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Americans have fallen back in love with debt-fuelled spending, as results from American Express illustrated. That is good news and bad news for credit card issuers. Businesses that make money by charging double-digit interest rates on revolving credit lines extract more fees when loan balances balloon.
But they can also easily blow those gains on marketing and rewards for cardholders. Investors who have been piling in on credit card stocks should curb their own enthusiasm.
After falling by a record $108bn in 2020, credit card debt is growing again. Balances rose $17bn in the third quarter of 2021, after an increase of the same size in the second quarter, according to the Federal Reserve Bank of New York.
The resurgence is reflected in Amex’s latest results. Revenue jumped 30 per cent to $12.1bn while net income rose a fifth to $1.7bn during the fourth quarter. Consumers have become less cautious and are shopping, dining and travelling despite the surge in new Covid-19 cases caused by the Omicron coronavirus variant.
Investors have taken note. After a 7 per cent gain in Tuesday morning trading, Amex shares were up more than 40 per cent over the past year. Stock in smaller rivals such as Synchrony Financial, Capital One Financial and Discover Financial have returned 24-45 per cent. This compares with the KBW Bank index’s 29 per cent gain.
Card issuers have then escalated their fight for new customers by promising beefier rewards and loosening lending standards. Their focus is on customers with good credit scores who will bring over balances from rivals.
Engineering these defections is costly. At Amex, total expenses rose 29 per cent to $9.8bn during the fourth quarter — well above the $9.3bn analysts had forecast. Within this, rewards for customers increased a third while marketing spend was 54 per cent higher.
So far so good. Revenues and costs are rising in tandem. Amex shares are not too pricey at 18 times forward earnings. They will become so when rising marketing costs comprise one axis of a diminishing returns curve.
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