Business Context and Reporting Period
Company: American Express Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: A leading global payments, network, and travel company operating through four segments: U.S. Card Services, International Card Services, Global Commercial Services, and Global Network & Merchant Services. The reporting period is characterized by significant global financial market volatility, a deteriorating economic outlook, and the company's initiation of major reengineering initiatives to reduce costs.
Key Financial Metrics
| Metric (in millions, except per share) | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Total Revenues | $8,007 | $24,477 |
| Net Income | $815 | $2,459 |
| Diluted EPS (Net Income) | $0.70 | $2.12 |
| Provisions for Losses | $1,368 | $4,440 |
| Cash and Cash Equivalents | $15,556 (Sep 30, 2008) | N/A |
| Total Debt (Short + Long Term) | $71,699 (Sep 30, 2008) | N/A |
| Shareholders' Equity | $12,519 (Sep 30, 2008) | N/A |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 24% year-over-year for the quarter ($815M vs. $1,067M) and 23% for the nine-month period ($2,459M vs. $3,181M). Diluted EPS dropped from $0.90 to $0.70 for the quarter.
- Provisions for Losses Surge: Total provisions for losses increased 51% in the quarter ($1,368M vs. $905M) and 71% for the nine months ($4,440M vs. $2,591M). This was driven by higher write-off and delinquency rates in the U.S. cardmember lending portfolio and increased merchant-related reserves.
- Revenue Growth: Total revenues increased slightly by 1% in the quarter ($8,007M vs. $7,964M) and 6% for the nine months ($24,477M vs. $23,025M), driven by higher discount revenue and net card fees, partially offset by lower securitization income.
- Securitization Income Drop: Securitization income, net, fell 49% in the quarter ($200M vs. $392M) due to a $100M reduction in the fair value of the interest-only strip and lower excess spread.
- Balance Sheet Strength: Cash and cash equivalents increased significantly to $15.6 billion from $8.9 billion at year-end 2007, reflecting a strategy to maintain liquidity amidst market turmoil.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Economic Outlook: Management expects consumer and business sentiment to deteriorate further into 2009, leading to softer spending, restrained loan growth, and rising unemployment.
- Credit Quality: Net write-off rates are expected to rise further in Q4 2008 and Q1 2009. The Q3 net write-off rate was 5.8%, increasing to 5.9% in September.
- Reengineering Initiatives: The company committed to a restructuring charge of approximately $370M to $440M (pretax) in Q4 2008. This includes eliminating ~7,000 positions (10% of workforce) and cutting operating costs, targeting $1.8 billion in annual benefits by 2009.
- Capital Markets: Access to unsecured term debt and asset securitization markets has been unavailable since late September 2008. The company is relying on commercial paper, bank deposits, and government facilities (CPFF, TLGP) for liquidity.
Risks and Contingencies
- Liquidity Risk: Severe disruption in capital markets could limit the ability to replace maturing liabilities. The company maintains $12 billion in cash equivalents and $9 billion in undrawn committed bank credit facilities.
- Rating Agency Actions: Moody's downgraded the company's long-term senior rating from A1 to A2 with a negative outlook. S&P placed ratings on CreditWatch with negative implications. Further downgrades could increase funding costs and trigger contractual obligations.
- Securitization Triggers: A decline in the "Total Trust Excess Spread Rate" could trigger early amortization of securitization trusts, requiring the company to fund receivables back onto its balance sheet, posing a severe liquidity challenge.
- Regulatory Risk: Proposed federal regulations regarding credit card practices (interest rate increases, payment allocation) could materially adversely affect results if adopted.
Investor Verification Checklist
- Liquidity Position: Verify the sufficiency of the $15.6 billion cash balance and undrawn credit lines against upcoming debt maturities ($3.6B in Q4 2008) given the freeze in securitization markets.
- Credit Loss Trajectory: Monitor the trend of net write-off rates (currently 5.8%) and the adequacy of the $2.64 billion cardmember lending reserve against the projected economic downturn.
- Reengineering Execution: Track the timing and magnitude of the $370M-$440M Q4 restructuring charge and the realization of the targeted $1.8 billion in 2009 cost savings.
- Interest Rate Spread: Assess the impact of the widening spread between LIBOR (funding cost) and the Prime Rate (lending yield) on net interest margins.
- Rating Agency Status: Watch for further rating actions from Moody's and S&P that could impact access to the Commercial Paper Funding Facility (CPFF) or trigger daily collection requirements in securitization trusts.