American Express Company — Q3 2010 Form 10-Q
Business context and period: Global payments, card and travel-services company. This unaudited filing covers the three and nine months ended September 30, 2010; comparisons are with the corresponding 2009 periods unless noted. Amounts are in U.S. dollars; financial-statement amounts are in millions unless stated otherwise.
Financial results and position
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenues, net of interest expense | $7.033 billion | $6.016 billion | $20.497 billion | $18.034 billion |
| Net interest income | $1.184 billion | $754 million | $3.679 billion | $2.414 billion |
| Provisions for losses | $373 million | $1.178 billion | $1.968 billion | $4.565 billion |
| Expenses | $5.020 billion | $3.920 billion | $14.042 billion | $11.589 billion |
| Net income | $1.093 billion | $640 million | $2.995 billion | $1.414 billion |
| Diluted EPS | $0.90 | $0.53 | $2.47 | $0.94 |
- Revenue and spending: Q3 worldwide billed business rose 14% to $179.3 billion; discount revenue increased 13% to $3.818 billion. Average discount rate was 2.56%, versus 2.54%.
- Credit and margins: Q3 provisions fell 68%, reflecting improving credit trends. The cardmember-loan net interest yield was 9.5%, down from 10.2%; management cited higher payment rates, lower revolving balances and CARD Act effects.
- Expenses: Q3 expenses increased 28%, including higher marketing and promotion, rewards, professional services and other expenses. Marketing and promotion rose 68%; cardmember rewards rose 29%.
- Cash flow: Nine-month operating cash flow was $7.227 billion, investing cash flow was $5.298 billion, and financing cash outflow was $7.885 billion. Cash and cash equivalents increased $4.742 billion to $21.341 billion.
- Balance sheet at September 30: Assets were $146.056 billion; liabilities $130.136 billion; shareholders’ equity $15.920 billion. Customer deposits were $28.365 billion. Short-term borrowings were $1.919 billion and long-term debt $68.828 billion.
- Liquidity and capital: Management reported $26.8 billion in excess cash and readily marketable securities after operating cash and short-term obligations. Committed bank credit facilities totaled $10.3 billion, with $3.9 billion drawn. Company Tier 1 and total risk-based capital ratios were 11.7% and 13.9%; Tier 1 leverage was 9.2%.
- Segments: Q3 segment income was $595 million for U.S. Card Services, $153 million for International Card Services, $159 million for Global Commercial Services and $259 million for Global Network & Merchant Services. Corporate & Other recorded a $73 million net expense.
Material changes versus prior period
- Net income increased 71% in Q3; diluted EPS rose to $0.90 from $0.53. For nine months, net income more than doubled and diluted EPS increased to $2.47 from $0.94.
- Card billed business growth and lower loss provisions supported earnings, while higher marketing, rewards and operating expenses absorbed part of the improvement.
- Credit quality improved: Q3 U.S. Card Services loan net write-off rate was 5.2%, compared with 9.8% on the reported GAAP-basis comparison; 30-day-past-due U.S. loans were 2.5%, versus 4.2%.
- New consolidation rules effective January 1, 2010 brought the Lending Trust’s securitized loans and related debt onto the balance sheet. This materially increased reported loans and debt and changed the location of related income, expense and loss provisions. Prior-period financial statements were not recast, limiting direct comparability; management also provides managed-basis comparisons.
- Marketing, promotion, rewards and cardmember-services expense was $2.251 billion in Q3 versus $1.619 billion a year earlier. The 2009 comparison also included a $180 million benefit in other, net expenses related to a net investment in foreign subsidiaries.
Outlook, management commentary and risks
- Management said the improved economic environment continued in Q3, with spending growth in the U.S. and internationally; spending growth through October was described as similar to Q3. It noted spending growth alongside lower borrowing and loan balances, reflecting consumer behavior and company strategy and risk actions.
- Management expected U.S. Consumer net interest yield to move closer to its historical level of approximately 9% by year-end 2010, subject to customer behavior and CARD Act requirements. This is an expectation, not a guarantee.
- The company retained its long-term revenue and EPS growth targets of at least 8% and 12–15%, respectively, on average over time. It revised its long-term ROE target to 25% or more, citing higher expected capital needs; assuming achievement of targets, it said it would seek to return at least 50% of capital generated to shareholders over time.
- Management said improving credit trends allowed significant business investment, but expected year-over-year benefits from credit improvement to decline over the course of the year. It described a cautious approach to future investment and expense commitments.
- No common shares were repurchased in Q3. The company said it began repurchases in Q4 2010 to the extent of shares issued under employee programs. Nine-month dividends paid were $650 million; declared dividends were $0.54 per share.
- Key risks include weak employment and uncertain consumer confidence; CARD Act effects; implementation of Dodd-Frank and Basel III capital and liquidity rules; competition and pressure on merchant pricing; funding costs and credit ratings; and litigation or regulatory action. Management cited a DOJ and state attorneys general antitrust case challenging anti-steering rules; an adverse outcome could require policy changes and hurt revenue or brand, though the complaint sought injunctive rather than monetary relief.
- Other contingencies include numerous legal proceedings and examinations. The company said it could not meaningfully estimate losses in excess of accrued liabilities, if any; it did not believe pending matters would materially affect consolidated financial condition or liquidity, but an individual outcome could materially affect a period’s results. Tax authorities were examining multiple years; unrecognized tax benefits could decrease by up to $691 million within 12 months, with the earnings effect uncertain.
- The company reported no securitization trust events requiring reserve funding or early amortization as of September 30. It cautioned that regulatory and rating-agency developments could affect the capacity or cost of asset-backed funding.
Important facts for investors to verify
- Separate underlying operating improvement from the effects of Lending Trust consolidation, including the non-comparable 2009 presentation and managed-basis loan trends.
- Track loan yields, payment rates, revolving balances, credit losses and reserve adequacy as credit-driven earnings benefits moderate.
- Assess whether spending and billed-business growth can sustain revenue while rewards, marketing and other investment spending rise and discount-rate pressure persists.
- Monitor capital-rule implementation, funding maturities, deposit growth, ratings and access to securitization markets.
- Follow the DOJ antitrust case, other significant litigation, tax examinations and the potential financial effects of regulatory changes.
- Evaluate progress against management’s revised long-term ROE and shareholder-return targets; these are targets, not near-term guidance.