American Express Company — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unaudited consolidated results; comparisons are with the corresponding 2014 periods unless noted. Amounts are in U.S. dollars.
Business context
American Express operates U.S. Card Services, International Card Services, Global Commercial Services, and Global Network & Merchant Services. It earns revenue from card spending, fees, lending, and network services. Business travel operations were deconsolidated into a joint venture in June 2014, affecting year-over-year comparisons, especially for the nine-month period.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue, net of interest expense | $8.193bn | $8.303bn | $24.427bn | $25.107bn |
| Net interest income | $1.505bn | $1.395bn | $4.375bn | $4.048bn |
| Provisions for losses | $529m | $488m | $1.416bn | $1.462bn |
| Total expenses | $5.726bn | $5.569bn | $16.527bn | $16.879bn |
| Net income | $1.266bn | $1.477bn | $4.264bn | $4.438bn |
| Diluted EPS | $1.24 | $1.40 | $4.15 | $4.17 |
| Operating cash flow | Not reported quarterly | $8.074bn | $8.586bn |
Q3 revenue net of interest expense fell 1%; net income fell 14%. For the nine months, revenue declined 3% and net income declined 4%. The filing reports Q3 return on average equity of 26.8% versus 28.8% and return on average tangible common equity of 34.2% versus 35.6%. The average discount rate was 2.46%, down from 2.48%; Card Member loan net interest yield was 9.5%, up from 9.3%.
- Spending and revenue: Q3 worldwide billed business was flat as reported and up 5% excluding foreign exchange; U.S. billed business rose 4%, while outside-U.S. business fell 8% as reported but rose 8% on an FX-adjusted basis. Stronger U.S. dollar, softer spending in some customer groups, lower average transaction size, pricing/mix, and partner payments weighed on reported results.
- Credit and costs: Q3 provisions rose 8%, with Card Member loan provisions up 17%, reflecting loan growth and credit performance. Management said write-off rates remained historically low but expected them to gradually rise as newer loan vintages season. Rewards expense and Card Member service costs increased, partly due to renewed co-brand agreements and growth investments.
- Margins and segments: Net interest income increased 8% in Q3, supported by higher average loan balances and lower borrowing costs. Q3 segment income was $794m for USCS (down 11%), $89m for ICS (down 37%), $151m for GCS (down 26%), and $462m for GNMS (up 8%).
Balance sheet, funding and liquidity
At September 30, 2015, total assets were $154.2bn, down from $159.1bn at year-end 2014. Cash and cash equivalents were $19.9bn, compared with $22.3bn; Card Member loans, net, were $67.7bn versus $69.2bn; and Card Member receivables, net, were $43.9bn versus $44.4bn. Customer deposits increased to $49.3bn from $44.2bn. Short-term borrowings were $3.2bn and long-term debt was $48.7bn, compared with $3.5bn and $58.0bn, respectively, at year-end. Shareholders’ equity was $21.3bn.
Nine-month cash flow was $8.1bn provided by operating activities, $2.7bn used in investing, and $7.5bn used in financing; cash declined $2.35bn. Financing outflows included $17.1bn of long-term debt repayments, $3.3bn of common-share repurchases, and $868m of dividends, partly offset by $7.9bn of debt issuance and $5.2bn of deposit growth. The company reported compliance with applicable liquidity requirements, including the liquidity coverage ratio, and stated that liquidity resources are intended to cover at least 12 months of obligations under stressed conditions.
Regulatory capital at September 30 included a 13.2% Common Equity Tier 1 ratio, 16.2% total risk-based capital ratio, and 12.1% Tier 1 leverage ratio. The company returned $4.1bn to shareholders in the first nine months through dividends and repurchases; repurchases were $3.3bn.
Outlook, commentary and notable items
- Management maintained full-year 2015 EPS guidance of $5.20–$5.35, expected a return to positive EPS growth in 2016, and said its 2017 target of 12%–15% EPS growth remained appropriate. The outlook excludes restructuring charges and other contingencies.
- Management cited uneven global growth, intense competition, foreign-exchange pressure, regulatory change, co-brand costs, and increased growth investment as headwinds. It expected FX to remain adverse through the rest of 2015 and potentially into 2016.
- The Q3 results included a $91m impairment of previously capitalized software development costs, mainly related to Enterprise Growth initiatives. The company paused certain initiatives, including the planned Serve launch in Mexico, and said further impairment was possible.
- The U.S. Costco co-brand and merchant acceptance agreements were set to expire March 31, 2016. The company said it had not yet seen a significant earnings impact from the relationship ending, although spending by Costco U.S. co-brand members softened. On October 26, 2015, it agreed to sell the related JetBlue card loan portfolio, subject to closing conditions, with completion expected in Q1 2016.
- A U.S. court injunction restricting enforcement of certain merchant anti-steering provisions took effect July 20, 2015. American Express is appealing and defending related merchant cases. The company estimated reasonably possible legal losses at zero to $370m in excess of reserves for matters where a range could be estimated; this is not a maximum exposure estimate. It said litigation could materially affect results, though it did not expect a material adverse effect on consolidated financial condition or liquidity.
- Other identified risks include EU payment rules, possible Australian payments regulation, consumer-protection oversight, credit deterioration, funding costs or ratings changes, and regulatory and tax developments. The filing states market risks had not materially changed since year-end 2014 and that disclosure controls were effective.
Most important facts for investors to verify
- Whether billed business, discount revenue, and card-member spending stabilize, particularly as the Costco U.S. relationship ends.
- Progress toward the $5.20–$5.35 full-year EPS range and the assumptions behind the 2016 and 2017 growth outlook.
- Whether loan growth, seasoning, and credit trends lead to higher write-offs, provisions, or reserve needs.
- The extent and returns of growth spending, co-brand costs, and any additional Enterprise Growth impairment.
- Developments in the DOJ appeal, merchant litigation, and possible losses beyond recorded reserves.
- Funding and liquidity trends, including deposit growth, debt maturities and repayments, capital ratios, and shareholder distributions.
- Comparability adjustments: the 2014 Global Business Travel deconsolidation and 2015 reclassification of certain partner payments affect period comparisons.