American Express Company — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports unaudited fourth-quarter results. American Express is a global payments company operating through Global Consumer Services, Global Commercial Services, and Global Merchant & Network Services; corporate and other activities are reported separately.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue, net of interest expense | $40.338 billion | $36.878 billion | Up 9% |
| Net interest income | $7.663 billion | $6.451 billion | Up 19% |
| Provisions for losses | $3.352 billion | $2.760 billion | Up 21% |
| Total expenses | $28.864 billion | $26.693 billion | Up 8% |
| Pretax income | $8.122 billion | $7.425 billion | Up 9% |
| Net income | $6.921 billion | $2.748 billion | Up from a tax-affected 2017 |
| Diluted EPS | $7.91 | $2.99 | Up from a tax-affected 2017 |
| Operating cash flow | $8.930 billion | $13.540 billion | Down |
Revenue growth reflected worldwide billed business up 9% to $1.184 trillion, increased card fees and higher net interest income. Discount revenue, the largest revenue source, rose 8% to $24.721 billion; the average discount rate declined to 2.37% from 2.40%. Net card fees increased 11% to $3.441 billion. Higher loan balances and yields lifted interest income, while interest expense rose 39% to $2.943 billion as funding rates and average debt and deposits increased.
Credit costs rose alongside lending growth and higher write-offs. Card Member loans reached $81.9 billion, up 12%; the loan net write-off rate (principal, interest and fees) increased to 2.4% from 2.1%, and 30-plus-day delinquencies rose to 1.4% from 1.3%. The loan-loss reserve was $2.134 billion, or 2.6% of loans, versus $1.706 billion, or 2.3%, in 2017.
Fourth-quarter revenue, net of interest expense, was $10.474 billion and net income was $2.010 billion. Fourth-quarter 2017 net income was a loss of $1.206 billion, principally reflecting the Tax Act charge; quarter-specific operating margin figures are not clearly provided in the filing text.
Balance sheet, capital and liquidity
- At year-end, total assets were $188.6 billion, cash and cash equivalents were $27.4 billion, and shareholders’ equity was $22.3 billion.
- Total debt was $61.5 billion ($3.1 billion short-term and $58.4 billion long-term), up from $59.1 billion. Customer deposits increased to $70.0 billion from $64.5 billion.
- Company regulatory capital ratios were 11.0% CET1, 12.0% Tier 1, 13.6% total capital, and 10.4% Tier 1 leverage; management reported ratios above applicable minimums.
- Liquidity resources included a $3.5 billion committed bank facility, undrawn at year-end, and revolving secured facilities with total capacity of $5.0 billion; $1.5 billion was drawn on the charge-card facility at year-end and repaid in January 2019. Management’s stated liquidity objective is to meet obligations for at least 12 months under a substantial weakening in economic conditions.
- Investing cash outflow was $19.615 billion, mainly reflecting growth in Card Member loans and receivables and investment securities. Financing cash inflow was $5.101 billion; cash, cash equivalents and restricted cash declined $5.455 billion.
Material changes and unusual items
- 2018 net income included $496 million in discrete tax benefits. The 2017 results included a $2.6 billion Tax Act charge. The reported effective tax rates were 14.8% and 63.0%, respectively; management’s adjusted rates were 20.9% and 28.3%.
- Worldwide billed business growth accelerated to 9% from 5% in 2017. Proprietary billed business rose 11%; Global Network Services billed business declined 2%, largely reflecting regulatory effects in Europe and Australia.
- Rewards, Card Member services, marketing and business development costs together rose 14% to $17.943 billion, reflecting higher spending, benefits and growth investment. Management said total operating expenses were flat year over year when considering certain discrete items.
- American Express acquired approximately $1 billion of Hilton cobrand loan balances in the first quarter. It also realigned its operating segments in 2018; prior periods were revised to conform.
- Cash returned to common shareholders was $2.9 billion: $1.3 billion in dividends and $1.6 billion in repurchases. The buyback program was suspended during the first half of 2018 to rebuild capital, then resumed.
Outlook, commentary and risks
Management said it intends to continue investing in customer acquisition, rewards, services, technology and merchant acceptance, and described sustained revenue growth as the foundation for steady, consistent double-digit EPS growth. This is management’s stated objective, not a guaranteed result. The company estimated a 2019 tax rate of approximately 22% before discrete items and planned approximately $6–$13 billion of unsecured term debt and $4–$11 billion of secured term debt issuance in 2019.
- Management cited an uncertain economic environment, intense competition, regulatory pressure and rising customer-engagement costs. Risks include weaker spending or repayment, increasing credit losses, discount-rate erosion, partner renegotiations, and merchant surcharging or steering.
- Delta is the largest cobrand partner: its portfolio represented about 8% of worldwide billed business and 21% of worldwide Card Member loans. All cobrand portfolios together represented about 17% of billed business and 36% of loans.
- Merchant antitrust litigation challenges contractual anti-steering and non-discrimination provisions. The filing states that adverse outcomes could change merchant agreements and harm card usage. For specified legal and VAT matters where a loss was reasonably possible and estimable, the estimated range was $0–$400 million in excess of accruals; this is not the maximum potential exposure.
- The company disclosed government inquiries and subpoenas concerning its small foreign-exchange international payments business, which it said generated less than 0.5% of revenue net of interest expense and was not expected to have a material operational or results impact.
- Other material risks include cyber incidents, data privacy and security rules, regulatory capital and liquidity requirements, Brexit, foreign exchange exposure, and the transition to the CECL expected-credit-loss accounting standard. CECL adoption was scheduled for 2020 and could materially increase reserves; the amount was not yet clear.
Important facts for investors to verify
- How much of the increase in earnings reflects recurring operating performance versus the lower tax rate and discrete tax benefits.
- Whether loan growth continues to outpace deterioration in write-offs, delinquencies and reserve coverage.
- Whether billed-business growth can offset continued discount-rate pressure and rising rewards and partner costs.
- The status and potential financial or commercial effects of merchant litigation, regulatory inquiries and cobrand renewals, particularly Delta.
- The company’s final CECL impact, 2019 funding execution, and ongoing ability to meet capital, liquidity and shareholder-return objectives.