American Express Company — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results; dollar amounts below are in U.S. dollars. American Express is a global payments company serving consumers and businesses through card, merchant, network, lending, and travel and lifestyle services.
Financial performance and position
| Metric | Q3 2019 | Change from Q3 2018 |
|---|---|---|
| Revenue, net of interest expense | $10.989 billion | +8% |
| Net interest income | $2.203 billion | +12% |
| Provisions for losses | $879 million | +8% |
| Total expenses | $7.844 billion | +9% |
| Pretax income | $2.266 billion | +7% |
| Net income | $1.755 billion | +6% |
| Diluted EPS | $2.08 | +11% |
- For the first nine months, revenue net of interest expense was $32.191 billion (+8%); net income was $5.066 billion (+3%); diluted EPS was $5.95 (+6%).
- Q3 revenue gains reflected billed-business growth, higher net card fees, and higher interest income. Worldwide billed business grew 5% reported and 6% adjusted for foreign exchange; proprietary billed business grew 6% reported and 7% FX-adjusted.
- Expenses rose faster than revenue, with customer engagement spending (marketing, rewards, and Card Member services) up 11%. Card Member services expense increased 22% in Q3; management expects it to remain the fastest-growing expense category.
- Credit indicators showed some deterioration: Q3 worldwide loan 30+ day delinquencies were 1.5%, versus 1.3% a year earlier; loan reserves were 2.7% of loans versus 2.5%. Q3 loan principal-only net write-off rate was 2.1%, unchanged year over year.
- At September 30, assets were $194.2 billion, liabilities $171.2 billion, and shareholders’ equity $23.0 billion. Cash and cash equivalents were $24.3 billion; customer deposits were $73.3 billion.
- Total debt was $61.3 billion ($2.8 billion short-term and $58.5 billion long-term), compared with $61.5 billion at year-end 2018. Cash, cash equivalents, and restricted cash totaled $25.4 billion.
- Nine-month operating cash flow was $10.4 billion; investing cash flow was negative $11.3 billion and financing cash flow negative $1.9 billion. Cash, cash equivalents, and restricted cash decreased $2.5 billion.
- At September 30, the company’s Common Equity Tier 1 ratio was 11.0% (management target range 10–11%); total risk-based capital ratio was 13.6% and Tier 1 leverage ratio 10.3%.
Changes versus comparable periods
- Q3 net income increased $101 million year over year, while total expenses increased $635 million and provisions increased $62 million. Diluted EPS growth exceeded net income growth in part alongside lower average common shares outstanding.
- Net card fees grew 19% in Q3, supported by Platinum, Delta, and Gold portfolios. Interest expense rose 13%, reflecting higher average rates, debt, and deposits.
- GNS billed business declined 6% reported (2% FX-adjusted), partly reflecting exits from network businesses in Europe and Australia. Excluding those geographies, GNS billings grew 3% FX-adjusted.
- For the nine months, share repurchases were $3.3 billion, versus $917 million in the prior-year period; dividends were $1.0 billion versus $970 million.
Outlook, management commentary, risks, and unusual items
- Management described broad-based growth, continued investment in card benefits, acquisitions, and the merchant network, and attractive opportunities over the moderate to long term. It cited a more modest economic growth backdrop, economic uncertainty, regulation, and intense competition as headwinds. The filing provides no specific earnings or revenue forecast.
- Management expects CECL adoption on January 1, 2020 to increase provisions relative to the current method, assuming no change in economic conditions, portfolio quality, or loan growth. Preliminary estimates indicated total Card Member loan and receivable reserves could rise 25–40%; loan reserves could rise 55–70%, with receivables reserves expected to decrease. Actual effects depend on conditions and portfolio composition at adoption.
- Legal proceedings are subject to uncertainty. For disclosed material matters where a loss is reasonably possible and estimable, the estimated range was $0–$250 million in excess of recorded accruals; the company states this is not its maximum exposure. Merchant antitrust outcomes could affect merchant steering and the Card Member experience.
- The company reported ongoing government inquiries concerning its foreign exchange international payments business, which represents less than 0.5% of revenue net of interest expense. It said its review led to approximately $1.5 million of customer remediation and did not expect a material adverse impact.
- Other principal risks include credit deterioration, competition and pressure on merchant pricing, regulatory changes, foreign-exchange and interest-rate movements, cyber and operational incidents, funding access, and partner or cobrand relationships. Management reported no material change in market-risk exposures since December 31, 2018.
- After quarter-end, on October 10, 2019, the Federal Reserve finalized rules placing American Express in Category IV, changing certain capital, liquidity, and stress-testing requirements. The filing also notes a new 120-million-share repurchase authorization approved September 23; no shares had been purchased under it by September 30.
Key facts for investors to verify
- Whether billed-business and fee growth can continue to outpace growth in rewards, servicing, marketing, and other costs.
- Trends in delinquencies, write-offs, loan growth, and the adequacy and eventual CECL impact of credit reserves.
- How FX movements and the wind-down of certain GNS businesses affect reported revenue and network growth.
- Capital return plans, regulatory capital requirements under the finalized Category IV rules, and funding and deposit costs.
- Developments in merchant litigation and regulatory inquiries, including potential financial or business effects beyond recorded accruals.