American Express Company — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; filed October 24, 2017. American Express is a global payments and financial services company with consumer, international/network, commercial, and merchant services segments. Financial statements are unaudited.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue, net of interest expense | $8.436B (+9%) | $7.774B | $24.632B (+2%) | $24.097B |
| Provisions for losses | $769M (+53%) | $504M | $1.926B (+37%) | $1.401B |
| Total expenses | $5.840B (+6%) | $5.535B | $17.113B (+9%) | $15.761B |
| Pretax income | $1.827B | $1.735B | $5.593B | $6.935B |
| Net income | $1.356B (+19%) | $1.142B | $3.933B (-14%) | $4.583B |
| Diluted EPS | $1.50 (+25%) | $1.20 | $4.30 (-10%) | $4.76 |
Q3 net interest income rose 26% to $1.675B; for the nine months it increased 8% to $4.705B. Q3 effective tax rate was 25.8%, versus 34.2%; nine-month rates were 29.7% and 33.9%. Management attributed the lower rates mainly to foreign tax credits and geographic earnings mix, with prior-year tax resolutions also benefiting the nine-month comparison.
At September 30, cash and cash equivalents were $26.2B; total assets $168.6B; total liabilities $147.5B; and shareholders’ equity $21.1B. Debt totaled $51.1B ($2.3B short-term and $48.8B long-term), while customer deposits were $61.3B. These balances compare with $52.6B of debt and $53.0B of deposits at year-end 2016.
For the nine months, operating cash flow was $8.6B, investing cash outflow $10.5B, financing cash inflow $2.6B, and cash increased $1.0B. The investment outflow reflected growth in card loans and receivables and restricted cash; the prior-year comparison included proceeds from portfolio sales. Q3 dividends declared were $0.35 per share. The company repurchased 15.2 million shares in Q3 for $1.3B at an average $86.08 per share.
Material changes versus prior periods
- Worldwide billed business grew 8% in Q3 and 3% year to date. U.S. billed business grew 7% in Q3 but declined 1% year to date; non-U.S. billed business rose 10% and 11%, respectively.
- Q3 revenue growth reflected higher spending and net interest income. Card Member loans grew 12% year over year to $67.9B; receivables grew 14% to $51.5B.
- Credit costs increased: Q3 loan-loss provisions rose 66% to $531M, and charge-card provisions rose 23% to $214M. The loan reserve was $1.502B, up from $1.223B at December 31, 2016. Q3 loan net write-off rate (principal only) was 1.8%, versus 1.7%; 30+ day delinquencies were 1.3%, versus 1.1%.
- Nine-month net income and EPS declined despite higher revenue, in part because 2016 included $1.218B of gains on sales of the JetBlue and Costco portfolios. The portfolio sales also make some year-to-date segment and revenue comparisons less comparable.
- Rewards expense increased 21% in Q3 to $1.9B, partly reflecting enhanced Platinum benefits and higher spending. Marketing expense fell 12% to $814M. Management said operating expenses were flat year over year excluding current-period charges and prior-year restructuring costs.
Outlook, commentary, risks, and unusual items
- Management said net interest yield had increased due to product mix, fewer introductory-rate balances, pricing actions, and higher benchmark rates; it expects yield to stabilize and net interest income growth to moderate.
- Management expects provisions for losses to continue growing faster than loans, reflecting loan growth, expected increases in delinquencies and write-off rates, seasoning loan vintages, and mix shift toward non-cobrand lending. Q3 provisions also included a small reserve build related to recent hurricanes.
- Management estimated an ongoing tax rate of approximately 32%, subject to discrete items. No specific full-year revenue or earnings guidance is provided in the filing text.
- The average discount rate declined to 2.42% in Q3 from 2.47%. Management expects pressure to continue from merchant negotiations, competition, OptBlue growth, and pricing regulation.
- Q3 included impairment and other charges related to the U.S. loyalty coalition and prepaid businesses; the filing text does not provide a clear amount. Regulatory, competition, credit, interest-rate, funding, foreign-exchange, and operational risks remain relevant.
- For material legal proceedings and VAT matters where losses are reasonably possible and estimable, the company disclosed a current estimated range of $0–$500M in excess of related reserves; this is not a maximum exposure estimate. Management said no known proceeding is expected to materially affect consolidated financial condition or liquidity, though outcomes could materially affect results.
- The U.S. Supreme Court granted review of the DOJ merchant anti-steering case on October 16, 2017. The CEO transition to Stephen J. Squeri, effective February 1, 2018, was announced October 18, 2017.
- Regulatory capital ratios exceeded stated minimums: American Express Company reported 11.9% CET1 and 14.7% total risk-based capital under transitional Basel III. The filing also reports ample committed and secured facilities, with no amounts drawn at September 30; $3.0B was drawn on the Charge Trust facility on October 6.
Important facts for investors to verify
- Whether rising delinquencies, write-off rates, and loan-loss provisions continue to outpace loan growth, and how reserve adequacy develops.
- Whether spending growth and lending yields offset ongoing discount-rate pressure, rewards costs, and higher funding costs.
- The amount and future effects of the U.S. loyalty coalition and prepaid business charges, and whether cost-reduction savings persist.
- Developments in the DOJ merchant case, other legal and VAT matters, and payment-system and consumer-finance regulation.
- Capital returns, deposit and debt funding trends, and liquidity needs, including the impact of the October facility draw.
- The effect of the 2016 portfolio-sale gains and the 2018 revenue-recognition standard on period-to-period comparability; management expects significant revenue/expense reclassifications under the new standard but no net-income impact.