Business context and reporting period
American Express Company is a global payments, card-lending, travel and merchant-services company. This unaudited Form 10-Q reports the three months ended March 31, 2014, compared with the first quarter of 2013; balance-sheet comparisons are with December 31, 2013. Amounts are in U.S. dollars unless stated otherwise.
Key financial metrics
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Total revenue, net of interest expense | $8.199 billion | $7.881 billion; up 4% |
| Net income | $1.432 billion | $1.280 billion; up 12% |
| Diluted EPS | $1.33 | $1.15; up 16% |
| Net interest income | $1.337 billion | $1.243 billion; up 8% |
| Provisions for losses | $485 million | $416 million; up 17% |
| Total expenses | $5.506 billion | $5.556 billion; down 1% |
| Effective tax rate | 35.1% | 32.9% |
| Return on average equity | 28.1% | 23.0% |
| Return on average tangible common equity | 35.4% | 29.3% |
| Card billed business | $238.1 billion | $224.5 billion; up 6% |
| Net interest yield on Card Member loans | 9.5% | 9.5% |
The filing does not present a standard operating-margin measure. At March 31, cash and cash equivalents were $20.740 billion; total assets were $151.497 billion and shareholders’ equity was $19.977 billion. Card Member receivables, net, were $44.240 billion and loans, net, were $62.825 billion.
Short-term borrowings were $2.821 billion and long-term debt was $54.095 billion, approximately $56.9 billion combined. Customer deposits were $42.671 billion. The company reported $15.5 billion of excess U.S. cash available for long-term maturities under its liquidity measure, and $12.1 billion of debt, securitization and certificate-of-deposit maturities through March 2015. Transitional Basel III capital ratios at March 31 included 13.6% Common Equity Tier 1, 15.1% total risk-based capital and 11.6% Tier 1 leverage.
Operating cash flow was $3.285 billion, investing cash flow was $1.557 billion and financing cash flow was negative $3.561 billion. Cash and cash equivalents increased $1.254 billion during the quarter to $20.740 billion.
Material changes versus the prior comparable period
- Revenue growth reflected 6% growth in billed business and higher card fees and commissions. Discount revenue rose 5%; net card fees rose 3%; other commissions and fees rose 8%. Travel commissions and fees fell 3%, and other revenue fell 7%, including effects of divestitures.
- Interest expense fell 15%, mainly due to lower deposit and debt funding costs; average loans also grew, supporting higher interest income.
- Loss provisions rose 17%, including a 40% increase in charge-card provisions. Management attributed this primarily to higher receivables and reserve builds, compared with reserve releases in the prior-year quarter. Loan net write-off rates improved: principal-only was 1.7% versus 1.9%.
- Expenses declined slightly overall, but marketing, rewards and Card Member services costs rose 4%. Salaries and benefits fell 5%, and other net expenses fell 4%.
- Operating cash flow declined from $7.547 billion, chiefly because the prior-year period had a much larger favorable change in accounts payable and other liabilities. Investing cash flow improved from $32 million, while financing cash outflow increased from $1.830 billion.
- Loans, net, decreased to $62.825 billion from $65.977 billion at year-end, while receivables, net, increased to $44.240 billion from $43.777 billion. Long-term debt declined to $54.095 billion from $55.330 billion.
By segment, net income increased in U.S. Card Services ($876 million versus $804 million) and Global Network & Merchant Services ($443 million versus $373 million), but declined in International Card Services ($159 million versus $178 million) and Global Commercial Services ($184 million versus $191 million).
Outlook, management commentary, risks and unusual items
- Management said spending growth remained solid but slowed modestly from Q4 2013; a stronger U.S. dollar continued to weigh on reported growth. It expected marketing investment to increase beginning in Q2 and did not expect the Q1 year-over-year operating-expense decline to continue.
- Management aimed to keep 2014 operating-expense growth below 3% and said the full-year effective tax rate could be closer to the mid-30% range. Longer-term targets, on average and over time, are at least 8% growth in revenue net of interest expense, 12–15% EPS growth and ROE of at least 25%.
- A proposed Global Business Travel joint venture was expected to close in Q2 2014, subject to approvals and other conditions. American Express planned to retain approximately 50% ownership; management estimated a pretax gain of $600–$700 million before transaction costs and expected to reinvest a substantial portion in growth and efficiency initiatives.
- The company announced plans to repurchase up to $4.4 billion of shares in 2014 and up to $1.0 billion in Q1 2015, and to raise the quarterly dividend from $0.23 to $0.26 beginning with the Q2 2014 declaration, subject to board approval. Q1 dividends and repurchases totaled approximately $1.2 billion.
- Risks include intense payments competition, foreign-exchange movements, economic and credit conditions, regulatory changes, and litigation. The DOJ and state attorneys general merchant-rules case could have a material adverse effect if similar restrictions were imposed on American Express. Proposed EU payment-industry rules could affect merchant pricing, network rules or licensing.
- For disclosed legal matters where losses were reasonably possible and estimable, the company gave an aggregate range of zero to $440 million in excess of accrued liabilities; this is not the maximum possible exposure. Management did not expect pending matters to materially harm consolidated financial condition or liquidity, but outcomes could materially affect results in a particular period.
- American Express Nippon Travel Agency reported obtaining 14 Iranian visas in Q1 for client travel arrangements; attributable revenue and net profit were described as negligible, and the agency said it intended to continue while permitted by U.S. law.
Important facts for investors to verify
- Whether billed-business and revenue growth sustain or slow further, particularly after foreign-exchange effects and merchant pricing pressures.
- Whether the increase in charge-card provisions and reserve builds persists, and how credit losses compare with management’s expectation that lending write-off rates eventually rise from historically low levels.
- Completion, timing and final economics of the Global Business Travel joint venture, including the gain after transaction costs and the use of proceeds.
- Actual 2014 expense growth, marketing investment and effective tax rate versus management’s stated outlook.
- Regulatory and litigation developments, including the DOJ merchant case, proposed EU rules and the disclosed possible-loss range.
- Capital and liquidity after planned repurchases and dividend increases, and the company’s ability to meet upcoming maturities while maintaining regulatory buffers.