American Express Earnings: Surge in Travel Spending and Net Interest Income Drives Revenue Growth

Wide-moat-rated American Express AXP reported strong first-quarter earnings as robust travel spending growth, particularly international travel spending, drove higher spending volume growth, while rising rates and higher loan balances led to rapid net interest income growth. This impressive revenue growth was offset, however, by higher credit costs. Net revenue increased 22% from last year to $14.3 billion, while earnings per share was down 12% to $2.41. This translates into a return on equity of 28.7%. The decline in earnings was due to a higher provisioning expense, which increased to $1.06 billion from a benefit of $33 million in the year-ago period. As we incorporate these results, we do not plan to materially alter our $169 per share fair value estimate.

Discount revenue, the transaction fees American Express charges merchants when its cards are used, increased faster than we had expected, rising 16% year over year to $7.95 billion on the back of strong travel and international spending. Travel spending rose 39% companywide (versus 9% growth year over year for general goods and services) and international card spending increased 29%. While the year-over-year comparisons benefit from the lapping of the tail end of the pandemic period, it appears that recent macroeconomic conditions have not impacted the travel plans of American Express’ cardholders.

Net interest income increased 36% year over year and 8% sequentially to $3 billion, driven primarily by loan growth, with card member loans increasing 22% year over year to $105 billion. While American Express has never focused on lending, with net interest income typically providing around 20% of its annual revenue, modifications to its card products to offer more borrowing features have led to broader utilization of its lending services. Although we expect loan growth to decelerate, the firm’s net interest income growth should continue to lead its peers as the impact of these changes filter through.