Business Context and Reporting Period
Company: American Express Company
Filing Type: Form 8-K (Current Report)
Date: September 18, 2007
Event: The Company announced an agreement to sell its international banking subsidiary, American Express Bank Ltd. ("AEB"), to Standard Chartered PLC. The operations of AEB will be reported as discontinued operations commencing with the third quarter of 2007. American Express International Deposit Company ("AEIDC") will be included in discontinued operations one year prior to its sale, which is contracted to occur 18 months following the sale of AEB.
Key Financial Metrics
Assets and Equity of Businesses Being Sold (as of June 30, 2007):
- Assets: $21.3 billion
- Equity Value: $772 million
Historical Performance of Businesses Being Sold:
- Year Ended Dec 31, 2006 After-tax Income: $45 million
- Six Months Ended June 30, 2007 After-tax Loss: $(42) million
Investment Portfolio Summary (as of August 31, 2007):
| Category | Market Value ($M) | Book Value ($M) | % of Total | Unrealized Gain ($M) | Unrealized Loss ($M) |
|---|---|---|---|---|---|
| AEB | 3,046 | 3,003 | 12% | 8 | (51) |
| AEIDC | 4,848 | 4,757 | 23% | 4 | (95) |
| All Other | 13,203 | 13,106 | 65% | 121 | (218) |
| Total | 21,097 | 20,866 | 100% | 133 | (364) |
Asset-Backed Holdings (as of August 31, 2007):
- Total Asset-Backed Holdings: $4.081 billion (19% of total portfolio).
- Subprime Mortgages: $177 million (contained within AAA-rated securities).
- Non-Residential Mortgage Backed Assets: $922 million (23% of asset-backed holdings), 99% rated AAA.
Material Changes and Unusual Items
- Discontinued Operations: Historical periods will be restated to reflect AEB and AEIDC as discontinued operations. The reported financials for these entities ($45M income in 2006, $(42)M loss in H1 2007) will not fully represent the final discontinued operations results due to intercompany allocation costs remaining in continuing operations.
- Investment Charge: A $50 million after-tax charge was recorded related to the AEB transaction. This reflects the reduction in value within the AEIDC portfolio attributable to market interest rate movements and a change in management's investment strategy regarding the holding period for certain investments.
- License Transfers: No card or travel businesses are part of the sale. The Company is acquiring new licenses or transferring operations in Argentina, Austria, and India to other subsidiaries.
Guidance, Outlook, and Risks
Outlook: The Company expects the sale of AEIDC to occur 18 months following the sale of AEB. The underlying investment portfolio continues to produce expected yields and cash flows.
Risks and Contingencies:
- Transaction Completion: Risks regarding the likelihood and timing of the transaction completion and the proceeds to be received.
- Interest Rate Fluctuations: Changes in interest rates can impact the value of the Company's investments.
- Accounting Changes: Restatement of historical periods and allocation of costs between continuing and discontinued operations.
- Forward-Looking Statements: The filing contains forward-looking statements subject to risks and uncertainties; actual results may differ materially.
Investor Verification Checklist
- Verify the final proceeds and closing date of the AEB sale to Standard Chartered.
- Confirm the specific intercompany cost allocations that will remain in continuing operations versus those in discontinued operations.
- Monitor the timing and accounting treatment of the AEIDC sale (contracted for 18 months post-AEB sale).
- Review the status of license transfers in Argentina, Austria, and India to ensure uninterrupted card and travel operations.
- Assess the impact of the $50 million after-tax charge on the Company's overall earnings for the quarter.