Business context and reporting period
American Express Company (NYSE: AXP) filed this Form 10-K for the fiscal year ended December 31, 2010. Its principal businesses are U.S. Card Services, International Card Services, Global Commercial Services, and Global Network & Merchant Services. The company combines card issuing, merchant acquiring and processing, network services, and travel and other fee-based services. Several financial statements and MD&A details are incorporated by reference to the 2010 Annual Report to Shareholders and are not reproduced in the supplied filing text.
Financial performance and key metrics
| Metric | 2010 | 2009 | Change or context |
|---|---|---|---|
| Revenue, net of interest expense | $27.8 billion | $24.5 billion | Up 13% |
| Income from continuing operations | $4.1 billion | $2.1 billion | Up 90% |
| Net income | $4.057 billion | $2.130 billion | Up 90% |
| Diluted EPS | $3.35 | $1.54 | Up 118% |
| Return on average equity | 27.5% | 14.6% | Improved |
| Return on average assets | 2.8% | 1.8% | Improved |
| Net interest income | $4.869 billion | $3.124 billion | Net yield on interest-earning assets rose to 5.3% from 4.3% |
| Worldwide billed business | $713 billion | Not clearly provided | Cards-in-force: 91.0 million at year-end |
Management attributed improved results to stronger cardmember spending and better credit performance. Average balances of total assets were $144.2 billion in 2010 versus $122.2 billion in 2009; these are annual averages, not year-end balances. The filing excerpt does not provide a clear consolidated cash-flow figure, year-end total debt, or full margin measures.
Credit, funding and liquidity indicators
- Cardmember loans were $61.3 billion at year-end versus $33.3 billion in 2009; the comparison is not like-for-like because new accounting rules brought the Lending Trust onto the balance sheet from January 1, 2010.
- Cardmember receivables were $37.3 billion versus $33.7 billion. Loan-loss allowance was $3.646 billion versus $3.268 billion; receivables-loss allowance was $386 million versus $546 million.
- Cardmember loan net write-off rate was 5.6% versus 8.5%; cardmember receivables net write-off rate was 1.7% versus 3.6%. Despite improved rates, loan net write-offs rose to $3.619 billion from $3.397 billion, while receivables net write-offs declined to $598 million from $1.131 billion.
- Customer deposits were approximately $29.7 billion at year-end. The filing describes funding through deposits, debt, securitizations, commercial paper, committed bank facilities and other liquidity sources.
- Year-end commercial paper was $645 million; other short-term borrowings were $2.769 billion. Average long-term debt was approximately $68.3 billion versus $55.5 billion in 2009; average balances should not be read as year-end debt.
- Available-for-sale securities were $14.010 billion at year-end, compared with $24.337 billion in 2009. The excerpt does not provide a complete cash balance or cash-flow statement.
Material changes versus the prior comparable period
- Revenue, net income, diluted EPS, returns on average assets and equity, and net interest income all improved materially from 2009.
- Management reported record cardmember spending by year-end and improving credit trends. It cautioned that the year-over-year benefit from credit improvement was expected to diminish during 2011.
- Reported loan balances increased sharply, principally reflecting consolidation of the Lending Trust under new accounting guidance; prior periods were not restated.
- Quarterly litigation settlement payments from MasterCard and Visa—$600 million and $280 million, respectively, in each of 2010 and 2009—were expected to end in the second and fourth quarters of 2011, respectively.
- The company repurchased 14.2 million common shares in the fourth quarter of 2010. Dividends declared were $0.72 per share, unchanged from 2009.
Outlook, management commentary, risks and contingencies
For 2011, management highlighted merchant value, customer-base expansion, international growth, digital and online spending, and development of fee-based services. The company set a goal of $3 billion in annual fee-based revenues by the end of 2014. It also cited an annualized gross expense-savings goal of approximately $500 million by 2012 for Global Services. The filing provides no specific 2011 earnings or revenue guidance.
- Credit and economic conditions: Weak employment, uncertain consumer confidence and housing conditions, and possible economic deterioration could affect spending, defaults, reserves and profitability. Management said it intended to retain flexibility to scale investment if conditions or credit benefits changed.
- Regulation: The CARD Act, Dodd-Frank, forthcoming debit/prepaid rules, and the new Consumer Financial Protection Bureau could alter pricing, products, funding, capital and compliance costs. Their ultimate effects were uncertain.
- Legal matters: The DOJ and multiple state attorneys general sued over merchant anti-steering and non-discrimination provisions, seeking injunctive relief. Merchant litigation also challenges these provisions. The filing states that aggregate reasonably possible losses for disclosed matters were estimated at zero to $500 million above accrued liabilities, where estimable; this is not the maximum possible exposure.
- Funding and capital: Access to debt and securitization markets, deposit growth, credit ratings and regulatory capital requirements could affect liquidity and funding costs. The Federal Reserve had not yet responded to the company’s request for approval of further 2011 share repurchases.
- Competition and operations: Alternative payments, mobile and online competitors, merchant pricing pressure, data breaches, technology disruption, outsourcing dependencies, foreign exchange, and reliance on airline and other partners are significant risks.
- Unusual items and transactions: Accertify was acquired in November 2010. The announced $660 million Loyalty Partner acquisition was expected to close in the first quarter of 2011. The excerpt does not quantify the full effect of these transactions on 2010 earnings or cash flow.
Important facts for investors to verify
- Review the incorporated 2010 Annual Report for the full cash-flow statement, year-end balance sheet, debt maturities, segment results, capital ratios and detailed liquidity disclosures.
- Separate underlying loan growth and credit trends from the Lending Trust consolidation effect; compare consistent portfolio definitions and write-off measures.
- Assess the 2011 earnings impact of the expiry of Visa and MasterCard settlement payments and the anticipated reduction in credit-related tailwinds.
- Track outcomes and potential costs from DOJ, state attorney general and merchant litigation, including the anti-steering case and disclosed loss range.
- Monitor final Dodd-Frank, CARD Act and capital/liquidity regulations, and their effects on merchant fees, prepaid products, deposits, dividends and repurchases.
- Test whether the fee-revenue and cost-savings goals can be achieved while the company sustains investment, rewards spending and credit quality.