American Express: Increasing Our Valuation About 6% as Net Interest Income Exceeds Expectations

Circling back to American Express AXP following earnings, we are raising our fair value estimate to $178 from $169, which translates to a 2023 price/earnings multiple of 16 times, as American Express’ growth momentum has remained more resilient in 2023 than we had initially expected. Around $4 of the increase comes from earnings since our update, while higher net interest income and fee income expectations increased our fair value estimate by around $3 and $2, respectively. We have also adjusted our near-term discount revenue expectations slightly higher, but this was largely offset by higher credit expenses, a consequence of American Express’ rapidly expanding loan book.

American Express entered 2023 with impressive loan growth momentum and rising net interest margins, powered by a shift in strategy toward a younger cardholder base and more ready access to lending services. We had expected American Express’ net interest growth to be strong in 2023, but with net interest income up more than 33% in the first six months of 2023 the firm’s results have come in well above our expectations. While we still expect growth to decelerate into the high-single digits over time, as American Express’ level of loan growth is unlikely to be maintainable in the long term, we now project that net interest income will increase 25.9% in 2023, up from our previous projection of 20.4%.

Similarly, American Express’ net card fee income growth has been above our expectations in 2023. While the number of proprietary cards in force was up only 7% at the end of the June quarter, this growth has been driven by the firm’s premium fee-based cards, which accounted for 70% of gross new cards. This has led net card fee income to grow faster than the number of total American Express cards, at 21% in the first six months of the year. As a result, we have increased our expectations for net card fee growth in 2023 to 20% from 14% initially.