PROBLEM 2–17 The following is an excerpt from a quarterly earnings announcement by American Express:

American Express Reports Record Quarterly Net Income of $648 Million QUARTER ENDED SEPTEMBER 30 Percentage

($ millions except per share amounts) 20X9 20X8 Inc./(Dec.)

Net income $ 648 $ 574 13.0%

Net revenues $ 4,879 $ 4,342 12.4%

Per share net income (Basic) $ 1.45 $ 1.27 14.2%

Average common shares outstanding 446.0 451.6 (1.2%)

Return on average equity 25.3% 23.9%

NINE MONTHS ENDED SEPTEMBER 30 Percentage

($ millions except per share amounts) 20X9 20X8 Inc./(Dec.)

Net income $ 1,869 $ 1,611 16.0%

Net revenues $14,211 $12,662 12.2%

Per share net income (Basic) $ 4.18 $ 3.53 18.4%

Average common shares outstanding 447.0 456.2 (2.0%)

Return on average equity 25.3% 23.9%

Due to a change in accounting rules, the company is required to capitalize software costs rather than expense them as they occur. For the third quarter of 20X9, this amounted to a pre-tax benefit of $68 million (net of amortization). Also, the securitization of credit card receivables produced a gain of $55 million ($36 million after tax) in the current quarter.

Required:
Evaluate and comment on both

(a) the earnings quality and

(b) the relative performance of American Express in the most recent quarter relative to the same quarter of the prior fiscal year.