AXP

American Express Company: Q3 2007 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for American Express Company for the period ended September 30, 2007. The Company is a leading global payments, network, and travel company. Effective July 1, 2007, the Company reorganized its reportable segments into four distinct groups: U.S. Card Services, International Card Services, Global Commercial Services, and Global Network & Merchant Services. The report also reflects the classification of American Express Bank Ltd. (AEB) and American Express International Deposit Company (AEIDC) as discontinued operations following an agreement to sell these entities to Standard Chartered PLC.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 14% year-over-year for the quarter and 13% for the nine-month period. Revenues net of interest expense grew 11% in Q3 and 10% YTD.
• Profitability: Net income rose 10% in Q3 and 14% YTD. Diluted EPS increased 14% in Q3 and 18% YTD.
• Expense Increases: Total expenses increased 9% in Q3 and 6% YTD, driven primarily by higher marketing, promotion, rewards, and human resources costs.
• Provisions for Losses: Provisions for losses and benefits increased 25% in Q3 and 32% YTD. The cardmember lending provision rose significantly due to increased loan volumes and higher write-off/delinquency rates following the unusually low rates in 2006.
• Discontinued Operations: The Company recorded a loss of $7 million from discontinued operations in Q3 2007, compared to income of $33 million in Q3 2006, primarily due to the sale of AEB and AEIDC.

Guidance, Outlook, and Risks

• Long-Term Targets: Management targets average annual growth of at least 8% in revenues net of interest expense, 12-15% in EPS, and a Return on Equity (ROE) of 33-36%.
• Capital Allocation: The Company aims to return approximately 65% of generated capital to shareholders via dividends and share repurchases. In the first nine months of 2007, approximately 85% of capital generated was returned.
• Visa Settlement (Subsequent Event): On November 7, 2007, the Company announced a settlement with Visa for a maximum of $2.25 billion. An initial payment of $1.13 billion is expected to be recorded as a reduction to operating expenses upon approval. Remaining payments are contingent on performance criteria.
• Membership Rewards Reserve: The Company is evaluating enhancements to its methodology for estimating the Membership Rewards liability, which could result in a significant increase to the reserve in the fourth quarter of 2007.
• Interest Rate Risk: The Company has reduced its fixed-rate debt and hedges, exposing it to higher short-term rates. This resulted in approximately $180 million of incremental interest expense in the first nine months of 2007.
• Credit Environment: Management notes signs of stress in the credit environment and is monitoring trends in write-off and delinquency rates closely.

Investor Verification Checklist

• Visa Settlement Approval: Verify the status of the Visa member bank approval required to finalize the $2.25 billion settlement and the timing of the initial $1.13 billion payment.
• Membership Rewards Reserve: Monitor the fourth-quarter 2007 results for the impact of the new actuarial evaluation on the Membership Rewards liability.
• Credit Quality Trends: Track the net write-off rates and delinquency levels in the cardmember lending portfolio to assess if the elevated provisions are stabilizing.
• Interest Rate Exposure: Review the Company's funding mix and hedging strategies in light of the reduced fixed-rate debt and potential volatility in LIBOR and credit spreads.
• Discontinued Operations: Confirm the final closing date and proceeds from the sale of AEB and AEIDC to Standard Chartered.