American Express Company — Q3 2012 Form 10-Q
Business context and period: Global payments and travel company offering charge and credit cards, merchant and network services, travel products, and related fee services. This unaudited report covers the quarter and nine months ended September 30, 2012; comparisons are with the same 2011 periods unless noted. Dollar amounts below are USD.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue, net of interest expense | $7.862bn | $7.571bn | $23.441bn | $22.220bn |
| Provisions for losses | $479m | $249m | $1.352bn | $703m |
| Pretax income | $1.870bn | $1.711bn | $5.522bn | $5.208bn |
| Net income | $1.250bn | $1.235bn | $3.845bn | $3.743bn |
| Diluted EPS | $1.09 | $1.03 | $3.31 continuing operations | $3.08 continuing operations |
| Net interest income | $1.181bn | $1.113bn | $3.435bn | $3.266bn |
- Q3 revenue grew 4%, while net income rose 1% and diluted EPS rose 6%. For nine months, revenue grew about 5%, net income about 3%, and continuing-operations diluted EPS about 7%.
- Q3 total expenses declined 2% to $5.513bn; nine-month expenses increased 2% to $16.567bn. The filing does not present a single consolidated operating-margin measure.
- Worldwide billed business rose 6% in Q3 and 8% for nine months. Q3 U.S. billed business grew 8%, versus 3% outside the U.S.; management said spending growth had slowed from the first half.
- Q3 cardmember-loan net write-off rate improved to 1.9% from 2.6%; the nine-month rate was 2.1% versus 3.1%. The company described credit performance as very strong and lending loss rates as at all-time lows.
Cash, balance sheet and funding
- Nine-month operating cash flow was $10.614bn, up from $6.374bn. Investing activities used $2.986bn, compared with $4.946bn provided in 2011; financing activities used $7.483bn, versus $2.698bn used.
- At September 30, cash and cash equivalents were $25.143bn; total assets were $152.873bn, liabilities $133.395bn, and shareholders’ equity $19.478bn. Short-term borrowings were $4.027bn and long-term debt $56.271bn. Customer deposits totaled $37.195bn.
- Management reported $18.4bn of cash and readily marketable securities available to fund maturities, against approximately $16.3bn of debt and certificate-of-deposit maturities over the following 12 months. This liquidity measure excludes cash designated for day-to-day operations.
- Regulatory capital ratios at quarter-end included a 12.7% Tier 1 risk-based ratio and 10.8% Tier 1 leverage ratio. The company estimated that proposed Basel III rules, if applied to Q3 positions, would produce a 12.6% Tier 1 risk-based ratio; these estimates are subject to change.
Material changes, outlook and risks
- Provisions for losses increased 92% in both the quarter and nine-month period, mainly because lending reserve releases were much smaller than in 2011. Q3 cardmember-loan provision was $264m versus $48m a year earlier.
- Management cited a challenging global economy, intense competition and slower Q3 spending growth. 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 long-term targets, not specific quarterly guidance.
- A review of the U.S. Membership Rewards ultimate redemption rate methodology was expected to finish by year-end and likely increase the Q4 reserve and rewards expense; the amount was not determined. Management estimated that a one-percentage-point increase in the global redemption-rate assumption could add about $330m to the existing reserve and about $40m to annual rewards expense.
- Other notable comparisons include $84m of nine-month gains on investment securities in 2012 and prior-year Visa/MasterCard litigation settlement income. The company also cited higher customer refunds related to internal and regulatory reviews. In October 2012, it agreed to $27.5m in regulatory penalties and an $85m restricted pool for customer refunds.
- Disclosed risks include possible legal and regulatory outcomes, with an estimated reasonably possible loss range of zero to $510m above accrued liabilities for specified matters; this is not a maximum exposure. Other risks include economic weakness, merchant surcharging, U.S. antitrust litigation, regulatory reform and potential tax-rate increases if active-financing tax legislation is not renewed. Europe represented about 11% of Q3 billed business.
Important facts for investors to verify
- Whether loan-loss provisions continue rising as reserve releases diminish, and whether credit quality remains strong.
- The final Membership Rewards reserve adjustment and its Q4 earnings effect.
- Progress on regulatory refunds, add-on product reviews, and the legal-loss estimate, including matters not yet quantifiable.
- Whether spending growth, particularly outside the U.S., and merchant discount economics support the company’s long-term growth targets.
- Liquidity and funding access against upcoming maturities, and any effects of proposed Basel III rules or changes in credit ratings.