Business Context and Reporting Period
Company: American Express Company
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: A leading global payments and travel company offering charge and credit payment card products and travel-related services. The company operates through two primary groups: the Global Consumer Group and the Global Business-to-Business Group.
Regulatory Status Change: On November 14, 2008, American Express Company and its principal operating subsidiary, American Express Travel Related Services Company, Inc. (TRS), became bank holding companies under the Bank Holding Company Act of 1956, subject to supervision by the Federal Reserve.
Key Financial Metrics
| Metric | 2008 | 2007 | Change |
|---|---|---|---|
| Total Revenues (net of interest expense) | $28.4 billion | $27.6 billion | +3% |
| Income from Continuing Operations | $2.9 billion | $4.1 billion | -30% |
| Net Income | $2.7 billion | $4.0 billion | -33% |
| Diluted EPS (Continuing Operations) | $2.48 | $3.45 | -28% |
| Diluted EPS (Net Income) | $2.33 | $3.36 | -31% |
| Return on Average Equity | 22.3% | 37.3% | -15.0 pts |
| Worldwide Billed Business | $683.3 billion | N/A | N/A |
| Cards-in-Force | 92.4 million | N/A | +6 million net |
Liquidity and Capital: In January 2009, the company received $3.39 billion from the U.S. Treasury under the Capital Purchase Program (CPP) in exchange for preferred stock and a warrant to purchase common shares. The company's credit ratings were downgraded by Moody's and S&P in the fourth quarter of 2008.
Material Changes vs. Prior Period
- Economic Environment: The latter half of 2008 saw a worsening global recession, increased volatility, and reduced liquidity in capital markets. This led to slowing cardmember spending (including a year-over-year decline in Q4), lower loan volumes, and higher delinquencies.
- Profitability Decline: Despite a 3% increase in total revenues, net income dropped 33% primarily due to increased provisions for credit losses and higher operating expenses related to the economic downturn.
- Discontinued Operations: The company completed the sale of American Express Bank Ltd. (AEBL) to Standard Chartered in February 2008. Results for AEBL and American Express International Deposit Company (AEIDC) are reported as discontinued operations.
- Acquisitions: In March 2008, the company acquired GE's Corporate Payment Services business for approximately $1.1 billion plus debt repayment.
Guidance, Outlook, and Risks
Outlook: Management expects consumer and business sentiment to deteriorate further in 2009, translating into weaker global economies and increased unemployment. The company anticipates continued pressure on spending and credit quality.
Key Risks and Contingencies:
- Credit Quality: Rising delinquencies and write-offs pose a significant risk. The company increased its allowance for loan losses significantly in 2008.
- Liquidity: Access to unsecured term debt and asset securitization markets was effectively frozen since September 2008, relying heavily on government programs (CPP, CPFF, TLGP) and internal cash flows.
- Regulatory Changes: New regulations regarding credit card practices (Regulation AA and Z) are expected to take effect in 2010, potentially restricting interest rate increases and payment application methods, which could materially affect results.
- Legal Proceedings: The company faces various class actions regarding merchant fees, insurance coverage, and gift card practices, as well as an antitrust investigation by the DOJ regarding merchant surcharging and anti-steering policies.
Investor Verification Checklist
- Credit Loss Provisions: Verify the adequacy of the allowance for loan losses given the sharp increase in net write-offs (5.5% of average cardmember loans in 2008 vs. 3.5% in 2007).
- Liquidity Sources: Confirm the sustainability of funding sources given the frozen securitization market and reliance on government support programs.
- Regulatory Impact: Assess the potential financial impact of the 2010 implementation of new federal credit card regulations (Regulation AA and Z).
- Capital Structure: Review the terms and dilution impact of the $3.39 billion preferred stock issuance and warrant to the U.S. Treasury.
- Merchant Discount Rates: Monitor trends in merchant discount rates, which have faced pressure from regulatory actions globally and competitive repricing.