NEW YORK (Reuters) - American Express Co (AXP.N) posted a 31 percent increase in second quarter profits, beating analysts’ expectations, as customers spent more on their cards and the company’s processing revenue jumped.
Average spending on the company’s cards for the quarter rose 15 percent to $3,767 from the same period a year ago and the number of outstanding American Express cards rose 6 percent to 94 million.
“You’re definitely seeing very strong spending growth and the question is how long can the strength persist?” said Sanjay Sakhrani, an analyst covering credit card companies at Keefe, Bruyette & Woods in New York.
Part of the spending growth is because consumers in general are spending more in the United States. The U.S. Census Bureau said last week that retail sales rose 7.7 percent in the second quarter from the same period a year ago.
But part of the growth is because American Express is spending more on its rewards program to encourage its customers to spend more.
The company spent more than $1.6 billion on its rewards program during the quarter, up 35 percent from last year’s second quarter. In the first quarter, American Express boosted its marketing and rewards spending by 30 percent.
In the second quarter, the rising rewards cost came from customers redeeming more reward points and from each reward point costing the company a little more.
Customers are ultimately redeeming a little more than 92 percent of their rewards points, compared with about 91 percent last year. Every 1 percentage point increase in rewards redemptions costs the company about $283 million.
Offering better rewards encourages customers to spend more on their American Express cards. The company has been focusing on making money from processing credit and debit card transactions, which is less risky than lending, so better rewards are a key engine for boosting profits.
American Express has few choices, but to offer better rewards as rivals such as JPMorgan Chase & Co (JPM.N) court its best customers — wealthy consumers who pay off their credit or charge card bills in full every month.
“There has been a war for the premium end of the industry for 15 years. If we were complacent, we’d lose market share,” Chief Financial Officer Dan Henry said on a conference call on Wednesday.
The New York-based company posted quarterly earnings for common shareholders of $1.32 billion, or $1.10 a share, compared with $1.00 billion, or 84 cents a share, in the same quarter last year.
Earnings per common share from continuing operations were $1.07, exceeding Wall Street analysts’ average estimate of $0.99, according to Thomson Reuters I/B/E/S.
In another effort to drive customers to spend more on their American Express card, the company said earlier this week it is working with merchants to offer coupons to customers via Facebook. Those coupons and special offers can only be redeemed if the customer makes a purchase using their American Express card.
In the years leading up to the credit crunch, the company boosted profit by making more loans, only to be burned by customer defaults. American Express is one of the few companies that issues credit cards and has its own processing network.
The company’s credit losses have been abating in recent quarters. American Express set aside $357 million to cover bad loans in the quarter, a 45 percent drop from the same quarter last year.
Total revenue excluding interest expense rose 12 percent to $7.62 billion. Processing revenue rose 16 percent to $4.28 billion.
Reporting by Dan Wilchins; editing by Andre Grenon