American Express Company — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; comparison is primarily with the corresponding 2019 periods. The filing is unaudited. American Express is a global payments company whose revenue is driven by card spending, lending, card fees, and merchant/network services.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Revenue, net of interest expense | $7.675 billion | $10.838 billion | -29% |
| Provisions for credit losses | $1.555 billion | $861 million | +81% |
| Total expenses | $5.498 billion | $7.758 billion | -29% |
| Pretax income | $622 million | $2.219 billion | -72% |
| Net income | $257 million | $1.761 billion | -85% |
| Diluted EPS | $0.29 | $2.07 | -86% |
- For the six months, revenue net of interest expense fell 15% to $17.985 billion; provisions rose to $4.176 billion from $1.670 billion; net income fell 81% to $624 million; diluted EPS was $0.71 versus $3.87.
- Q2 discount revenue fell 39% to $4.015 billion as billed business declined 34% and the average discount rate fell to 2.23% from 2.37%. Net card fees increased 15% to $1.141 billion. Net interest income declined 9% to $1.884 billion.
- Expenses declined largely with lower billings and travel-related benefit use: Card Member rewards fell 49%, and marketing and business development fell 23% year over year.
- Credit reserves were a major earnings factor. The company recorded a $1.1 billion reserve build related to deteriorating macroeconomic forecasts, partly offset by lower loan and receivable balances. Q2 provision also included a $53 million corporate-client receivable write-off; an expected insurance recovery reduced other expense.
Business trends and segments
- Worldwide billed business declined 34% in Q2, with sequential improvement: down 40% in April, 36% in May, and 26% in June. Travel and entertainment spending was down 87% for the quarter; non-T&E spending was down 13%.
- U.S. billed business fell 32%; outside the U.S. it fell 38%. Large and global corporate billed business declined 64%, compared with a 27% decline for small and midsized businesses.
- Global Consumer Services Group Q2 segment income was $527 million, down 40%. Global Commercial Services reported a $60 million segment loss versus $561 million income a year earlier. Global Merchant and Network Services segment income fell 88% to $66 million.
- Card Member loans were $70.1 billion, down 16% year over year; receivables were $37.6 billion, down 36%. The loan reserve was $5.628 billion, or 8.0% of loans, compared with 2.6% a year earlier. Reported delinquencies and write-off rates increased in several portfolios, though pandemic relief programs affect delinquency aging.
Cash, capital, debt, and liquidity
- At June 30, cash and cash equivalents were $41.5 billion, up from $23.9 billion at year-end 2019. Six-month operating cash flow was negative $89 million, versus positive $11.477 billion in 2019; investing cash flow was positive $22.146 billion, largely reflecting declines in card balances. Financing cash flow was negative $4.780 billion.
- Total debt was $50.4 billion, down from $64.2 billion at December 31, 2019; customer deposits rose to $84.8 billion from $73.3 billion. The company reported no borrowings under its $3.5 billion committed bank facility or its two revolving secured facilities.
- American Express’s CET1 ratio was 13.6% and its bank subsidiary’s was 18.0%, both above stated regulatory minimums and company targets. Management said liquidity and capital had been strengthened and were sufficient for the uncertain environment.
- Share repurchases were suspended beginning in March. The company intended to maintain its $0.43 quarterly common dividend for Q3, subject to board approval and regulatory constraints.
Outlook, risks, and unusual items
- Management provided no quantitative earnings or revenue guidance. It said the pandemic’s duration and economic effects remained highly uncertain, and warned that continued billed-business declines would materially affect results. A shift toward non-T&E spending could further pressure the discount rate.
- The company adopted CECL on January 1, 2020. Adoption increased loan reserves by $1.663 billion and reduced receivable reserves by $493 million, with an after-tax $882 million reduction to opening retained earnings. 2020 credit-loss results are therefore not directly comparable with 2019, which used the prior incurred-loss method.
- Customer Pandemic Relief balances peaked at $8.5 billion in April and declined to $0.7 billion at June 30. Longer-term financial-relief program balances were approximately $2.6 billion; delinquent loans and receivables totaled $1.9 billion.
- The Q2 effective tax rate was 58.7%, versus 20.6%, reflecting discrete charges primarily related to foreign deferred tax assets and lower pretax income. A prior-year litigation charge affected six-month expense comparisons.
- Legal proceedings include merchant antitrust claims and international VAT disputes. For certain material legal matters where a range could be estimated, the company disclosed a possible loss of zero to $200 million in excess of accruals; this is not a maximum exposure. The filing also noted increased potential exposure from travel-related Card Member purchase protections, which could not be quantified.
- Other risks include renewed or prolonged COVID-19 restrictions, worsening consumer and business credit, partner or merchant distress, regulatory changes affecting payments and discount revenue, competition, cyber incidents, funding costs, and capital-distribution restrictions.
Important facts for investors to verify
- Whether the improvement in billed business after April continued, especially in travel and large-corporate spending, and whether discount-rate pressure persisted.
- How credit performance and reserve estimates evolve as relief programs end and CECL forecasts change; review delinquency, write-off, reserve coverage, and relief-program balances together.
- Whether cash generation normalizes and the high liquidity position remains appropriate given its stated funding cost; monitor deposits, debt maturities, and access to funding markets.
- Whether regulatory approvals and capital requirements permit the planned dividend, and whether share repurchases remain suspended.
- Developments in merchant litigation, VAT matters, travel-related protection claims, and the ultimate effect of COVID-19 on operating results.