Showing their innate ability to ignore the bad and focus on what they saw as “good”, US investors and analysts loved the after hours quarterly profit statement from American Express. Moody’s rate credit rating agency didn’t. It read it and whipped out a downgrade in ratings and put Amex on a negative outlook watch.

Investors boosted Amex shares 9% and more after the close: they had liked the earnings per share from continuing operations of 74 US cents per share, topping forecasts of 59 US (but down from 94 US cents a year earlier). The company reported revenue of $US7.2 billion versus forecasts for $US7.31 billion.).

But buried in the figures were the nasties: “Consolidated provisions for losses totaled $US1.4 billion, up 51 percent from $905 million a year ago,” Amex reported.

In the US card business, “provisions for losses increased to $US941 million, up from $US638 million a year ago, reflecting increased write-off and past due rates driven by the impact of the economic slowdown. On a managed basis the net loan write-off rate was 5.9%, up from 5.3% in the second quarter and 3.0% a year ago. Owned net write-offs were 6.1% in the quarter, up from 5.8% in the second quarter and 3.0% a year ago.”

The international card business had net income of $US67 million in the quarter, down 52% from $US140 million a year ago with provisions for losses rising to $US316 million, from $US197 million a year ago reflecting higher past due and write-off rates as well as loan and business volume growth.

The CEO, Ken Chennault said in a statement that “We saw clear signs earlier this year of a weakening environment and the recent volatility in the financial markets has reinforced our view that consumer and business sentiment is likely to deteriorate further, translating into weaker economies around the globe well into 2009.

“Cardmember spending is likely to remain soft. Loan growth will be restrained, in part because of the steps we are taking to reduce credit risks, and credit indicators are likely to reflect the continued downturn in the economy and throughout the housing sector.”

For the first 9 months of the year, provisions and losses jumped more than 70% to $US4.4 billion from $US2.591 billion. Losses on cardmember ledning surged 84% in the latest 9 months to $US3.3 billion from $US1.79 billion). Amex is bleeding as badly as some banks are.

Moody’s noticed that and those comments from the CEO about the poor outlook and cut Amex’s long-term senior ratings to A2 from A1 and affirmed its Prime-1 short-term ratings:

The downgrade reflects Amex’s negative asset quality trends and lending exposures, particularly in the United States where home prices have fallen sharply. Amex has maintained its ‘spend-centric’ strategic model, which emphasizes non-interest income from fees relating to customer spending, as opposed to interest income from revolving credit balances; however, the company’s lending exposures have grown significantly over time. With this shift, eroding economic conditions across the U.S. will likely pose a greater burden on Amex’s asset quality and profitability.

Some analysts were too gloomy on third quarter losses and provisions, with some estimating the around $US1.9 billion. Investors ignored that to boost the shares in after hours trading, but Moody’s captured the reality for the card giant, and other other companies depending on consumers. its going to get tougher. Barrons ignored that as well.

Peter Fray

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