American Express Company — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; filed April 29, 2013. Financial statements are unaudited. American Express is a global payments and travel company, with charge and credit cards, merchant/network services, commercial services, and travel-related products.
Financial results and position
| Metric | Q1 2013 | Q1 2012 / prior date | Change |
|---|---|---|---|
| Revenue, net of interest expense | $7.881B | $7.587B | +4% |
| Net income | $1.280B | $1.256B | +2% |
| Diluted EPS | $1.15 | $1.07 | +7% |
| Net interest income | $1.243B | $1.133B | +10% |
| Provisions for losses | $497M | $412M | +21% |
| Total expenses | $5.475B | $5.402B | +1% |
| Operating cash flow | $7.547B | $3.432B | Up $4.115B |
| Cash and cash equivalents | $27.964B | $22.250B at Dec. 31, 2012 | + $5.714B |
| Total assets | $156.855B | $153.140B at Dec. 31, 2012 | + $3.715B |
| Long-term debt | $56.366B | $58.973B at Dec. 31, 2012 | Down $2.607B |
Short-term borrowings were $3.359B; customer deposits were $41.301B. Shareholders’ equity was $19.290B. Card billed business rose 6% to $224.5B, while cards-in-force increased 5% to 103.2M. The average discount rate was 2.52%, versus 2.53% a year earlier.
Credit indicators remained favorable overall: cardmember loan principal net write-off rate fell to 1.9% from 2.3%; U.S. card receivables principal write-off rate declined to 2.0% from 2.3%. Loan provisions nevertheless increased, primarily because reserve releases were lower than in Q1 2012. Average cardmember loans increased 3% year over year, and reported net interest yield on loans rose to 9.5% from 9.2%.
Operating cash flow growth was driven mainly by a $4.946B change in accounts payable and other liabilities, compared with $502M in Q1 2012. Investing cash flow was $32M, versus $1.948B; financing cash used was $1.830B, versus $3.316B. The operating cash flow increase therefore reflects working-capital movements and should not be read as equivalent growth in earnings.
At March 31, the company reported a 12.6% Tier 1 risk-based capital ratio, 14.6% total risk-based capital ratio, and 10.3% Tier 1 leverage ratio. It estimated that proposed Basel III rules, if in effect, would have produced a 12.4% Tier 1 risk-based ratio and an 8.7% supplementary leverage ratio under its stated assumptions.
Material changes versus Q1 2012
- Revenue growth reflected 6% higher billed business, higher card fees, and stronger net interest income. Discount revenue rose 4%; net card fees rose 7%.
- Income growth was modest relative to revenue: provisions rose 21%, including a 30% increase in cardmember loan provisions, as prior-year reserve releases were lower in 2013. Management also cited improved credit performance and lower write-offs.
- Operating expenses rose just 1%. Rewards costs increased 4%, largely with co-brand spending; salaries and benefits fell 1%.
- Segment income rose at U.S. Card Services (+7%), Global Commercial Services (+8%), and Global Network & Merchant Services (+4%); it fell at International Card Services (-10%), principally reflecting higher provisions and currency effects.
- The effective tax rate increased to 32.9% from 29.2%; Q1 2012 included a $50M benefit from realization of foreign tax credits.
Outlook, commentary, risks, and unusual items
- Management described spending growth as healthy but slower than in Q1 2012 amid a slow-growth economy. It aims, on average and over time, for at least 8% growth in revenue net of interest expense, 12–15% EPS growth, and ROE of at least 25%; these are targets, not specific Q1 2013 guidance.
- Management aims to keep annual operating expense growth below 3% over the next two years, using 2012 expenses excluding the Q4 2012 restructuring charge as the base. It targets marketing and promotion at approximately 9% of revenue for full-year 2013; the Q1 ratio was approximately 7.9%.
- The company announced plans to repurchase up to $3.2B of shares in the last three quarters of 2013 and up to $1.0B in Q1 2014, and to raise the quarterly dividend from $0.20 to $0.23 beginning with the Q2 2013 declaration. Execution is subject to regulatory approval, capital generation, operating results, and market conditions. Q1 repurchases were $787M, covering 13.0M shares at an average $61.73.
- Liquidity resources included $20.9B of cash available to fund maturities, against $17.0B of stated debt and CD maturities over the following 12 months. The company also reported $7.7B of committed bank credit facilities and additional secured financing capacity. Management’s stated liquidity objective is to meet expected obligations for at least 12 months, including under stress scenarios.
- Risks include intense competition, sluggish global conditions, possible pressure on merchant pricing, regulatory and compliance costs, consumer spending and credit trends, funding costs and ratings, currency and interest-rate movements, and execution of expense and growth plans. Europe represented approximately 11% of quarterly billed business.
- Regulatory scrutiny of card add-on products and consumer practices may lead to changes in products or pricing, restitution, penalties, or higher costs. The DOJ and states’ antitrust action concerning merchant acceptance rules could have a material adverse effect if similar restrictions were imposed on American Express.
- For certain legal matters where losses were reasonably possible and estimable, the company disclosed an aggregate range of $0–$440M in excess of accrued liabilities, if any; this is not the maximum possible exposure. The company said no pending matter was expected to materially affect consolidated financial condition or liquidity, while acknowledging a particular period’s results could be materially affected.
- Other notable items: $1.058B increase in restricted cash, mainly associated with the Lending Trust; no securitization trust triggering events occurred. Potential decreases in unrecognized tax benefits over the next 12 months could be as much as $886M, with the income-statement effect of part of that amount unclear.
Most important facts for investors to verify
- Whether billed-business growth and card-fee gains can offset discount-rate and merchant-pricing pressure.
- Whether higher loss provisions reflect normalization of reserve releases or a deterioration in future credit trends; monitor delinquency and write-off measures by segment.
- Whether management delivers its expense-growth objective while sustaining investment, rewards, and customer service.
- Whether operating cash flow remains strong after the unusually large working-capital contribution from accounts payable and other liabilities.
- Regulatory and legal developments, especially consumer-product reviews and the DOJ merchant acceptance case, and any resulting costs or business restrictions.
- Capital-plan execution, dividend increase, share repurchases, and liquidity coverage of upcoming debt and deposit maturities.