American Express Company: Q1 2019 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2019, compared with Q1 2018. American Express operates a global payments, card-issuing and merchant-network business serving consumers and businesses.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue, net of interest expense | $10.364B | $9.718B | +7% |
| Net interest income | $2.059B | $1.841B | +12% |
| Provisions for losses | $809M | $775M | +4% |
| Total expenses | $7.597B | $6.861B | +11% |
| Pretax income | $1.958B | $2.082B | -6% |
| Net income | $1.550B | $1.634B | -5% |
| Diluted EPS | $1.80 | $1.86 | -$0.06 |
| Operating cash flow | $8.547B | $2.063B | Increased |
Discount revenue rose 5%, net card fees 14%, and interest income 20%. Interest expense increased 44%, reflecting higher rates and average debt and deposits. Customer-engagement spending (marketing, rewards and Card Member services) rose 12%. The effective tax rate was 20.8%, versus 21.5%.
At March 31, cash and cash equivalents were $33.2B; total assets were $197.2B and shareholders’ equity was $22.2B. Total debt was $60.4B ($2.0B short-term and $58.4B long-term), and customer deposits were $72.9B. Regulatory capital ratios exceeded stated Basel III minimums: Company CET1 10.8%, Tier 1 11.8%, total capital 13.4%, and Tier 1 leverage 10.0%.
Worldwide billed business increased 4% (7% adjusted for foreign exchange); proprietary billings grew 7% reported and 9% FX-adjusted. Card Member loans reached $81.0B, up 11% year over year. The principal-only loan net write-off rate rose to 2.3% from 2.0%; 30-plus-day delinquency increased to 1.5% from 1.4%.
Material changes and management commentary
- Revenue growth did not translate into higher earnings: expenses grew faster than revenue. Management attributed the EPS decline in part to a merchant litigation-related charge, which reduced EPS by $0.21.
- Management described a solid start, citing broad-based billing and revenue growth, card acquisitions, higher card fees and loan growth. A stronger U.S. dollar weighed on reported international growth.
- GNS billed business declined 10%, primarily as the company exited network business in Europe and Australia following regulatory changes; excluding those geographies, GNS billings grew 6% year over year.
- Operating cash flow increased substantially, mainly because of the amount and timing of accounts payable and other liability payments; it should not be read as an equivalent increase in underlying earnings.
- Q1 shareholder returns totaled $1.6B: $1.3B in share repurchases and $0.3B in common dividends. The company repurchased about 12 million shares at an average $104.03.
Outlook, risks and unusual items
- No specific full-year EPS or revenue guidance is provided in the filing. Management expects provisions for losses to grow at a higher rate over the remainder of 2019 and customer-engagement spending to continue increasing. It plans continued investment for medium- and long-term growth.
- The 2019 funding plan anticipates approximately $6B-$12B of unsecured term debt issuance and $5B-$10B of secured term debt issuance, subject to market, business and regulatory conditions. The company reported $3.5B of committed bank credit and $5.0B of committed revolving secured facilities, none drawn at quarter-end.
- CECL is scheduled to take effect January 1, 2020. Management said implementation work was substantially developed, but the standard could materially change credit reserves through earlier recognition of expected lifetime losses; the impact was not yet clear.
- Legal matters include merchant antitrust cases and other claims. The individual merchant cases in the anti-steering litigation were dismissed with prejudice on April 12, 2019; a motion to dismiss and compel arbitration in the related class action remained pending. For certain disclosed matters, estimated reasonably possible losses were $0-$240M in excess of accruals; this is not a maximum exposure estimate.
- Other principal risks include competition, payments regulation and merchant surcharging, credit performance, funding and interest-rate sensitivity, foreign exchange, cybersecurity, and legal or regulatory actions. Management reported no material changes in market-risk exposures since December 31, 2018 and no material changes to the prior-year risk factors.
- Operating lease accounting adoption added approximately $700M of right-of-use assets and lease liabilities. A Q1 2018 Hilton portfolio acquisition, with about $1B of balances at acquisition, affects period comparability.
Important facts for investors to verify
- How much of revenue growth converts to earnings as customer-engagement and other expenses continue rising.
- Whether higher loan write-offs and delinquencies persist, and how credit reserves will change under CECL.
- The ongoing financial and business implications of the merchant litigation, including potential effects on merchant steering and card acceptance.
- Execution and cost of the 2019 funding plan, deposit growth, and maintenance of capital and liquidity buffers.
- Whether reported international performance improves when currency effects and the GNS geographic exits are considered.