American Express profits tumble 56%

Results, however, beat Wall Street estimates, helped by merchant and card processing units. Company also says it wants to pay back TARP money.

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By David Ellis, CNNMoney.com staff writer

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American Express CEO Kenneth Chenault said his firm wants to pay back $3.39 billion in TARP funds once it gets approval from regulators.
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NEW YORK (CNNMoney.com) -- Profits at American Express declined by more than half in the latest quarter, the company said Thursday, as spending by cardmembers slowed and credit troubles continued to mount.

The credit card giant also said, however, that it was hoping to soon pay back money it received from the government as part of last fall's financial rescue package.

AmEx said it earned $437 million, or 31 cents a share during the first quarter ending in March, down 56% from $991 million, or 85 cents, during the same period a year ago. Revenues came in at $5.9 billion, down 18% from a year ago.

Analysts were expected a profit of just $142 million, or 12 cents a share, according to Thomson Reuters. But revenues were lower than forecasts of $6.45 billion.

American Express (AXP, Fortune 500) shares rose more than 6% in after hours trading, after finishing the session 8% higher.

But a decline in overall spending by cardmembers dragged on the firm's results, as did a boost to the company's reserves to cope for future loan losses. The company said provisions totaled $1.8 billion by quarter's end, up 49% from $1.2 billion a year ago.

Major credit card issuers like AmEx have ramped up their loan loss reserves over the past year amid rising unemployment levels and as more consumers default on their card payments.

AmEx also reported a spike in write-offs, or loans the company believes are not collectable. During the first three months of the year, write-offs soared to 8.5% from 6.7% in the previous quarter.

The company warned that it expected that number to climb another 2 to 2.5 percentage points during the second quarter in its U.S. portfolio, and an additional half percentage point during the third quarter, before finally leveling off by the end of this year.

Daniel Henry, American Express' chief financial officer, indicated that the company would remain cautious given the economic climate, and attempt to focus on controlling costs.

Along those lines, Henry in a conference call with investors that the company planned to implement some staff reductions during the second quarter, but did not give any indication how sweeping the cuts would be.

Helping to offset the weak spots in the quarter were strong contributions from the company's merchant services and bank card processing businesses during the quarter, noted Kenneth Chenault, AmEx's chairman and chief officer.

"At a time when some parts of the card industry were incurring substantial losses, we remained solidly profitable thanks, in part, to our flexibility in adapting to a very difficult economic environment and the diversity of our business model," he said in a statement.

Chenault added that, pending approval by regulators and the results of the soon-to-be announced stress tests, the company intended to repay the government's preferred shares and warrants as part of the Troubled Asset Relief Program, or TARP. So far, AmEx has received $3.39 billion from the Treasury Department.

In order to access those funds and various other government rescue programs, American Express converted into a bank holding company late last year.

Driving that conversion was an effort to improve the company's funding options as credit became incredibly difficult to secure.

With conditions having improved significantly since then, Henry told investors Thursday that he anticipated that the majority of the company's future funding would be met by raising deposits. He added that company's reliance on the Federal Reserve's Term Asset-Backed Securities Loan Facility, or TALF, would be limited.

Under the program, the Fed effectively serves as a matchmaker, partnering buyers and sellers of newly issued, top-rated securities backed by a variety of loans, including those related to credit cards.

Many have viewed AmEx as a proxy for the broader credit card industry.

But unlike several of its peers in the financial services industry, the New York City-based firm has managed to stay profitable despite the severe downturn in the nation's economy.

Earlier this week, credit card lender and regional bank Capital One (COF, Fortune 500) reported a $176.1 million loss for the first quarter, hurt by rising credit costs and as the company set aside more money for bad loans.

The latest results from American Express also come just hours after President Obama discussed the need for more protection for credit card holders with leading industry representatives, including executives from AmEx and Capital One as well as JPMorgan Chase (JPM, Fortune 500), Citigroup (C, Fortune 500), Visa (V, Fortune 500) and Mastercard (MA, Fortune 500). To top of page

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