American Express Co's first-quarter profit rose 33 percent from a year ago, beating expectations, but its expenses soared 19 percent, and shares in the credit card lender and processing network fell 1.8 percent.
The company's wealthy customers spent more on their credit cards than a year earlier, but expenses outpaced American Express's revenue growth as it spent more on rewards programs for its customers.
People are skeptical about those kinds of moves, said Michael Holland, chairman of money manager Holland & Co, which includes American Express shares in its holdings.
If they are actually picking up some competitive advantage by spending now, I'll be delighted. They don't have a history of being wasteful with expenditures, but time will tell, he said.
American Express was one of the first to recover from a surge in losses on its credit cards during the financial crisis, when people lost their jobs and could no longer pay their bills. But most lenders have seen credit quality gradually improve over the past year.
Anerican Express has refocused its business on processing the transactions of high-spending customers who mostly pay their bills in full every month.
But those customers expect to earn pricey rewards, such as free flight upgrades or hotel stays, from the points they earn every time they swipe their American Express cards. Chief Financial Officer Dan Henry told analysts on a conference call that more customers are redeeming their points for awards.
The company may not be able to afford to reduce its spending on rewards or marketing very much in the face of the increased competition it is facing for its affluent customers.
JPMorgan Chase & Co , the second-largest U.S. bank, has revamped its credit card unit to focus on processing transactions for wealthy customers -- and is also offering them some new rewards for using its credit cards.
SPENDING TO SLOW
American Express, which lends directly to consumers but also competes with Visa Inc and MasterCard Inc to process credit card transactions, has recovered from the financial crisis more fully than many other consumer lenders.
The New York-based company said on Wednesday it earned $1.18 billion, or 97 cents per share, in the first quarter -- up from $885 million, or 73 cents per share, a year earlier.
The earnings were 4 cents per share better than analysts' average expectation of 93 cents per share, according to Thomson Reuters I/B/E/S.
Spending on American Express cards rose 17 percent.
Chief Executive Kenneth Chenault said in the earnings release that the company's results reflected credit quality and billed business trends that are among the best we've seen.
Revenues rose 7 percent from a year earlier, slightly more than expected, to $7.03 billion.
Expenses soared 19 percent to $5.2 billion, with the biggest increases coming from what the company spends on its rewards programs for customers. Marketing expenses also rose 15 percent.
Chenault said in the release that the increase in expenses had helped American Express jump-start its expansion into new payment technologies, including online payments. But the company plans to slow the growth of our operating expenses toward the end of this year and into next, he said. .
American Express shares fell 1.8 percent to $46.14 in after-hours trading following the earnings report on Wednesday. They had closed less than 1 percent higher at $47.00 during the regular session on the New York Stock Exchange.
(Reporting by Maria Aspan; Editing by Gary Hill)