American Express Company — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Financial statements are unaudited; comparisons are with the corresponding 2022 periods unless stated otherwise. Dollar amounts are U.S. dollars.
Business context
American Express is a global payments company spanning consumer and commercial cards, merchant services, its payments network, lending, and travel and lifestyle services. Its results depend on card spending and fees, interest income and funding costs, credit performance, and expenses for rewards, customer benefits, marketing, and operations.
Financial and operating performance
| Metric | Q2 2023 | Change | Six months 2023 | Change |
|---|---|---|---|---|
| Revenue net of interest expense | $15.1 billion | +12% | $29.3 billion | +17% |
| Net interest income | $3.1 billion | +32% | $6.1 billion | +34% |
| Provisions for credit losses | $1.2 billion | +$788 million | $2.3 billion | +$1.9 billion |
| Pretax income | $2.7 billion | +8% | $4.9 billion | -7% |
| Net income | $2.2 billion | +11% | $4.0 billion | -2% |
| Diluted EPS | $2.89 | +12% | $5.29 | -$0.01 |
- Q2 revenue growth reflected billed business growth, higher card fees and increased net interest income. Discount revenue rose 8%, net card fees 21%, and net interest income 32%. Interest income rose 71%, while interest expense rose sharply to $1.7 billion from $439 million, principally reflecting higher rates paid on deposits.
- Worldwide network volumes increased 8% in Q2 and 11% for the first half. Q2 billed business rose 8%; travel and entertainment spending grew 14%, while goods and services spending grew 6%. U.S. Consumer Services billed business rose 10%, International Card Services 15%, and Commercial Services 2%.
- Q2 total expenses increased 7% to $11.1 billion. Rewards expense rose 10% and Card Member services expense 40%, mainly with higher spending and travel-benefit usage. Marketing expense declined 6%; operating costs also reflected higher technology and compensation expenses.
- Credit costs increased as loan balances expanded and net write-offs and reserves rose. Q2 loan net write-off rate, including principal, interest and fees, was 2.1% versus 1.1%; loans 30+ days past due were 1.1% versus 0.7%. Management said credit metrics remained below pre-pandemic levels and described them as best-in-class.
- At June 30, gross Card Member loans were $114.6 billion, up 20% year over year; gross receivables were $58.2 billion, up 4%. Loan reserves were $4.4 billion, or 3.8% of loans, versus $3.0 billion, or 3.1%, a year earlier.
- Cash and cash equivalents were $43.0 billion at June 30, versus $26.3 billion a year earlier and $33.9 billion at December 31, 2022. Customer deposits were $122.8 billion, compared with $96.4 billion a year earlier. Long-term debt was $46.7 billion, versus $40.5 billion a year earlier.
- For the first half, operating cash flow was $3.5 billion (versus $8.1 billion), investing cash outflow was $9.3 billion (versus $15.4 billion), and financing cash inflow was $14.6 billion (versus $11.2 billion). The investing outflow primarily reflected growth in loans and receivables; financing inflows mainly reflected deposit growth and debt proceeds.
Changes, capital and outlook
- Q2 earnings improved, but first-half net income declined 2% and pretax income declined 7%, as substantially higher credit provisions and expenses offset revenue growth.
- Common Equity Tier 1 capital was 10.6%, within the company’s 10%–11% target range. In Q2, American Express returned $1.6 billion to shareholders: $1.1 billion in repurchases and $0.5 billion in common dividends. It repurchased 6.9 million shares at an average price of $161.13.
- Management expressed confidence in its business model and commitment to long-term profitable growth, while emphasizing continued investment and operating efficiencies. The filing provides no numerical earnings or EPS guidance in the text supplied. Its 2023 funding plan anticipated $6–$10 billion of unsecured term debt and $3–$7 billion of secured term debt issuance.
- In July, the company signed a 10-year extension of its Hilton Worldwide agreement. Also in July, it settled an OCC review of historical U.S. small-business sales practices for a $15 million civil penalty. CFPB said it did not intend to recommend enforcement at that time; DOJ, the U.S. Attorney’s Office for the Eastern District of New York, and New York State investigations remained ongoing.
- For certain legal matters where loss was reasonably possible and estimable, the company disclosed an estimated range of zero to $310 million in excess of accrued amounts; it cautioned this is not a maximum exposure. Merchant litigation, possible regulatory remedies, and VAT disputes could also affect results.
Risks and unusual considerations
Key risks include worsening credit performance or recession, slower spending growth (particularly among U.S. small and mid-sized businesses and corporate customers), higher deposit and funding costs, competition and pressure on merchant discount rates, regulatory changes to card fees or practices, litigation and investigations, and cyber or operational incidents. Management noted ongoing capital-market volatility. Its interest-rate sensitivity assessment changed: a hypothetical immediate 100-basis-point decrease in rates would now have a comparable detrimental impact on annual net interest income to a 100-basis-point increase. The lower tax rates in 2023 reflected discrete tax benefits, including resolution of prior-year tax items for the first half.
Investor facts to verify
- Whether credit losses, delinquencies, and reserve levels continue to rise as loan balances grow, and how performance compares with management’s stated expectations.
- Whether spending and fee growth—especially U.S. SME and commercial growth—can sustain revenue momentum as growth moderates.
- How higher deposit rates and funding costs affect net interest income, margins, and the 2023 funding plan.
- Progress toward the CET1 target range and the pace of dividends and repurchases relative to balance-sheet growth.
- Developments and potential financial effects of the sales-practices investigations, merchant litigation, and other regulatory or tax matters.