Business context and reporting period
American Express Company’s unaudited Form 10-Q covers the three months ended March 31, 2015, compared with the first quarter of 2014. Its four reportable segments are U.S. Card Services (USCS), International Card Services (ICS), Global Commercial Services (GCS), and Global Network & Merchant Services (GNMS). Business travel was deconsolidated into a joint venture effective June 30, 2014, making year-over-year comparisons less comparable, particularly for travel revenue and GCS expenses.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 or comparison |
|---|---|---|
| Revenue net of interest expense | $7.950 billion | $8.173 billion; down 3% |
| Net income | $1.525 billion | $1.432 billion; up 6% |
| Diluted EPS | $1.48 | $1.33; up 11% |
| Net interest income | $1.447 billion | $1.337 billion; up 8% |
| Provisions for losses | $420 million | $485 million; down 13% |
| Total expenses | $5.214 billion | $5.480 billion; down 5% |
| Operating cash flow | $2.126 billion | $3.285 billion |
| Cash and cash equivalents, March 31 | $23.572 billion | $22.288 billion at December 31, 2014 |
| Short-term borrowings / long-term debt, March 31 | $2.361 billion / $54.712 billion | $3.480 billion / $57.955 billion at December 31, 2014 |
Worldwide billed business rose 3% to $245.6 billion, or 7% excluding foreign-exchange effects. U.S. billed business increased 6%; billed business outside the U.S. declined 3% as reported but grew 8% on a constant-currency basis. The average discount rate was 2.49%, versus 2.51%. Average Card Member loans increased 5% year over year to $67.6 billion; the loan net interest yield was 9.6%, compared with 9.5%.
At March 31, total assets were $154.684 billion, total liabilities $132.854 billion, and shareholders’ equity $21.830 billion. Customer deposits totaled $44.928 billion. The company reported a 13.8% Common Equity Tier 1 ratio, 14.9% Tier 1 ratio, and 16.8% total risk-based capital ratio under transitional Basel III. Trailing-12-month return on average equity was 29.0%; return on average tangible common equity was 36.2%.
Cash from investing activities was $2.821 billion and financing activities used $3.542 billion. Operating cash flow was lower year over year, mainly reflecting a decline in accounts payable associated with merchant-payment volumes. Financing cash flows included $3.1 billion of long-term debt principal payments, $791 million of common-share repurchases, $268 million of dividends paid, and $841 million from preferred-share issuance.
Material changes versus the prior comparable period
- Revenue net of interest expense fell $223 million, primarily because travel commissions and fees declined $334 million following the GBT joint-venture transaction. Discount revenue increased 1% as reported, while net interest income rose with higher average loan balances and lower interest expense.
- Net income and diluted EPS increased despite lower reported revenue, supported by lower provisions and expenses. Expense comparisons also reflect the GBT deconsolidation and favorable foreign-currency-related items.
- Provisions declined partly because charge-card provisions reflected a reserve release, compared with a reserve build in Q1 2014. Management expects provisions to increase later in 2015.
- Card Member rewards expense increased 4%, and Card Member services and other expense increased 18%, with renewed co-brand relationships contributing to higher costs. Marketing and promotion expense increased 4%.
- Other comprehensive loss was $232 million, mainly reflecting a $255 million foreign-currency translation loss; comprehensive income was $1.293 billion.
Outlook, risks, contingencies, and unusual items
- Management forecast full-year 2015 EPS growth to be flat to modestly down, despite Q1 growth exceeding its full-year expectations. It attributed the stronger quarter partly to the timing of growth spending and expense and provision benefits it did not expect to persist. Management expected positive EPS growth in 2016 and 12%–15% growth in 2017 and beyond.
- Management expected foreign exchange to remain a headwind, marketing expense to remain near 2014’s elevated level, and quarterly earnings to be more uneven during the transition. It cited uneven global growth, slower U.S. retail and corporate spending, lower fuel prices, and increased co-brand costs.
- The U.S. Costco co-brand and merchant-acceptance agreements will expire March 31, 2016 and will not be renewed. The company said it had begun to see slower new U.S. Costco co-brand acquisitions and anticipated investment to attract affected Card Members.
- A trial court ruled for the U.S. Department of Justice in February 2015 over merchant-contract provisions restricting discrimination against American Express cards. The remedy remained to be determined; the company intended to appeal. The filing warns that an adverse remedy could materially affect the business.
- Pending legal and governmental matters had an estimated reasonably possible loss range of $0–$360 million in excess of accrued liabilities, where estimable; this is not the company’s maximum exposure. Management did not believe pending matters would materially adversely affect consolidated financial condition or liquidity, but an outcome could materially affect a particular period’s results.
- Potential EU payment regulation could affect partner arrangements, merchant acceptance rules, and pricing across the industry. Other risks cited include intense payment-industry competition, possible higher short-term rates, and failure to renew U.S. active-financing tax legislation.
- The company said it maintained liquidity sufficient for at least 12 months under its stated stress approach and complied with applicable liquidity requirements, including the Liquidity Coverage Ratio. It had $6.6 billion of committed bank credit facilities and undrawn $3.0 billion and $2.0 billion securitization facilities.
- The Federal Reserve did not object to a capital plan permitting up to $6.6 billion of repurchases from Q2 2015 through Q2 2016 and a proposed quarterly dividend increase from $0.26 to $0.29 beginning in Q2 2015, subject to board approval. Q1 shareholder returns were approximately $1.0 billion.
- Unusual accounting and presentation items include a revised classification of certain partner payments that reduced both discount revenue and marketing expense; prior periods were revised and were not materially misstated. The company also changed charge-off timing for certain modification-program accounts from 180 to 120 days past due.
Important facts for investors to verify
- How the Costco U.S. agreement expiration affects billed business, card acquisitions, merchant acceptance, and the timing and returns of replacement investments.
- Whether full-year EPS, expense-control, and later-year provision expectations remain achievable as growth spending ramps up.
- The final remedy and appeal outcome in the DOJ merchant-contract case, and the implications of EU payment regulation for discount rates and GNS partnerships.
- Underlying revenue and expense trends after separating foreign-exchange effects and the GBT deconsolidation from reported year-over-year comparisons.
- Credit quality and reserve trends, including the effect of the changed charge-off timing on reported loss measures.