expenses. American Express raised its full-year revenue growth guidance to 10 percent but left its earnings-per-share forecast unchanged at $17.30 to $17.90. That combination explains why the market reaction was chilly. Reuters reported that the shares fell 6.4 percent in morning trading as investors focused on the unchanged profit outlook, while Barron’s noted that revenue came in slightly below Wall Street expectations despite the earnings beat.
For management, the message was explicit: reinvest the upside now to defend the franchise later. Chief Executive Stephen Squeri said the company could let the outperformance fall to the bottom line or invest to grow the business, and that it had chosen the latter. That is a rational choice if American Express can keep deepening its relationship with younger, higher-spending customers. It is also a costly one at a time when JPMorgan Chase, Citigroup and Capital One are all competing harder for premium card users with richer travel, dining and lifestyle perks.
Credit quality gave the company room to make that choice. Provisions for credit losses fell to $1.1 billion from $1.4 billion a year earlier, helped by a reserve release compared with a reserve build in the prior-year quarter, partly offset by higher net write-offs. The second-quarter net write-off rate was 2.0 percent, flat from a year earlier. That is a materially better backdrop than the one facing lenders more exposed to stressed borrowers, and it supports American Express’s view that spending growth and credit performance remain core strengths.
The strategic question is whether the premium-card model is becoming more powerful or merely more expensive. The refreshed Platinum portfolio is now the fastest-growing part of the U.S. consumer business, according to the company, and MarketWatch reported that the card’s newer benefits include lifestyle credits designed to make the annual fee feel more like a membership bundle than a financing product. American Express is also extending its ecosystem through moves such as the proposed acquisition of TheFork, a European restaurant booking platform, and new ways for U.S. card members to redeem Membership Rewards points through Apple Pay.
Investors are right to ask for evidence that this spending produces operating leverage over time. But the quarter also shows why American Express retains a premium position in consumer finance. Its cardholders are still spending, credit losses remain contained, and new fee-paying customers are arriving even as competition intensifies. The near-term earnings ceiling is self-imposed. The longer-term test is whether today’s reinvestment makes the network harder to dislodge when the next turn in the consumer cycle arrives.