American Express Company — Q3 2018 Form 10-Q
Business context and reporting period. Global payments company serving consumers, businesses and merchants through proprietary charge and credit cards, merchant/network services and related products. This unaudited quarterly report covers the three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted. Amounts are in U.S. dollars; financial statement amounts are generally in millions.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Change |
|---|---|---|---|
| Revenue, net of interest expense | $10.144B | $9.290B | +9% |
| Net interest income | $1.961B | $1.677B | +17% |
| Provisions for losses | $817M | $770M | +6% |
| Total expenses | $7.209B | $6.689B | +8% |
| Pretax income | $2.118B | $1.831B | +16% |
| Net income | $1.654B | $1.359B | +22% |
| Diluted EPS | $1.88 | $1.51 | +25% |
For the nine months, revenue net of interest expense was $29.864B (+10%), net income $4.911B (+24%) and diluted EPS $5.59 (+29%). The effective tax rate fell to 21.9% from 25.8% in Q3 and 29.7% for the nine months in 2017, primarily reflecting the U.S. tax-rate reduction under the Tax Act.
Revenue and spending. Q3 worldwide billed business rose 8% to $294.7B; proprietary billed business increased 11%, while Global Network Services (GNS) billed business declined 5%. Discount revenue increased 8% to $6.181B, net card fees rose 11% to $870M, and other fees and commissions rose 6% to $798M. The average discount rate was 2.38%, versus 2.40% a year earlier. Management attributed revenue growth to spending, fees and net interest income, partly offset by lower discount rates.
Credit, cash flow and balance sheet. Card Member loans were $77.6B at September 30, up 14% year over year; net loans were $75.7B. Loan loss reserves were $1.937B, up 29% from year-end 2017. Q3 loan net write-off rate was 2.1% on principal only, versus 1.8% a year earlier; 30+ day delinquency was 1.3%, unchanged. Cash and cash equivalents were $30.2B; total debt was $57.6B and customer deposits $69.3B. Shareholders’ equity was $21.5B. For the first nine months, operating cash flow was $10.2B, investing cash flow was $(14.2)B and financing cash flow was $1.9B; cash, cash equivalents and restricted cash declined $2.0B.
Material changes and segment results
- Q3 segment income rose 15% at Global Consumer Services Group (GCSG) to $779M, 20% at Global Commercial Services (GCS) to $606M, and 38% at Global Merchant and Network Services (GMNS) to $580M. Corporate & Other reported a $311M net expense.
- Customer engagement spending—marketing and business development, rewards and Card Member services—increased 13% in Q3, driven by higher spending, travel-benefit use and growth initiatives. Total expenses rose 8%.
- Provisions increased 25% for the nine months, reflecting loan growth and higher write-offs; Q3 provision growth was more moderate. The company acquired the remaining portion of the Hilton cobrand loan portfolio from Citibank in Q1, with approximately $1B outstanding at acquisition.
- The share repurchase program resumed in Q3 after being suspended in the first half to rebuild capital. AmEx repurchased 7.4M shares during Q3 at an average $105.06; Q3 dividends declared were $0.39 per common share.
Outlook, risks and unusual items
- No specific numerical earnings or revenue guidance is provided. Management expects the average discount rate to continue declining over time due to merchant negotiations, OptBlue expansion, competition, volume pricing and regulation. It expects loan write-off rates to rise gradually as the portfolio grows, while noting credit performance had been better than expected year to date.
- Management plans continued investment in growth, digital channels, partnerships and customer value, while citing rising interest rates, global regulation and intense competition as headwinds. It expects a greater share of generated capital to support asset growth than historically.
- Key credit risks include seasoning of newer loan vintages and higher write-offs; loan loss provisions and reserves may rise. The company said adoption of the CECL expected-loss standard, scheduled for 2020, may materially increase credit reserves.
- Legal proceedings and VAT matters remain outstanding. For material matters where losses are reasonably possible and estimable, the company’s estimated range is $0–$390M in excess of accruals; it cautions this is not a maximum exposure. The Supreme Court ruled for AmEx in the federal anti-steering case, but separate merchant litigation continues, with trial scheduled for April 2019.
- Authorities have requested information about the company’s FX international payments business; AmEx says the business represents less than 0.5% of revenue net of interest expense and does not expect a material adverse impact. It also disclosed a current-year loss on a prepaid reloadable and gift-card business transaction and foreign-exchange losses related to Argentina’s currency devaluation.
- AmEx reported capital ratios above regulatory requirements and said it met all applicable capital requirements. It identified competition, regulation, interest rates, credit performance, funding and liquidity, cybersecurity, and legal outcomes among risks that could affect results.
Important facts for investors to verify
- Whether spending and revenue growth can continue to offset declining average discount rates and higher rewards and service costs.
- Whether loan growth leads to further deterioration in write-off rates, credit provisions or reserve coverage, particularly as recent vintages season.
- Funding costs and deposit growth amid rising rates, and the capital needed to support asset growth and shareholder distributions.
- Developments in merchant litigation, VAT assessments, FXIP inquiries and the potential loss range beyond recorded accruals.
- The eventual impact of CECL adoption on reserves, earnings, capital and regulatory ratios; management’s estimate of that impact is not yet clear.