American Express Company — FY 2017 Form 10-K
Business context and reporting period. American Express is a global payments and financial services company operating consumer, commercial, merchant-acquiring and network businesses. This annual report covers the year ended December 31, 2017; the fourth-quarter figures are included below. Amounts are U.S. dollars unless noted.
Financial performance and position
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Revenue, net of interest expense | $33.471 billion | $32.119 billion | +4% |
| Net interest income | $6.441 billion | $5.771 billion | +12% |
| Provisions for losses | $2.759 billion | $2.026 billion | +36% |
| Total expenses | $23.298 billion | $21.997 billion | +6% |
| Pretax income | $7.414 billion | $8.096 billion | -8% |
| Income tax provision | $4.678 billion | $2.688 billion | +$1.990 billion |
| Net income | $2.736 billion | $5.408 billion | -49% |
| Diluted EPS | $2.97 | $5.65 | -47% |
- Tax and Q4: A provisional $2.6 billion charge tied to the Tax Cuts and Jobs Act drove the 2017 effective tax rate to 63.1% (28.4% excluding that charge, a non-GAAP measure). Fourth-quarter net loss was $1.197 billion, versus net income of $825 million in Q4 2016.
- Revenue drivers and margins: Worldwide billed business rose 5% to $1.085 trillion; U.S. volume increased 1% and non-U.S. volume 12%. Discount revenue grew 3% to $19.186 billion, while the average discount rate slipped to 2.43% from 2.45%. Net card fees grew 7% to $3.090 billion. Net interest yield on average Card Member loans, a non-GAAP measure, was 10.5%, up from 9.6%.
- Credit: Card Member loans increased 12% to $73.4 billion. Loan principal net write-off rate rose to 1.8% from 1.6%, and 30-plus-day delinquencies increased to 1.3% from 1.2%. Loan loss reserves were $1.706 billion, or 2.3% of loans, versus $1.223 billion, or 1.9%.
- Cash flow: Operating activities provided $13.540 billion; investing activities used $18.273 billion, largely reflecting growth in loans and receivables; financing activities provided $12.245 billion. Cash and cash equivalents increased $7.719 billion to $32.927 billion.
- Balance sheet and funding: Total assets were $181.159 billion, up from $158.893 billion. Customer deposits were $64.452 billion, compared with $53.042 billion; short- and long-term debt totaled $59.082 billion, compared with $52.571 billion. Shareholders’ equity declined to $18.227 billion from $20.501 billion.
- Capital and distributions: Company CET1 ratio was 9.0%, down from 12.3% at year-end 2016; the company reported that the tax charge, balance-sheet growth and capital returns contributed to the decline. It returned $5.5 billion to shareholders in 2017, including $4.3 billion of repurchases and $1.2 billion of common dividends.
Material changes and segment results
- International growth led overall billings, while U.S. consumer billings remained affected by the prior Costco portfolio transition. The prior-year comparison also included gains on sales of the Costco and JetBlue portfolios totaling about $1.2 billion, recorded as reductions in expenses.
- U.S. Consumer Services segment income fell 25% to $1.891 billion, as higher loan-loss provisions and expenses outweighed revenue growth. International Consumer and Network Services income rose 39% to $912 million; Global Commercial Services income rose 6% to $2.027 billion; Global Merchant Services income rose 8% to $1.574 billion.
- Card Member rewards expense increased 12% to $7.608 billion, mainly from enhanced Platinum benefits and higher spending. Marketing and promotion expense declined 12% to $3.217 billion, reflecting lower growth spending and efficiencies.
Outlook, commentary, risks and unusual items
- Management estimated a 2018 effective tax rate of approximately 22% before discrete items, following the federal corporate tax rate reduction to 21%. The $2.6 billion tax charge was provisional and subject to further analysis.
- Management expected average merchant discount rates to continue declining and lending delinquencies, write-off rates and provisions to rise as recent loan vintages season and the portfolio mix shifts toward non-cobrand lending.
- The company suspended share repurchases for the first half of 2018 to rebuild capital, while intending to maintain quarterly dividends at the then-current level. Any second-half repurchases were subject to the Federal Reserve’s 2018 capital-plan review.
- For 2018, the company planned approximately $6–13 billion of unsecured term debt issuance and $5–12 billion of secured term debt issuance. Funding access, market conditions, deposit costs and credit ratings remain relevant risks.
- Material exposures include intense payments competition, merchant pricing pressure, regulatory changes and data/cybersecurity risks. The DOJ/state antitrust matter concerning merchant anti-steering rules was awaiting U.S. Supreme Court review; related merchant litigation and arbitrations were stayed. The filing estimated a possible loss range of zero to $500 million above recorded reserves for certain disclosed legal and VAT matters where estimable; this was not the company’s maximum exposure.
- In August 2017, subsidiaries entered a CFPB consent order concerning card offerings in Puerto Rico, the U.S. Virgin Islands and other U.S. territories. The proposed U.S. bank conversion and merger were conditionally approved, with completion expected in the first half of 2018.
Important facts for investors to verify
- Whether the provisional Tax Act charge, deemed-repatriation tax and deferred-tax estimates were finalized or revised.
- Subsequent trends in loan delinquencies, write-offs, reserves and loan growth, particularly for U.S. consumer lending.
- Progress in rebuilding CET1 capital and the Federal Reserve’s decisions on capital distributions and any resumed buybacks.
- Actual discount-rate erosion, billed-business growth and merchant acceptance as competition and regulation evolve.
- Developments in the Supreme Court antitrust case, merchant claims and the CFPB consent-order remediation.
- Execution and financial effects of the proposed U.S. prepaid-business transition to InComm, which remained subject to final agreements.