American Express Company (AXP) — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; comparisons are generally with the quarter ended September 30, 2022. Financial statements are unaudited. American Express is a global payments company offering consumer and business card, lending, merchant, network, travel and related services.
Financial performance and key metrics
- Q3 revenue: Revenue net of interest expense was $15.38 billion, up 13%. Non-interest revenue rose 9% to $11.94 billion; net interest income rose 34% to $3.44 billion.
- Profit: Net income was $2.45 billion, up 30%; diluted EPS was $3.30, up 34%. Pretax income increased 26% to $3.10 billion. The effective tax rate was 20.9%, versus 23.6%.
- Costs and credit provisions: Total expenses rose 7% to $11.05 billion. Provisions for credit losses increased 58% to $1.23 billion, primarily reflecting higher write-offs and loan growth.
- Spending and card base: Network volumes increased 7% to $420.2 billion; billed business increased 8% to $366.2 billion. Cards-in-force grew 5% to 138.2 million. Travel and entertainment spending rose 13%, while goods and services spending rose 6%.
- Credit: Card Member loans were $118.0 billion, up 19% year over year; receivables were $58.8 billion, up 6%. The loan net write-off rate including principal, interest and fees rose to 2.2% from 1.1%; 30+ day delinquency on loans rose to 1.3% from 0.9%. The loan credit reserve was $4.72 billion, or 4.0% of loans, versus 3.4% a year earlier.
- Cash flow (nine months): Operating cash flow was $11.8 billion, compared with $12.6 billion; investing cash outflow was $16.3 billion, versus $22.9 billion; financing cash inflow was $14.3 billion, versus $18.9 billion. Cash and cash equivalents increased $10.0 billion during the period.
- Balance sheet and funding (September 30, 2023): Cash and cash equivalents were $43.9 billion, versus $33.9 billion at December 31, 2022. Customer deposits were $124.4 billion, long-term debt $46.4 billion and short-term borrowings $1.6 billion. Total assets were $250.6 billion and shareholders’ equity was $27.3 billion.
- Capital and shareholder returns: The company’s CET1 ratio was 10.7%, within its 10%–11% target range. It returned $1.7 billion to common shareholders in Q3, including $1.3 billion of repurchases and $0.4 billion of dividends; the quarterly dividend declared was $0.60 per share.
Material changes versus the prior comparable period
- For the first nine months, revenue net of interest expense increased 16% to $44.72 billion, while net income rose 8% to $6.44 billion and diluted EPS rose 11% to $8.59.
- Nine-month provisions for credit losses increased to $3.49 billion from $1.16 billion, principally reflecting higher write-offs and growth in loans and receivables. Management noted that prior-year write-off rates were near historic lows.
- Q3 billed business grew 9% in U.S. Consumer Services and 18% in International Card Services, but only 1% in Commercial Services. International growth was 15% on an FX-adjusted basis.
- Higher interest rates contributed to increased interest income and interest expense, including higher costs paid on customer deposits. Net card fees grew 20% in Q3, reflecting premium portfolio growth and card acquisition and retention.
- Marketing expense declined 15% in Q3 due to management’s timing of acquisition and engagement spending. Salaries and employee benefits rose 17%, with higher compensation and staffing; card services and business development costs also increased.
Outlook, commentary, risks and unusual items
- Management cited continued business momentum and confidence in the business model, and stated its commitment to sustainable, profitable long-term growth. It intends to return excess capital while managing CET1 within its target range. The filing text does not provide a clear quantified earnings or revenue forecast.
- Management highlighted ongoing uncertainty in the geopolitical and macroeconomic environment. Risks discussed include recession, inflation and interest-rate changes; weaker consumer or business spending; worsening credit performance; competition; funding and capital-market conditions; cyber and operational threats; and regulatory or litigation outcomes.
- A proposed U.S. Basel III capital framework could materially change capital requirements. Based on preliminary analysis, the company said the proposed expanded risk-based approach could consume the buffer between its current CET1 ratio and minimum requirements; the ultimate effect depends on final rules and management actions.
- In July 2023, the company paid a $15 million OCC civil money penalty resolving a review of historical small-business sales practices. Related DOJ, U.S. Attorney and New York DFS investigations remained ongoing; the CFPB said it did not intend to recommend an enforcement action at that time.
- Merchant antitrust and other legal matters remain pending. For matters where a loss is reasonably possible and estimable, the company disclosed a current range of zero to $310 million in excess of recorded accruals; this is not its maximum possible exposure. The company warned that adverse merchant outcomes could also affect its business.
- Other regulatory uncertainties include a proposed CFPB reduction to the credit-card late-fee safe harbor and litigation over small-business credit data reporting requirements. The filing also describes possible regulatory pressure on merchant pricing, network practices and European cobrand relationships.
Important facts for investors to verify
- Whether rising write-offs and delinquencies continue, and how they affect provisions, reserve coverage and profitability.
- Whether card spending, particularly U.S. commercial billings, sustains growth as travel demand and broader economic conditions change.
- The final impact and timing of proposed Basel III capital rules on CET1 requirements, capital distributions and business strategy.
- Developments in the sales-practices investigations, merchant litigation and other legal or regulatory matters, including any additional costs or required business changes.
- How deposit funding costs, debt issuance and loan growth affect net interest income, liquidity and funding needs.