American Express Company — Q2 2017 Form 10-Q
Business context and period. Global payments and financial-services company; results cover the unaudited three and six months ended June 30, 2017. The four reportable segments are U.S. Consumer Services, International Consumer and Network Services, Global Commercial Services, and Global Merchant Services.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Change |
|---|---|---|---|
| Revenue, net of interest expense | $8.307B | $8.235B | +1% |
| Provisions for losses | $584M | $463M | +26% |
| Expenses | $5.774B | $4.756B | +21% |
| Pretax income | $1.949B | $3.016B | -35% |
| Net income | $1.340B | $2.015B | -33% |
| Diluted EPS | $1.47 | $2.10 | -30% |
- Q2 net interest income was $1.530B, up 6%; non-interest revenue was $6.777B, essentially flat. Net card fees rose 8%, while other revenue fell 19%.
- For the first six months, revenue net of interest expense was $16.196B (-1%), net income $2.577B (-25%), and diluted EPS $2.80 (-21%). Operating cash flow was $4.284B, investing cash flow was negative $4.158B, and financing cash flow was positive $4.974B. Cash and equivalents increased $5.234B to $30.442B.
- At June 30, total assets were $166.997B and shareholders’ equity was $21.175B. Customer deposits were $57.726B; short- and long-term debt totaled $55.371B ($3.426B and $51.945B, respectively), versus $52.571B at year-end 2016.
- Regulatory capital remained above stated transitional Basel III minimums: company CET1 12.3% versus 5.8%; total risk-based capital 15.2% versus 9.3%; supplementary leverage ratio 9.4% versus 3.0%.
Material changes and management commentary
- Comparability is significantly affected by 2016 gains on sales of the JetBlue and Costco card portfolios: the prior-year quarter included a $1.091B expense reduction from the Costco sale; the first half included $1.218B of portfolio-sale gains. The prior-year quarter also included a restructuring charge. Management said that excluding these items, adjusted operating expenses declined, reflecting cost-reduction initiatives.
- Worldwide billed business was flat year over year as reported and up 1% assuming constant foreign-exchange rates in Q2. U.S. billed business declined 4%, affected by the prior-year Costco relationship; non-U.S. billed business grew 9% reported and 11% on a constant-currency basis. Cards-in-force rose 4% worldwide.
- Management cited strong middle-market, small-business, and international consumer and small-business performance, while large-corporate spending was only slightly higher. Net interest yield on Card Member loans rose to 10.3% from 9.5%, attributed to product mix, fewer introductory-rate balances, pricing actions, and higher benchmark rates.
- Credit provisions increased with loan and receivable growth, slightly higher delinquencies, and higher loan write-off rates, partly reflecting seasoning of newer Card Members and a shift toward non-cobrand lending. Management expected provisions to continue growing faster than loans during the rest of 2017.
- Card Member engagement spending increased, including from enhanced U.S. Platinum rewards and growth in the Delta cobrand portfolio. Management described continued investment in revenue growth, investment optimization, and cost-base reduction. The filing gives no specific full-year earnings or revenue guidance.
Outlook, risks, and contingencies
- Management expects the average discount rate to face pressure over time from merchant negotiations, competition, OptBlue growth, volume discounts, and pricing regulation. It also cited intense competition and regulatory uncertainty.
- Legal proceedings and VAT matters: for disclosed matters where loss is reasonably possible and estimable, the estimated range is $0–$450M in excess of related reserves. The company cautioned this is not a maximum exposure; outcomes could materially affect results, though it did not expect a material adverse effect on consolidated financial condition or liquidity.
- Regulatory and litigation risks include payment-network pricing rules, possible merchant surcharging or steering, consumer-protection reviews, and merchant antitrust claims. The Second Circuit judgment favored American Express in the DOJ case; 11 states sought Supreme Court review. The filing notes the CFPB’s new arbitration rule could increase exposure to class-action claims.
- Credit, funding, interest-rate, foreign-exchange, operational, and competitive risks remain. Management reported no material change in market-risk exposures since December 31, 2016. The company reported effective disclosure controls and no material change in internal control over financial reporting.
- The Federal Reserve did not object to a capital plan allowing up to $4.4B in share repurchases from Q3 2017 through Q2 2018 and a proposed quarterly dividend increase to $0.35 from $0.32, subject to Board approval. The company repurchased 11M shares in Q2 at an average $79.72.
Important facts for investors to verify
- Separate underlying operating trends from the prior-year Costco and JetBlue portfolio-sale gains and restructuring charge; assess the impact on expense and earnings comparisons.
- Track loan growth alongside delinquency, net write-off rates, reserve coverage, and management’s expectation that provisions will outpace loan growth for the remainder of 2017.
- Monitor billed-business trends by geography and customer type, the average discount rate, merchant incentives, and the effects of OptBlue and payment regulation.
- Review funding and liquidity developments, including debt and deposit growth, capital ratios, ratings, and execution of the approved capital-return plan.
- Follow legal and regulatory matters, particularly the estimated contingency range, VAT assessments, payment-network rules, and merchant litigation.