American Express Company — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited. Amounts are in U.S. dollars; financial figures are in millions unless noted.
Business context
American Express is a global payments company serving consumers and businesses through charge and credit cards, merchant and network services, lending, and travel-related services. Its segments are Global Consumer Services Group (GCSG), Global Commercial Services (GCS), and Global Merchant and Network Services (GMNS).
Financial results and key metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue net of interest expense | $10.84 billion (+8%) | $10.00 billion | $21.20 billion (+8%) | $19.72 billion |
| Provisions for losses | $861 million (+7%) | $806 million | $1.67 billion (+6%) | $1.58 billion |
| Total expenses | $7.76 billion (+9%) | $7.11 billion | $15.36 billion (+10%) | $13.97 billion |
| Pretax income | $2.22 billion (+6%) | $2.09 billion | $4.18 billion, essentially flat | $4.17 billion |
| Net income | $1.76 billion (+9%) | $1.62 billion | $3.31 billion (+2%) | $3.26 billion |
| Diluted EPS | $2.07 (+13%) | $1.84 | $3.87 (+5%) | $3.70 |
Q2 pretax margin was approximately 20.5% of revenue net of interest expense, versus 20.9% a year earlier; the comparable six-month margin was approximately 19.7%, versus 21.2%. The effective tax rate declined to 20.6% in Q2 and 20.7% for the first half, primarily due to resolution of prior-year tax items.
- Revenue drivers: Q2 discount revenue increased 6%, net card fees 17%, and net interest income 13%. The average discount rate was unchanged at 2.37%. Interest expense rose 25% in Q2 and 34% for the first half, reflecting higher rates, debt and deposits.
- Spending and lending: Worldwide billed business rose 5% in Q2; proprietary billings increased 7% reported and 8% FX-adjusted. Card Member loans were $83.2 billion, up 10% year over year. Net interest yield on average Card Member loans was 10.8% in Q2, versus 10.6%.
- Credit: Q2 loan-loss provision increased 14%, primarily from higher net write-offs associated with loan growth. The loan net write-off rate, principal only, was 2.3% for Q2 versus 2.1%; 30-plus-day delinquency was 1.4% versus 1.3%. Receivables net write-off rate, principal only, was 1.7% versus 1.8%.
- Cash flow, six months: Operating cash flow was $11.5 billion, investing cash outflow $10.5 billion, and financing cash outflow $1.5 billion. Cash, cash equivalents and restricted cash declined $0.5 billion to $27.3 billion. The operating cash flow increase from $5.1 billion a year earlier was primarily attributed to timing of accounts payable and other liability payments.
- Balance sheet at June 30: Total assets were $197.6 billion and shareholders’ equity $23.1 billion. Cash and cash equivalents were $26.9 billion. Total debt was $60.5 billion ($2.8 billion short-term and $57.7 billion long-term); customer deposits were $72.6 billion.
- Capital: Common Equity Tier 1 ratio was 11.0% at American Express Company and 11.9% at American Express National Bank, above the stated 7.0% Basel III minimum. The company’s stated CET1 target range is 10%–11%.
Material changes versus prior period
- Revenue growth was broad-based, but earnings growth lagged revenue over the first half: expenses rose 10% and net income rose 2% year over year.
- Customer-engagement spending—marketing, rewards and Card Member services—rose 11% in both Q2 and the first half. Card Member services expense increased 35% in each comparison period, primarily due to greater use of travel benefits.
- Proprietary billings grew while GNS billings declined 7% in Q2 and 8% in the first half, reflecting the company’s exit from network business in Europe and Australia. Excluding those geographies, management said GNS billings rose 6% year over year on an FX-adjusted basis in Q2.
- The company repurchased $1.9 billion of shares and paid $0.7 billion of common dividends in the first half, compared with no reported share repurchases in the comparable 2018 period. Common shares outstanding were 832 million at June 30, versus 847 million at year-end 2018.
Outlook, commentary and risks
- Management described the economy as growing at a steady but more modest pace than in 2018. It cited attractive growth opportunities and plans to continue investing in products, benefits, customer acquisition and the merchant network to support medium- and long-term revenue growth. The filing does not provide a specific full-year earnings or revenue forecast.
- The company planned to increase its quarterly common dividend from $0.39 to $0.43 beginning in Q3 2019, subject to Board approval. Its 2019 funding plan included approximately $6–$11 billion of unsecured term debt and $5–$9 billion of secured term debt issuance.
- Management’s preliminary CECL simulations indicated that credit-loss reserves could increase 25%–40% across Card Member loans and receivables, with the loan portfolio’s estimated increase at 55%–70% relative to the existing incurred-loss model. Adoption was scheduled for January 1, 2020; actual impact would depend on portfolio balances, economic conditions and forecasts.
- Key risks include competition, economic and foreign-exchange conditions, credit performance, funding costs, regulation and litigation, cybersecurity, and the cost and effectiveness of rewards and cobrand partnerships. Legal matters with reasonably possible losses were estimated at a range of zero to $240 million in excess of recorded accruals; the company cautioned this is not its maximum exposure.
- The company reported no material change in market risks since December 31, 2018, and no material change to the risk factors in its 2018 Form 10-K. It said disclosure controls were effective and internal control over financial reporting had not materially changed during the quarter.
Important facts for investors to verify
- Whether growth in revenue and billings can continue to outpace the rising costs of rewards, benefits, marketing and servicing.
- Whether loan growth, delinquency and write-off trends lead to further increases in provisions and reserves.
- The eventual CECL reserve and regulatory-capital impact compared with the preliminary estimates.
- Progress and costs associated with GNS exits in Europe and Australia, and the effects of payment regulation or merchant steering on discount revenue and card acceptance.
- Developments in merchant antitrust, VAT and other legal matters, including possible losses beyond recorded accruals.
- Execution of the funding plan, deposit growth and the proposed dividend increase, alongside the company’s capital targets and asset-growth needs.