Higher consumer spending boosts AmEx profit

REUTERS: American Express Co posted a strong first-quarter profit, as its customers spent more on their credit cards while redeeming fewer rewards, and the company said it will look to boost its digital offerings.

As the U.S. economy begins to add jobs and gain strength, consumers have been spending more with their credit cards, the dollar volume of which grew 8.7% in March, according to KKR-owned payment processor First Data.

Though American Express caters to the high-spending consumers who pay their bills on time, these sought-after customers also expect pricey rewards such as flight upgrades and free hotel rooms from the points they earn every time they swipe their cards, which sent its costs soaring last year.

In the first quarter, costs for cardmember rewards fell 7% to $1.47 billion but the company’s customers spent more than they did last year.

The company said the fall in reward costs was due to lower increases in the rate at which it expects members to redeem their points. While it expects the rate to rise in 2012, the increase will still be line with levels seen before 2011.

On a post earnings conference call, Chief Financial Officer Dan Henry said the number of cards in circulation rose 7% to 98 million.

American Express is also investing more money in building its e-commerce services. The company already has deals with social networking sites Facebook and Twitter and is expanding further online.

It has been beefing up its digital commerce offering, Serve, which is an online payments platform.

“Last year, we saw the digital growth at 22% of billings. I strongly suspect it’s in all likelihood growing at a faster rate than the average,” CFO Henry said on the call.

The company appointed Neal Sample, the former chief technology officer of EBay’s (EBAY.O) commerce platform, to the Serve team earlier this month.

“Digital at American Express is a buzz word. We think it’s important that we think about transforming the company,” Henry said.

For the first quarter, net income was $1.26 billion, or $1.07 per share, compared with $1.18 billion, or 97 cents per share, last year.

Total revenue, net of interest expense, was $7.61 billion, up 8%.

Analysts expected the company to earn $1.00 per share on revenue of $7.57 billion, according to Thomson Reuters I/B/E/S.

The company’s lending business, which was one of the first to recover from a surge in losses on its credit cards during the financial crisis, has also seen fewer defaults.

Among the large credit card companies, including JPMorgan Chase, Discover Financial, Capital One, Bank of America and Citigroup, American Express had the lowest delinquency rate in March.

But a larger lending portfolio led the company to set aside $412 million to cover future loan losses, more than four-times what it provisioned last year

The credit card company said the comparison reflects the $725 million it released from its loan loss reserves last year.

American Express, which lends directly to consumers but also competes with Visa Inc and MasterCard Inc  to process credit card transactions, said global network and merchant services revenue grew 8% to $1.25 billion.