By MADLEN READ
NEW YORK (AP) — American Express Co. has ended another round of litigation with a rival card company, but still faces serious headwinds from its customers.
After announcing Wednesday that it will be getting $1.8 billion from MasterCard Inc. in settlement of an antitrust suit, the credit card lender — known for catering to jet-setters and the well-heeled — revealed that it has again underestimated how quickly its cardholders are falling behind on their debt.
“Business conditions continue to weaken in the U.S. and so far this month we have seen credit indicators deteriorate beyond our expectations,” said AmEx Chief Executive Kenneth Chenault in a statement.
The rocky consumer climate comes amid a tough legal period for credit card companies, which are battling among themselves and with federal authorities around the world over various rules and fees. Wednesday’s settlement was seen by industry experts as positive for both companies — mainly because the $1.8 billion figure was close to expectations, and because the two companies can now put the litigation behind them.
MasterCard shares rose $9.42, or 3.4 percent, to $289.79 Wednesday. American Express had accused the Purchase, N.Y.-based credit and debit card processor of conspiring to discourage some banks from issuing its credit cards.
MasterCard said it agreed to make 12 quarterly payments of $150 million to American Express, and plans to book a $1 billion charge related to the settlement in the current fiscal quarter.
“We are pleased to have reached a settlement that will enable us to keep our strong balance sheet intact,” MasterCard Chief Executive Robert Selander said in a statement. The settlement, Selander said, was in the best interest of shareholders because it removed “the uncertainty, time commitment and expense of a prolonged court case.”
Craig Maurer, an analyst with Calyon Securities Inc., agreed, and noted that MasterCard was able to structure its settlement more favorably than Visa Inc. did when it reached a similar suit last year for $2.7 billion — Visa agreed to pay $1.15 billion up front.
American Express shares, however, slipped $1.16 to $40.94. The company will receive about $800 million a year for three years from the two settlements, which total more than $4 billion, but many investors remain worried about consumer debt trends. MasterCard and Visa process cards for banks — they do not issue credit, as American Express Co. and Discover Financial Services do.
Back in January, AmEx CFO Daniel Henry predicted the write-off rate in the company’s U.S. segment would peak at 5.1 percent to 5.3 percent in 2008. But the write-off rate in U.S. card services — including both on-balance sheet cardmember loans and off-balance sheet securitized cardmember loans — by March had already reached the 5.3 percent level.
Now, it’s June, and delinquencies and defaults are still rising.
The big catalysts are falling home prices, rising commodities costs and the shaky job outlook. Economic data has been coming in weak: on Tuesday, one report showed consumer confidence at its lowest level since 1992 and another showed the average U.S. home price at its lowest level since 2004. And next week, economists anticipate the Labor Department will report the sixth straight month of jobs losses in June.
Keefe, Bruyette & Woods analyst Sanjay Sakhrani noted that AmEx will probably have to lower its prediction of earnings-per-share growth of 4 percent to 6 percent for 2008, which would amount to $3.51 to $3.61.
If AmEx does meet its own earnings guidance — which it reiterated only a few weeks ago — it would be mostly due to the MasterCard settlement, according to Citigroup analyst Bradley Ball. Ball also noted that it appears AmEx will likely hold off on business-building initiatives until conditions get better.
The informal warning from American Express — which reports second-quarter financial results next month — arrived a day ahead of Discover’s earnings for the quarter that ended May 31.
Analysts surveyed by Thomson Financial, on average, predict Discover earnings of 37 cents per share. That’s less than half the per-share profit of 88 cents the lender posted last year during the second quarter.
“We expect that Discover will acknowledge that things are not as great as they said they would be,” said John T. Williams, another analyst at Calyon Securities. He said Discover’s prediction in March that the company’s 2008 charge-off rate would be between 4.75 percent and 5 percent might have to be boosted higher — or abandoned altogether.
AP Business Writer Jeremy Herron contributed to this report.