American Express Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. American Express is a global payments and services company operating through U.S. Consumer Services, International Consumer and Network Services, Global Commercial Services, Global Merchant Services, and Corporate & Other.
Financial performance and position
- Revenue: Revenue net of interest expense was $7.889 billion, down 2% from $8.088 billion. Non-interest revenue declined 2%; net interest income declined 5% to $1.500 billion. Net card fees rose 7% to $748 million.
- Profit: Net income was $1.237 billion, down 13%; diluted EPS was $1.34, down 8% from $1.45. Pretax income was $1.817 billion. The effective tax rate fell to 31.9% from 34.7%. Reported ROE was 25.1% versus 23.6%.
- Credit costs: Provisions for losses rose 32% to $573 million, including $337 million for Card Member loans. Loan reserves were $1.248 billion, or 2.0% of loans, versus $1.223 billion at year-end. Loan principal net write-off rate rose to 1.7% from 1.5%; 30+ day delinquencies rose to 1.2% from 1.1%.
- Expenses and margins: Total expenses increased 1% to $5.499 billion. Rewards expense increased 6% to $1.807 billion, while salaries and benefits fell 6%. Total revenues after provisions were $7.316 billion; the filing does not provide a single consolidated operating-margin figure.
- Cash flow: Operating cash flow was $1.160 billion, down from $2.529 billion; investing cash flow provided $700 million, down from $3.640 billion; financing provided $2.205 billion versus $3.924 billion used in Q1 2016. Cash and equivalents rose to $29.366 billion from $25.208 billion, with a $4.158 billion net increase.
- Balance sheet and funding: Total assets were $161.385 billion and shareholders’ equity $20.935 billion. Debt was $55.2 billion ($3.6 billion short-term and $51.6 billion long-term), up from $52.6 billion at year-end; customer deposits were $53.8 billion. Transitional Basel III company ratios included 12.7% CET1 and 15.6% total capital. The company reported $3.0 billion of undrawn committed bank credit and approximately $252 billion of unused credit outstanding, not all of which is expected to be drawn.
- Shareholder returns: The company repurchased 10.9 million shares for $0.8 billion and paid $0.3 billion in common dividends; total returns were approximately $1.1 billion.
Changes versus the prior comparable period
- The end of the U.S. Costco cobrand relationship in June 2016 makes year-over-year comparisons less comparable. Management attributed much of the reported revenue and U.S. billed-business decline to Costco-related prior-year activity. Worldwide billed business was down 1% reported and flat on an FX-adjusted basis; it grew excluding prior-year Costco billings.
- U.S. billed business declined 6%, while non-U.S. billed business rose 12%. Average basic Card Member spending increased 11% worldwide; worldwide cards-in-force fell 6%, primarily reflecting the portfolio change.
- Reported revenue was weaker, but management said adjusted revenue excluding Costco effects and foreign exchange grew, driven by billed business, adjusted net interest income, and card fees. No exact adjusted growth rate is stated in the supplied filing text.
- Provisions increased with lending growth, slightly higher delinquencies, and higher write-off rates. Management cited seasoning of newer-cardmember loans and a shift toward non-cobrand lending products.
Outlook, commentary, and risks
- Management said it expected provisions to grow faster than loans during the balance of 2017. No specific full-year earnings or revenue guidance is provided in the supplied filing text.
- Management cited continued progress on growth and cost initiatives, strong middle-market and small-business performance, and strong international consumer and small-business billings. Cost reduction initiatives contributed to lower operating expenses.
- Competition, merchant pricing pressure, cobrand renewals, regulatory changes, and the ability to sustain cardmember spending and rewards economics remain significant risks. Management expected the average discount rate to likely decline over time amid OptBlue expansion, merchant negotiations, competition, volume discounts, and pricing regulation.
- Legal proceedings and VAT matters are ongoing. For specified matters where possible losses could be estimated, the company disclosed a current range of $0 to $440 million in excess of related reserves; this is not a maximum exposure. Management said outcomes could materially affect results, though it did not believe current matters would materially affect consolidated financial condition or liquidity.
- The company prevailed in the U.S. Department of Justice merchant-acceptance antitrust case after the Second Circuit reversal and entry of judgment in its favor in January 2017; related merchant claims and other proceedings continue.
- A prior-year $127 million gain on the JetBlue portfolio sale and other HFS portfolio effects affect comparability. In Q1 2017, resolution of a prior-year tax position resulted in a $289 million benefit recorded in equity/AOCI, not net income.
- Management identified expected liquidity coverage requirements as an ongoing consideration, but did not expect significant changes to funding programs based on its current understanding. It also noted that the Federal Reserve’s 2017 capital-plan decision was pending.
Important facts for investors to verify
- How much underlying billed-business and revenue growth persists after separating Costco effects, foreign exchange, and other portfolio changes.
- Whether rising loan provisions, delinquencies, and write-off rates develop as management expects, particularly as newer loans season and lending mix changes.
- The sustainability of rewards and cardmember-service costs, merchant discount rates, and the returns from growth and cost initiatives.
- Developments in legal, VAT, consumer-protection, payments-regulation, and merchant claims, including potential losses beyond recorded reserves.
- Debt maturities, funding costs, liquidity needs, and the outcome of regulatory capital-plan review as shareholder returns continue.