By Mehnaz Yasmin and Niket Nishant
(Reuters) -American Express Co on Friday forecast its full-year profit to be higher than initially expected, but built bigger provisions to prepare for potential defaults as an economic downturn looms, sending its shares down 5% in premarket trading.
Big U.S. banks have said consumers’ financial health has remained strong despite aggressive rate hikes to curb soaring inflation that could tip the economy into a recession, but some believe the tightening could lead to a surge in defaults.
“There is perceived fear around credit quality moving forward,” said Thomas Hayes, chairman and managing member at New York-based investment firm Great Hill Capital.
To better prepare for defaults, AmEx built provisions of $778 million in the third quarter, compared with analysts’ estimate of $604.1 million.
“We are mindful of the mixed signals in the broader economy and have plans in place to pivot should the operating environment change dramatically,” AmEx Chief Executive Stephen Squeri said.
Still, the company expects to report full-year profit above its prior forecast of $9.25 to $9.65 per share.
Demand for leisure travel has stayed resilient as customers shrug off rising airfare to make up for two years of postponed trips, while businesses move away from Zoom calls and resume travel to strengthen client relationships.
The blending of work and leisure travel has also caught up, executives in the travel industry have said in recent months.
Strong growth in travel and entertainment in its international markets helped AmEx beat September-quarter profit estimates. Spending volumes in the segment surpassed pre-pandemic levels for the first time this quarter.
Net income rose 3% to $1.88 billion, or $2.47 a share, beating Street estimate of $2.41, according to Refinitiv IBES data.
Revenue rose 24% to $13.6 billion, while expenses climbed 19% as AmEx had to spend heavily on customer rewards, compensation and marketing.
(Reporting by Mehnaz Yasmin and Niket Nishant in Bengaluru; Editing by Shinjini Ganguli)