American Express Company — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2014; comparative periods are 2013. Unaudited interim results. American Express provides charge and credit cards, payment-network and merchant services, and travel-related services. From July 1, 2014, business travel operations were conducted through a 50%-owned, non-consolidated joint venture (GBT JV).
Financial performance
Amounts are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
| Metric | Q3 2014 | Q3 2013 | Change | Nine months 2014 | Nine months 2013 | Change |
|---|---|---|---|---|---|---|
| Revenue, net of interest expense | $8,329 | $8,301 | Flat | $25,185 | $24,427 | +3% |
| Provisions for losses | $488 | $419 | +16% | $1,462 | $1,353 | +8% |
| Total expenses | $5,595 | $5,878 | -5% | $16,957 | $17,166 | -1% |
| Net income | $1,477 | $1,366 | +8% | $4,438 | $4,051 | +10% |
| Diluted EPS | $1.40 | $1.25 | +12% | $4.17 | $3.67 | +14% |
- Revenue drivers: Q3 discount revenue rose 5% to $4.915 billion, while billed business increased 9% to $258.1 billion. Average discount rate declined to 2.49% from 2.52%. Net interest income grew 9% to $1.395 billion, reflecting higher average loan balances and lower funding costs.
- Credit: Q3 total provisions rose primarily because of charge-card losses and reserve building. Card Member loan net write-off rate (principal only) was 1.5%, down from 1.7%; charge-card receivables’ comparable rate was 1.6%. Management described write-off rates as near historical lows but expected them eventually to rise.
- Profitability: Reported return on average equity was 28.8%, versus 24.3%; return on average tangible common equity was 35.6%, versus 30.6%. The effective tax rate was 34.2% for Q3, up from 31.8%.
- Balance sheet at September 30: Cash and cash equivalents were $21.3 billion; total assets $153.9 billion; customer deposits $42.7 billion; short-term borrowings $3.4 billion; long-term debt $55.7 billion; shareholders’ equity $20.2 billion. Total debt was approximately $59.1 billion, compared with $60.4 billion at year-end 2013.
- Cash flow, nine months: Operating cash flow was $8.6 billion, investing cash outflow $3.0 billion and financing cash outflow $3.7 billion. Cash increased $1.8 billion to $21.3 billion. Financing included $3.2 billion in share repurchases and $770 million in dividends paid.
- Capital and liquidity: September 30 company Common Equity Tier 1 and total risk-based capital ratios were 13.6% and 15.1%, respectively; Tier 1 leverage ratio was 11.6%. Management reported $15.6 billion in excess U.S. cash available for long-term maturities, in addition to liquidity facilities. No securitization triggers occurred during the nine-month period.
Material changes and unusual items
- GBT JV transaction closed June 30. American Express retained a 50% interest, contributed $900 million, deconsolidated the former travel-business operations and recorded a $626 million pretax gain ($409 million after tax) in Q2. This makes year-over-year travel revenue and GCS expense comparisons less comparable.
- Excluding $336 million of prior-year GBT-related Q3 expense, management said adjusted total expenses increased 1% and adjusted operating expenses were flat. These are non-GAAP comparisons.
- The proposed SAP acquisition of Concur Technologies could produce an approximately $700 million gain for American Express if completed; management said it intended to direct potential proceeds toward business-building and efficiency initiatives. The gain was contingent, not recognized in this quarter.
- American Express repurchased 13.0 million shares in Q3 at an average $88.49 per share. It returned $1.4 billion to shareholders in Q3 and expected up to $1.15 billion of additional repurchases for the remainder of 2014, subject to market conditions and its capital plan.
Outlook, risks and contingencies
- Long-term, average-over-time financial targets: at least 8% growth in revenue net of interest expense, 12–15% EPS growth and ROE of at least 25%. If EPS and ROE targets are achieved, the company aims to return approximately 50% of capital generated to shareholders over time.
- Management remained committed to 2014 operating expense growth below 3% after specified adjustments, including the GBT transaction and certain restructuring and other items. It also noted planned growth investments and possible pressure from compliance, technology and other costs.
- Competition and changing payment technologies, potential continued erosion in the average discount rate, co-brand partner relationships, economic and credit conditions, foreign exchange and interest-rate movements, and regulatory changes were identified as risks. The filing also discusses proposed European payment-industry rules and U.S. litigation over merchant anti-steering provisions.
- Legal proceedings and governmental examinations: for matters where a loss was reasonably possible and estimable, the aggregate estimated range was $0–$350 million in excess of related accruals. The company cautioned this is not a maximum-loss estimate and actual outcomes may differ materially. Management did not expect a material adverse effect on consolidated financial condition or liquidity, but a particular period’s operating results could be affected.
- The company said it was under IRS examination for tax years 2008–2011 and that unrecognized tax benefits could decrease by up to $686 million within 12 months; approximately $529 million of that amount, if recognized, would affect equity rather than earnings or the effective tax rate.
- American Express Nippon Travel Agency reported obtaining 15 Iranian visas for client travel arrangements during Q3, with negligible related gross revenue and net profit; it intended to continue while permitted by U.S. law.
Key facts for investors to verify
- How much of earnings growth reflects recurring operations versus the GBT transaction gain and other investment or reserve items.
- Whether billed-business growth can offset discount-rate erosion, incentives and the revenue-sharing economics of faster-growing GNS business.
- Credit performance and reserve adequacy as loan balances grow and management’s historically low write-off rates potentially rise.
- Execution and financial effects of the GBT JV transition, planned investment spending, and any closing and gain from the proposed SAP-Concur transaction.
- Capital-return plans, capital requirements and funding access, including the proposed preferred-share issuance and Basel III transition.
- Developments in the DOJ and merchant litigation, other regulatory matters, and the disclosed possible-loss range.