American Express Co and Capital One Financial Corp said rising customer delinquencies reduced second-quarter earnings, and shares of the large U.S. credit card issuers fell after hours.

Profit fell 84 percent at American Express, while Capital One reported a third straight quarterly loss. Both are writing off close to $1 out of every $10 they lend, even after the government let them repay federal bailout money.

In after-hours trading, shares of American Express fell 4.4 percent to $28.14, and Capital One fell 4.8 percent to $26.50.

American Express and Capital One have slowed issuance of new cards as consumers try to reduce card balances, even as reserves for uncollectible debt rise, said John Augustine, chief investment strategist at Fifth Third Private Bank in Cincinnati. This scenario suggests these companies will remain under stress until charge-offs start to level off.

Consumers and businesses are struggling to keep current on card payments in the worst economic slowdown in decades.

Defaults on U.S. credit cards rose to a record 10.76 percent in June and could reach 13 percent by the middle of 2010, Moody's Investors Service said on Wednesday.

Economists say charge-off rates are closely tied to the nation's unemployment rate, which at 9.5 percent is the highest since 1983 and is widely expected to soon reach double digits.

EARNINGS FALL

American Express said quarterly net income available to common shareholders fell to $102 million, or 9 cents per share, from $650 million, or 56 cents, a year earlier. Before preferred stock dividends, net income was $337 million.

Excluding items, profit was 27 cents per share, according to Reuters Estimates, matching the average analyst forecast. Net revenue fell 18 percent to $6.09 billion. Analysts expected $6.36 billion.

In the U.S. card business, managed net charge-offs, or loans the company does not expect to be repaid, rose to 10 percent from 8.5 percent in the previous quarter.

Write-off rates are at historical high levels, Chief Financial Officer Dan Henry said on a conference call. This is having a significant impact driving lower earnings. He said the decline in customer spending moderated in June and July.

Chief Executive Kenneth Chenault also expressed some optimism, saying charge-offs could fall below 10 percent over the rest of 2009, below the company's prior forecast.

Capital One, based in McLean, Virginia, had a quarterly net loss available to shareholders of $275.5 million, or 65 cents per share, compared with a profit of $452.9 million, or $1.21, a year earlier. Before preferred stock dividends, profit was $224.2 million.

Excluding items, the loss per share was 64 cents, according to Reuters Estimates, larger than the average 51 cents loss projected by analysts. Managed revenue rose 1 percent to $4.15 billion. Analysts expected $3.85 billion.

In the U.S. card business, charge-offs rose to 9.23 percent from the first quarter's 8.39 percent.

Chief Executive Richard Fairbank on a conference call said consumers are behaving defensively, in part by reducing spending. He said charge-offs may keep rising this year, and projected a 10.3 percent year-end unemployment rate, with housing prices bottoming out 42 percent below their 2006 peak.

REPAYING UNCLE SAM

Both companies took charges tied to the repayment of funds taken from the government's Troubled Asset Relief Program.

American Express repaid $3.39 billion and Capital One $3.55 billion after regulators conducted stress tests of both companies and found they did not need more capital.

Other major card issuers have also suffered rising credit losses, including Bank of America Corp , Citigroup Inc and JPMorgan Chase & Co .

JPMorgan Chief Executive Jamie Dimon projected that his bank's card business will not make money in 2009 or 2010.

(Reporting by Juan Lagorio and Jonathan Stempel; editing by Andre Grenon and Carol Bishopric)

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