American Express shelves recession playbook, predicts strong holiday

While American Express is reporting strong payments growth, analysts peppered the company's executives with questions about how it would handle a potential recession.

"We haven't seen any change; the reality is last quarter was a record-level quarter and this quarter was only [a bit] behind that," said Steve Squeri, chairman and CEO of American Express, during Friday's earnings call. 

For the quarter that ended Sept. 30, Amex reported net income of $1.9 billion, or $2.47 per share, compared with $1.8 billion, or $2.27 per share, the prior year. That beat analysts' projections of $2.41 per share. Total quarterly revenue was $13.6 billion, up 24% from $10.9 billion a year earlier. Spending on travel and entertainment was 57% higher than the prior year, surpassing pre-pandemic levels.

Amex reported earnings amid high inflation and concerns over a broader economic downturn. Analysts and investors are on the lookout for signs that economic weakness is negatively impacting consumer credit and reducing payment volume, which could threaten Amex and other card companies.  

Amex has provisioned $780 million for losses, higher than analysts' expectations of $570 million and up from a benefit of $191 million a year ago. Delinquencies increased from .7% to .9% in the past year, staying below the pre-pandemic level of 1.5%. The $780 million provision in the current quarter includes a $387 million reserve build. 

"The main pushback we hear is the [Amex] guidance includes a 'steady state' macro environment and investors are obviously hunkering down for a non-steady state soon," said Autonomous, a financial research firm, in a research note. 

Amex has not seen changes in its customers' spending behavior, but it is mindful of mixed signals in the broader economy, according to Squeri. The company has plans to pivot if the operating environment changes dramatically, according to Squeri, who said the current pace of consumer spending is not showing signs of weakness. 

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"The holiday season looks really strong," Squeri said. "If you are traveling you're going to be eating at restaurants and bringing presents with you." 

For the full year, the company said earnings should be higher than prior projections of $9.25 to $9.65 per share, or 23% to 25% growth over 2021; Autonomous reports analysts' consensus is for $9.90 per share for the full year. Amex reports it has factored in an uptick in unemployment, particularly among white-collar workers, in its forward projections. Amex's projections include mid-teens growth for 2023. "To pull out the recession playbook at this time doesn't make any sense," Squeri said.

If the company does need to pivot, Squeri said it's well positioned thanks to lessons learned during the most recent downturn. During the early days of the pandemic, Amex's net income dropped substantially. The company responded by helping distressed consumers during the pandemic, a strategy it could return to if necessary. The company's customer base is also different than during the 2008 recession, with more premium cardholders, more fee-paying cardholders and different sources of revenue, the CEO said. 

Younger consumers have helped drive Amex's recovery from its pandemic dip. American Express added 3.3 million proprietary cards during the quarter, with millennials and Generation Z consumers accounting for more than 60% of the acquisitions. Amex has tightened underwriting even as it has added new accounts, Squeri said. 

Marketing expense is another area where the company could make adjustments. Amex is on pace to spend about $5 billion in marketing in 2022, compared with a range of $3.5 billion to $6.5 billion before the pandemic. The company has the flexibility to reduce that spending based on economic conditions, Squeri said, adding Amex monitors and updates its credit risk criteria on a regular basis. 

Under analyst questioning, Squeri pushed back on the idea that inflation is driving its revenue growth as consumers pay more for travel, entertainment and other items, thus pushing up payment volume. 

"Eighty percent of our growth is transactions right now," Squeri said. "It's not inflation, it's a higher level of engagement. The notion that we're growing because of the tailwind of inflation is a silly notion."