American Express profits reveal record returns. Why is the stock going down?

The group said the strong sales reflected growth in core cardholder spending as well as continued engagement with premium products. In addition, spending on travel and leisure was a standout, rising by 39% after adjusting for the effects of foreign exchange. Millennial and Generation Z customers continue to be the fastest-growing group in terms of spending, up 28% from a year earlier among those demographics.

This momentum is expected to continue.

“Travel and leisure spending is off the charts and strong in every geography and across every type of customer,” said Jeffrey Campbell, Chief Financial Officer, Amex. Barron. He added that customers still show a passion for travel.

But Amex, like other financial institutions, is preparing to default as the economy shows signs of weakness, even though the company caters to a premium segment of spenders. This setup likely explains the first-quarter earnings loss. Amex recorded a consolidated provision for credit losses of $1.1 billion, reflecting a net reserve build-up of $320 million. However, credit metrics remained strong through April, the company noted.

Campbell describes the rulings as a quarter of “business as usual” because it’s the first time a ruling hasn’t been determined by pandemic circumstances. Just as the pandemic hit, a new accounting standard emerged — current expected credit loss (CECL) — that requires financial firms to build reserves for expected credit losses in advance rather than realizing them over the life of the loan. The intent of this rule was that companies would save during the good times to prepare for the bad times. In practice, however, this move added volatility to profits as reserves are built up and released if losses are not realized.

Despite the ruling, Amex sounded a positive note.

“Our clients have so far been resilient in the face of slowing macroeconomic growth, rising inflation, and rising interest rates, while remaining best-in-class credit performance,” said Stephen J. Squire, Chairman and Chief Executive Officer of Amex. “However, we do perceive mixed signals in the external environment.”

However, Amex reiterated its full-year guidance issued in January, forecasting revenue growth of 15% to 17% and earnings per share between $11 and $11.40.

Amex shares fell 2.3 percent in Thursday’s trading.

Write to Jack Denton at [email protected]