Business context and reporting period
American Express Company is a global payments company providing consumer and commercial credit and charge cards, merchant and network services, and travel and lifestyle products. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the first quarter of 2019. COVID-19 sharply affected activity late in the quarter: worldwide billings grew 5% in January and February combined, then fell 25% year over year in March.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue, net of interest expense | $10.31 billion | $10.36 billion | Down 1% |
| Provisions for credit losses | $2.62 billion | $809 million | Up $1.81 billion |
| Total expenses | $7.24 billion | $7.60 billion | Down 5% |
| Pretax income | $452 million | $1.96 billion | Down 77% |
| Net income | $367 million | $1.55 billion | Down 76% |
| Diluted EPS | $0.41 | $1.80 | Down $1.39 |
| Operating cash flow | $(2.22) billion | $8.55 billion | — |
| Investing cash flow | $21.93 billion | $(2.71) billion | — |
| Financing cash flow | $(5.42) billion | $(83) million | — |
Discount revenue, the largest revenue source, fell 6% to $5.84 billion. Worldwide billed business declined 6% to $279.3 billion (U.S. down 3%; outside the U.S. down 11%, or 7% on an FX-adjusted basis). The average discount rate decreased to 2.34% from 2.37%, reflecting a shift toward non-travel-and-entertainment spending. Net card fees rose 18% to $1.11 billion; net interest income increased 13% to $2.33 billion, supported by higher average loans and yields. Other fees and commissions fell 10%, and other revenue fell 14%.
Credit-loss provisions included a substantial reserve build reflecting the deteriorating economic outlook. At March 31, Card Member loans were $77.7 billion, down 4% year over year, and receivables were $44.7 billion, down 21%. Loan reserves were $5.24 billion, or 6.7% of loans, versus $2.12 billion a year earlier; receivables reserves were $459 million, or 1.0% of receivables. The overall $1.7 billion reserve build during the quarter was driven by revised macroeconomic assumptions.
Segment income was $201 million for Global Consumer Services Group, down 79%; $38 million for Global Commercial Services, down 93%; and $417 million for Global Merchant and Network Services, down 27%. Corporate & Other reported a $289 million net loss, improved from a $487 million loss, primarily because of a prior-year litigation charge.
Balance sheet, debt and liquidity
At March 31, 2020, total assets were $186.1 billion and shareholders’ equity was $21.0 billion. Cash and cash equivalents were $36.1 billion, up from $23.9 billion at year-end, primarily as loans and receivables declined. Total debt was $56.1 billion, down from $64.2 billion at December 31, 2019; customer deposits rose to $78.0 billion from $73.3 billion. The company reported a 11.7% Common Equity Tier 1 ratio, above its stated 10%–11% target range, and said it had sufficient liquidity for internal and regulatory requirements. It also had undrawn committed secured facilities of $5.0 billion and an undrawn $3.5 billion bank credit facility.
Material changes, outlook and risks
- Management said the sharp fall in business volumes continued into April. Results for the remainder of 2020 depend on the timing and strength of spending recovery, unemployment, small-business closures and resulting credit losses; the company said it could not determine these outcomes. No full-year earnings guidance was provided in the filing.
- Management anticipated a further decline in the average discount rate in the second quarter if late-March and April spending trends continued. It expected slower net card-fee growth as new-account growth slowed, and planned to reduce proactive marketing and operating expenses while continuing selected long-term investments and customer support.
- Under the new CECL credit-loss accounting standard, adopted January 1, 2020, the company increased loan reserves by $1.663 billion and reduced receivables reserves by $493 million at adoption; the after-tax opening retained-earnings reduction was $882 million. Comparisons of 2020 credit provisions and reserves with 2019 are not directly comparable because 2020 uses CECL and 2019 uses the prior incurred-loss method.
- The Customer Pandemic Relief Program had approximately $5.1 billion of Card Member and other loans and $3.4 billion of receivables enrolled as of April 19, based on balances at enrollment. The company warned that worsening forecasts could require another large reserve build in the second quarter.
- American Express repurchased 7.2 million shares for $0.9 billion during the quarter and paid $0.3 billion in common dividends, then suspended share repurchases because of uncertainty. It did not expect meaningful unsecured or secured term-debt issuance for the rest of 2020 and expected higher net interest expense from maintaining increased liquidity.
- Key risks include prolonged pandemic restrictions or weak recovery; elevated unemployment, customer defaults and reserve-estimation uncertainty; pressure on spending, travel, the discount rate and card fees; partner and merchant stress; funding-market and credit-rating changes; regulatory, antitrust and tax matters; and operational, cyber and fraud risks.
- The company reported pending legal matters and estimated a current possible loss range of zero to $190 million in excess of recorded accruals for certain matters; it cautioned that this is not a maximum exposure and actual results could vary significantly.
Important facts for investors to verify
- Subsequent-quarter billings, especially the pace of recovery from the 25% March decline, and trends in travel and commercial spending.
- Further credit-reserve changes, delinquency and write-off trends, and the performance of customers enrolled in pandemic relief programs.
- Cash, deposit and funding trends; the cost of maintaining liquidity; and whether capital ratios remain above regulatory requirements and management targets.
- Whether expense reductions, customer support and product investments affect customer retention, card-fee growth or longer-term competitive position.
- Developments in disclosed litigation and regulatory matters, including the potential effects of merchant steering or changes to card-network rules.