American Express Company — Q3 2020 Form 10-Q
Business context and reporting period. American Express is a global payments company offering consumer and commercial cards, merchant services, network services, and travel and lifestyle products. This unaudited filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Results were significantly affected by COVID-19 and related travel restrictions and economic disruption.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Revenue, net of interest expense | $8.751 billion | $10.989 billion | Down 20% |
| Provision for credit losses | $665 million | $879 million | Down 24% |
| Pretax income | $1.364 billion | $2.266 billion | Down 40% |
| Net income | $1.073 billion | $1.755 billion | Down 39% |
| Diluted EPS | $1.30 | $2.08 | Down 38% |
| Return on average equity | 15.3% | 31.5% | Lower |
For the first nine months, revenue net of interest expense was $26.736 billion, down 17%; provisions for credit losses were $4.841 billion, up 90%; net income was $1.697 billion, down 67%; and diluted EPS was $2.01, down 66%. The nine-month effective tax rate rose to 30.4% from 21.4%, primarily reflecting charges related to certain foreign deferred tax assets.
- Revenue drivers: Q3 discount revenue fell 24% to $4.999 billion as worldwide billed business declined 19% and the average discount rate fell to 2.27% from 2.39%. Net card fees rose 15% to $1.191 billion, supported by premium products. Net interest income fell 15% to $1.874 billion, reflecting lower average loan balances and benchmark rates.
- Spending and credit: Worldwide T&E billed business fell 69%, while non-T&E billed business grew 1%. Card Member loans were $69.6 billion, down 17% year over year, and receivables were $40.8 billion, down 28%. Q3 delinquency and write-off measures showed mixed trends: 30-plus-day loan delinquency was 1.2% versus 1.5%, while the loan principal-only net write-off rate was 2.5% versus 2.1%.
- Credit reserves: The Q3 provision declined, reflecting a modest reserve release and lower net write-offs. Nine-month provisions increased substantially amid the pandemic-driven economic outlook. The loan reserve was $5.688 billion, or 8.2% of loans, at quarter-end; comparisons are affected by adoption of CECL in 2020.
- Expenses: Q3 total expenses fell 14% to $6.722 billion, mainly due to lower rewards and travel-benefit usage. Marketing and business development expense was approximately flat as customer-value enhancements and the Shop Small campaign offset lower acquisition marketing.
Liquidity, capital and cash flow
- Cash and cash equivalents were $33.0 billion at September 30, 2020, up from $23.9 billion at December 31, 2019. Nine-month cash, cash equivalents and restricted cash increased $11.2 billion.
- Nine-month operating cash flow was $2.1 billion, versus $10.4 billion in 2019; investing activities provided $17.2 billion, versus using $11.3 billion; financing activities used $8.4 billion, versus $1.9 billion. Changes reflected lower loan and receivable balances, debt repayments, and deposit growth.
- Total debt was $46.5 billion, down from $64.2 billion at year-end 2019; customer deposits were $85.5 billion, up from $73.3 billion. The company reported no draws on its $3.5 billion committed bank facility or its two secured borrowing facilities.
- American Express’s CET1 ratio was 13.9%, compared with a 7.0% regulatory minimum; its National Bank subsidiary’s CET1 ratio was 16.1%. Management described capital and liquidity as strong and above targets and regulatory requirements.
- The company paid $1.0 billion in common dividends and repurchased $0.9 billion of shares during the first nine months. Repurchases were suspended beginning in March. Management intended to maintain the Q4 common dividend at the prior-quarter level, subject to Board approval and regulatory constraints.
Changes, outlook and risks
Management reported steady improvement in billed business from mid-April, but performance remained uneven: non-T&E spending had recovered to pre-pandemic levels, while travel and entertainment spending remained sharply depressed. Management said it was beginning to selectively increase long-term investment to rebuild growth and return to pre-pandemic earnings and financial performance; the filing provides no quantified earnings or revenue guidance. Management noted that sustained declines in billed business could materially affect future results.
Key uncertainties include the pandemic’s duration and effects on spending, travel, unemployment and credit performance; changing stimulus and relief measures; the pace of recovery; funding costs and market access; and competitive, regulatory, litigation, cyber-security and partner risks. A 10-percentage-point shift in CECL scenario weighting from baseline to the pessimistic downside scenario would increase modeled credit losses by approximately $240 million; the company cautioned this sensitivity is hypothetical, not a forecast.
- Longer-term financial-relief program balances classified as troubled debt restructurings reached approximately $3.1 billion. Delinquent loans and receivables, including relevant relief balances, totaled $1.2 billion at quarter-end.
- For disclosed material legal proceedings where a loss range could be estimated, the estimated range was zero to $200 million above recorded accruals; this is not the company’s maximum exposure. The company also disclosed increased uncertainty around losses connected with Card Member purchase protections for travel-related transactions.
- CECL adoption on January 1, 2020 increased loan reserves by $1.663 billion and reduced receivable reserves by $493 million; the after-tax opening retained-earnings reduction was $882 million. This change limits comparability with prior-year credit-loss measures.
Investor verification priorities
- Track recovery in billed business, especially T&E spending, average discount rate and merchant mix.
- Monitor credit performance, CECL reserve assumptions, relief-program balances, delinquency trends and net write-offs.
- Confirm the sustainability of net card-fee growth and the effects of customer-value investments and rewards costs.
- Review liquidity, deposit funding, debt maturities, capital requirements, dividend decisions and any resumption of share repurchases.
- Follow developments in merchant antitrust cases, payment regulation, travel-related purchase-protection exposure and pandemic-related risks.