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Riding the secular shift in the global payments industry, American Express (NYSE:AXP) posted the results for its third quarter performance for the current year, with profits edging moderately as compared to a year ago. We reiterate our buy rating on the stock given the company's future prospects. Much of the improvement in the results was associated with the growth in cardmember loan portfolio and the resultant increase in net interest income, rise in cardmember spending, and lower operating expense. While global card spending surged 6%, card spending in the U.S. increased 8% YoY. Card spending is slower than expected. However, given the challenging global economic environment, we believe other card issuers, including Visa (NYSE:V) and MasterCard (NYSE:MA), will benefit from this growth in card spening, both in the U.S. and globally, when they report their performances for the third quarter on October 31.

The company posted earnings per share of $1.09 on revenues of $7.9 billion. Both the top line and the bottom line remained in line with the mean expectations of analysts covering the stock.

Segmental Review:

With the exception of the Global Network and Merchant Services segment, earnings from all the remaining segments dropped YoY. However, revenues for all segments were up on a YoY basis.

YoY comparison reveals that earnings of $699 million from the U.S. Card Services segment remained 5% below expectations of $733 million. The segment remains the largest contributor to total earnings of the company, with over 50% of total income coming from it. Revenues of $4.1 billion accruing from the U.S Card Services segment remained 6% above last year's revenues, with the growth in revenues driven by a 5% surge in average cardmember loans. This resulted in an increase in the net interest income, and an 8% increase in cardmember spending. Total expense from the segment surged by 2% over the same time period.

The bottom line from the International Card Services segment dropped the most when compared YoY. Third quarter earnings of $164 million from the segment remained 26% below the earnings of the same quarter of the previous year. Revenues of $1.3 billion from the segment dropped by 3%, largely due to foreign currency translations. Removing the impact of foreign currency translations, the top line witnessed a surge of 2%. Effective expenses management within the segment resulted in a 3% decline in the total expenses of the segment during the third quarter of 2012, as compared to the third quarter of 2011.

Profits of $183 million from the Global Commercial Services segment plunged by 7%, despite a 2% increase in the revenues accruing from the segment. The improvement in revenues was a result of higher cardmember spending, while the impact was partially offset by lower travel commissions and fees. An 88% rise in provisions for losses resulted in a decline in the bottom line.

Global Network and Merchant Services was the only segment that posted a surge in profits as compared to the same period of the previous year. The 8% surge in profits led the bottom line to be $360 million at the end of the third quarter of 2012. Higher merchant-related revenues driven by an increase in global cardmember spending drove the revenues from the segment up by 5%. Expenses from the segment surged 2% during the third quarter of 2012.

Going forward, we believe the biggest credit card issuer by purchases will benefit from its payments network by partnering with Wal-Mart (NYSE:WMT) stores, which may also help the company capitalize on new rules for debit cards that are creating problems for banks like JPMorgan (NYSE:JPM). Therefore, we reiterate our buy rating on the stock.

Source: American Express: Third Quarter Earnings Makes Us Bullish