Business Context and Reporting Period
Company: American Express Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: A leading global payments, network, and travel company operating through four segments: U.S. Card Services (USCS), International Card Services (ICS), Global Commercial Services (GCS), and Global Network & Merchant Services (GNMS). The company utilizes a "spend-centric" business model.
Key Financial Metrics
| Metric (Millions) | Three Months Ended June 30, 2008 |
Three Months Ended June 30, 2007 |
Six Months Ended June 30, 2008 |
Six Months Ended June 30, 2007 |
|---|---|---|---|---|
| Total Revenues | $8,340 | $7,877 | $16,445 | $15,204 |
| Revenues Net of Interest Expense | $7,484 | $6,938 | $14,670 | $13,422 |
| Net Income | $653 | $1,057 | $1,644 | $2,114 |
| Diluted EPS (Net Income) | $0.56 | $0.88 | $1.41 | $1.75 |
| Cash and Cash Equivalents | $20,091 | $11,737 (Dec 31, 2007) | $20,091 | $11,737 (Dec 31, 2007) |
| Total Debt (Short + Long Term) | $74,554 | $73,047 (Dec 31, 2007) | $74,554 | $73,047 (Dec 31, 2007) |
| Return on Equity (Trailing 12-Month) | 31.1% | 37.5% | 31.1% | 37.5% |
Material Changes vs. Prior Period
- Profitability Decline: Net income for the three months ended June 30, 2008, decreased 38% ($404 million) compared to the prior year. This was primarily driven by a significant increase in provisions for losses.
- Credit Deterioration: Provisions for losses and benefits increased 93% ($912 million) to $1.9 billion for the quarter. This included a $600 million addition to U.S. lending credit reserves due to credit indicators deteriorating beyond prior expectations. Net write-off rates for U.S. cardmember lending rose to 6.7% (annualized) for the quarter.
- Revenue Growth: Total revenues increased 6% year-over-year for the quarter, driven by a 12% increase in worldwide billed business ($180.9 billion) and higher discount revenue ($3.99 billion).
- Segment Performance:
- U.S. Card Services: Segment income plummeted 96% to $21 million due to credit costs.
- Global Commercial Services: Segment income increased 40% to $227 million, aided by the acquisition of GE's Corporate Payment Services (CPS).
- International Card Services: Segment income remained relatively flat at $115 million.
- Discontinued Operations: The sale of American Express Bank Ltd. (AEB) to Standard Chartered was completed in February 2008. Results are now reported as discontinued operations.
Guidance, Outlook, and Risks
- Outlook Revision: Management withdrew its prior forecast of 4-6% EPS growth for the full year 2008. The company expects U.S. cardmember lending write-off rates in the third and fourth quarters to be higher than the June level.
- Cost Reduction: The company is intensifying re-engineering efforts to reduce costs and staffing levels, expecting restructuring-related charges in the second half of 2008.
- Legal Settlements:
- Visa/MasterCard: Reached a settlement with MasterCard for up to $1.8 billion (in addition to a $2.25 billion Visa settlement). Payments are contingent on performance criteria in the U.S. Global Network Services business.
- Regulatory Risks: Proposed federal regulations regarding credit card practices (e.g., interest rate increases, payment allocation) could materially adversely affect results if adopted without offsetting actions.
- Market Risk: One credit rating agency revised the company's outlook from stable to negative in July 2008. The company faces risks related to the airline industry consolidation and bankruptcies.
- Investment Portfolio: Exposure to mortgage and asset-backed securities decreased to $639 million. The company recognized $124 million in net unrealized mark-to-market losses on trading securities (AEIDC portfolio) for the six-month period.
Key Facts for Investor Verification
- Credit Reserve Adequacy: Verify the sufficiency of the $600 million reserve addition and the trajectory of U.S. net write-off rates (currently 6.7% annualized) against management's expectation of further deterioration.
- Settlement Contingencies: Monitor the achievement of performance criteria required to receive the remaining quarterly payments from the Visa and MasterCard settlements.
- Regulatory Impact: Assess the potential financial impact of proposed federal bank regulator amendments regarding unfair or deceptive acts and Truth in Lending rules.
- Capital Allocation: Note that share repurchases were halted in the second quarter due to the uncertain economic environment; verify future capital return plans.
- Investment Valuation: Review the fair value measurements of Level 3 assets, specifically the interest-only strip and retained subordinated securities, which are sensitive to credit spread and prepayment assumptions.