American Express Company (AXP) — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. American Express is a global payments company operating through Global Consumer Services Group (GCSG), Global Commercial Services (GCS), and Global Merchant and Network Services (GMNS).
Financial performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue, net of interest expense | $36.1 billion | $43.6 billion | (17%) |
| Provisions for credit losses | $4.7 billion | $3.6 billion | +32% |
| Total expenses | $27.1 billion | $31.6 billion | (14%) |
| Pretax income | $4.3 billion | $8.4 billion | (49%) |
| Net income | $3.1 billion | $6.8 billion | (54%) |
| Diluted EPS | $3.77 | $7.99 | (53%) |
| Return on average equity | 14.2% | 29.6% | Down 15.4 percentage points |
Fourth-quarter revenue, net of interest expense, was $9.35 billion versus $11.37 billion a year earlier; net income was $1.44 billion versus $1.69 billion, and diluted EPS was $1.76 versus $2.03.
- Revenue drivers: Discount revenue fell 22% to $20.4 billion as worldwide billed business declined 19% and the average discount rate fell to 2.28% from 2.37%. Net card fees rose 15% to $4.7 billion, largely on premium products. Net interest income declined 7% to $8.0 billion, reflecting lower average loans and interest rates.
- Spending and credit: Worldwide billed business was $1,010.6 billion. Travel and entertainment (T&E) spending fell 61%, while non-T&E spending fell 1%. Card Member loans declined 16% and receivables declined 24% year over year at year-end. Credit-loss provisions increased primarily from reserve building; loan net write-offs were $2.17 billion and receivables net write-offs were $881 million.
- Segments: Segment income was $2.70 billion for GCSG (down 29%), $736 million for GCS (down 66%), and $954 million for GMNS (down 55%). Corporate & Other reported a $1.26 billion net loss.
- Margins and costs: Lower billed business reduced revenue, while rewards, card services, and other variable costs also declined. The effective tax rate increased to 27.0% from 19.8%, primarily due to valuation allowances on certain foreign deferred tax assets.
Cash flow, balance sheet, and capital
- Operating cash flow was $5.6 billion, down from $13.6 billion. Investing activities provided $11.6 billion, mainly reflecting lower loan and receivable balances; financing activities used $9.1 billion.
- Year-end cash and cash equivalents were $33.0 billion; cash plus investment securities totaled $54.6 billion. Management said liquidity was sufficient to meet internal and regulatory needs, including a stressed 12-month period.
- Total debt was $44.9 billion, down from $64.2 billion; customer deposits were $86.9 billion, up from $73.3 billion. Shareholders’ equity was $23.0 billion. The company issued no unsecured or secured term debt in 2020.
- Regulatory capital ratios remained above requirements: American Express CET1 was 13.5% and AENB CET1 was 16.2%. The company’s stated CET1 target range was 10%–11%.
- Common dividends declared were $1.72 per share. The company returned $2.3 billion through common dividends and share repurchases, but suspended repurchases in March 2020. It planned to resume repurchases in Q1 2021, subject to Federal Reserve limits, with approximately $440 million of capacity then authorized.
Material changes and unusual items
- The COVID-19 pandemic sharply curtailed travel and business activity. Billed business reached a low in mid-April and gradually improved; non-T&E spending returned to pre-pandemic levels in the second half, while T&E remained substantially depressed.
- CECL was adopted on January 1, 2020. Adoption increased loan reserves by $1.663 billion and reduced receivables reserves by $493 million, with a net-of-tax $882 million reduction to opening retained earnings. Comparisons of 2020 credit reserves and provisions with 2019 are not fully comparable because prior periods use the incurred-loss method.
- American Express purchased loyalty points from certain travel partners during 2020; the points were recorded as prepaid assets and could be impaired if partners fail or customer demand changes.
- The company recorded $125 million of restructuring charges in 2020. It also disclosed a $9.8 billion Membership Rewards liability, an important estimate based on redemption assumptions.
Outlook, risks, and contingencies
Management described 2021 as a “transition year,” with continued pandemic effects and a focus on rebuilding growth momentum. The filing does not provide specific numerical 2021 revenue or earnings guidance. Recovery depends substantially on spending trends—especially travel—credit performance, economic conditions, vaccine and treatment progress, and the pace of reopening. Management noted that strong liquidity and capital provide flexibility, while acknowledging the cost of holding elevated liquidity.
- Key risks include prolonged or renewed pandemic disruption, weak travel demand, higher credit losses or reserve needs, pressure on merchant discount rates, intense competition, and the financial health of airline and other partners. Delta represented about 9% of worldwide billed business and 21% of worldwide Card Member loans at year-end.
- Other material exposures include cyber and operational disruptions, regulatory and privacy requirements, capital and funding restrictions, and possible changes in customer behavior. The company estimated a hypothetical 100-basis-point rate increase could reduce annual net interest income by up to $113 million.
- Regulatory and criminal inquiries into historical small-business card sales practices were ongoing; the company reported cooperating and enhancing controls and did not expect a material adverse impact. Merchant litigation involving anti-steering and non-discrimination provisions remains outstanding. For certain disclosed legal matters, estimated reasonably possible losses ranged from zero to $210 million above accruals; this is not a maximum exposure.
- Potential customer reimbursement exposure for undelivered merchant goods or services was estimated at a maximum of $19 billion under a severe all-merchants-fail scenario; the company said this was not indicative of expected losses. It had accrued $58 million for related protection exposures.
Most important facts for investors to verify
- Whether the recovery in billed business continues, particularly in T&E, and whether the average discount rate stabilizes.
- Whether credit reserves and write-offs prove adequate as government support and forbearance programs change; note the CECL-related comparison limitations.
- Whether customer deposits, liquidity levels, and funding costs remain favorable and capital distributions proceed within regulatory limits.
- Developments and any financial consequences from the small-business sales-practices inquiries and merchant litigation.
- Whether the Membership Rewards liability, partner commitments, and undelivered-goods exposure remain supportable under changing travel and partner conditions.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Credit-loss reserves and the Membership Rewards liability were identified as critical audit matters.