American Express Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Comparisons are with Q1 2015 unless stated otherwise. The company realigned its reportable segments, with prior periods restated to conform.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Total revenues, net of interest expense | $8.088 billion | $7.950 billion | +2% |
| Net interest income | $1.580 billion | $1.447 billion | +9% |
| Provisions for losses | $434 million | $420 million | +3% |
| Total expenses | $5.470 billion | $5.214 billion | +5% |
| Pretax income | $2.184 billion | $2.316 billion | -6% |
| Net income | $1.426 billion | $1.525 billion | -6% |
| Diluted EPS | $1.45 | $1.48 | -2% |
| Cash provided by operating activities | $2.469 billion | $2.126 billion | +$343 million |
| Cash and cash equivalents at period end | $25.045 billion | $22.762 billion at Dec. 31, 2015 | +$2.283 billion |
Revenue growth was led by net interest income, spending and card fees, but earnings declined as expenses rose faster than revenue. Marketing and promotion expense increased 19% to $727 million; Card Member rewards increased 4% to $1.703 billion. The effective tax rate was 34.7%, versus 34.2%.
Worldwide billed business grew 3% (6% on a foreign-currency-adjusted basis); cards-in-force grew 6%. The average discount rate declined to 2.44% from 2.49%. Worldwide Card Member loans were $57.4 billion, down 14% year over year as reported, substantially reflecting the transfer of the Costco and JetBlue portfolios to held-for-sale status and the JetBlue sale. Management said underlying loan growth remained healthy after excluding those portfolios.
At March 31, total assets were $158.8 billion and shareholders’ equity was $20.7 billion. Short-term borrowings were $2.6 billion and long-term debt $47.3 billion, for total debt of $49.9 billion, down from $52.9 billion at year-end. Customer deposits were $55.8 billion, up from $55.0 billion. The company reported a 12.6% Common Equity Tier 1 ratio and a 9.6% supplementary leverage ratio. It stated it was compliant with applicable liquidity requirements, including the Liquidity Coverage Ratio.
Cash from investing activities was $3.640 billion, chiefly reflecting a net decrease in Card Member receivables and loans, including held-for-sale balances. Financing activities used $3.864 billion, including $1.128 billion of common-share repurchases and $302 million of dividends. These cash-flow movements reflect the company’s lending and funding activities and should not be read as conventional free cash flow.
Material changes and unusual items
- American Express completed the sale of the JetBlue cobrand loan portfolio in March and recorded a $127 million pretax gain ($79 million after tax).
- The company agreed to sell the U.S. Costco cobrand loan and receivables portfolio, with closing expected in June 2016, subject to customary conditions. Management estimated a gain of approximately $1 billion; the final amount could differ.
- Q1 included an $84 million pretax restructuring charge ($55 million after tax), the initial phase of a plan to reduce the cost base by $1 billion by the end of 2017. Additional charges are expected and may be significant.
- Share repurchases totaled 19.9 million shares at an average $56.17 per share. Dividends and repurchases together returned about $1.4 billion, approximately 99% of capital generated during the quarter.
Outlook, management commentary and risks
- Management expected Q2 EPS to exceed Q1, reflecting the anticipated Costco portfolio-sale gain, and expected lower earnings in the second half after the U.S. Costco relationship ends. Costco cobrand accounts represented about 10% of cards-in-force and 7% of worldwide billed business in Q1.
- Management expected 2016 growth-initiative spending to be consistent with 2015. It expected the Costco sale gain to help fund growth initiatives.
- Management anticipated continued erosion of the average discount rate, with a greater decline in 2016 than in 2015, citing OptBlue expansion, merchant negotiations, industry mix, competition and regulation.
- Management expected loan growth to increase provisions and noted possible upward pressure on write-off rates, including from seasoning of loans to newer Card Members. It cited excellent credit performance in Q1; reported Card Member loan principal write-off rates were 1.5%, unchanged year over year.
- Key risks include the Costco transition and final sale gain, competitive and regulatory pressure on merchant discount revenue, the DOJ antitrust appeal and related merchant claims, credit performance, restructuring execution, and economic, foreign-exchange and funding-market conditions.
- For material legal matters where a loss was reasonably possible and estimable, the company disclosed a possible loss range of zero to $350 million in excess of reserves; this is not a maximum exposure estimate. Management said litigation could materially affect results, though it did not expect a material adverse effect on consolidated financial condition or liquidity.
- The filing reported no material change in market risks since December 31, 2015. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the Costco portfolio sale closed as expected, the realized gain versus the approximately $1 billion estimate, and post-transition spending and account retention.
- Whether billed-business and revenue growth can offset continued discount-rate pressure, rewards costs and elevated growth investment.
- Progress, total charges and realized savings from the $1 billion cost-reduction plan through 2017.
- Loan growth, delinquency trends, write-offs and provisions, particularly in merchant financing and newer Card Member cohorts.
- Developments in the DOJ appeal, merchant litigation and legal contingencies, including potential effects on merchant steering and Card Member experience.