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Credit Suisse raised its earnings estimates of credit-card company American Express Co. primarily on incremental reserve release, while maintaining its Underperform rating with a price target of $38.
American Express reported second quarter EPS of $0.84, compared to Credit Suisse estimate of $0.81, and First Call estimate of $0.78. Pre-provision income was about $0.03 stronger than Credit Suisse model as higher fee income was partially offset by continued investment in the business.
Credit costs were about $0.08 better than the brokerage house model, primarily due to incremental reserve drawdown in the card-member lending allowance. The remaining difference was $0.08 higher taxes as the quarter included a $44 million valuation allowance related to the deferred tax asset and a catch-up in the year-to-date tax rate.
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“We continue to believe that longer-term American Express will experience pressure on its merchant discount rate as it is the highest among the four major card networks. We believe that the risk of pressure on the discount rate is increasingly likely over the next 12-18 months following the recent focus on debit interchanges,” said M. Orenbuch, an analyst at Credit Suisse.
The brokerage increased its 2010 EPS estimate to $3.50 from $3.15 and its 2011 estimate to $3.65 from $3.50, primarily on incremental reserve release. The brokerage’s estimates factor in $1.20 and $0.30 per share of reserve release in 2010 and 2011.
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However, the brokerage lowered its 2012 EPS estimate to $3.90 from $4.00 on a lower benefit from reserve release and modestly higher tax rate.
American Express management will host its semi-annual financial community meeting on August 4, 2010. The analyst expects management to provide an update on its product strategies as well as details on various other business investments.
American Express shares at 11:30 am EDT were up 0.39 percent at $43.36 on the NYSE.
