AmEx forecasts stronger earnings even as it builds bigger provisions

(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 4% before the bell.

Despite aggressive rate hikes by the U.S. Federal Reserve to curb soaring inflation that could tip the economy into a recession, consumers’ financial health has been holding out so far.

Strong growth in travel and entertainment in its international markets helped AmEx beat estimates for third-quarter profit, with spending volumes in the segment surpassing pre-pandemic levels for the first time this quarter.

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.

“We have not seen changes in the spending behaviors of our customers, but we are mindful of the mixed signals in the broader economy and have plans in place to pivot should the operating environment change dramatically,” Chief Executive Officer Stephen Squeri said in a statement.

AmEx built provisions of $778 million in the third quarter, compared with analysts’ estimate of $604.1 million.

Still, the company expects to report full-year profit above its prior forecast of $9.25 to $9.65 per share.

Net income rose 3% to $1.88 billion, or $2.47 a share, in the three months ended Sept. 30, beating Street estimate of $2.41 a share, according to data from Refinitiv IBES.

Revenue in the quarter rose 24% to $13.6 billion, while expenses climbed 19% as the company had to spend heavily on customer rewards, compensation and marketing.

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