American Express Company (NYSE: AXP) — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results; this is an annual filing, not a standalone Q4 10-K. Unless indicated otherwise, amounts are U.S. dollars.
Business context
American Express operates an integrated card-issuing, merchant-acquiring and payments network business. Its three reportable segments are Global Consumer Services Group (GCSG), Global Commercial Services (GCS) and Global Merchant and Network Services (GMNS). Worldwide billed business was $1,240.8 billion, up 5%; proprietary billed business was $1,070.5 billion, up 7%.
Financial performance and position
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Revenue, net of interest expense | $43.56 billion | $40.34 billion | +8% |
| Net interest income | $8.62 billion | $7.66 billion | +12% |
| Provisions for losses | $3.57 billion | $3.35 billion | +7% |
| Total expenses | $31.55 billion | $28.86 billion | +9% |
| Pretax income | $8.43 billion | $8.12 billion | +4% |
| Net income | $6.76 billion | $6.92 billion | -2% |
| Diluted EPS | $7.99 | $7.91 | +1% |
| Return on average equity | 29.6% | 33.5% | Down |
Net income margin on revenue net of interest expense was approximately 15.5%, compared with 17.2% in 2018; the comparison reflects, in part, a lower 2018 tax rate from discrete tax benefits. The 2019 effective tax rate was 19.8%, versus 14.8% in 2018.
- Revenue drivers: Discount revenue rose 6% to $26.17 billion, while net card fees rose 17% to $4.04 billion. The average discount rate was unchanged at 2.37%. Net interest income growth reflected higher loan balances and yield.
- Credit: Card Member loans were $87.4 billion, up 7%. The worldwide loan net write-off rate, including principal, interest and fees, rose to 2.7% from 2.4%; 30-plus-day delinquencies increased to 1.5% from 1.4%.
- Cash flow: Operating activities provided $13.6 billion; investing activities used $16.7 billion; financing activities used $0.5 billion. Cash, cash equivalents and restricted cash decreased $3.4 billion. Operating cash flow increased from $8.9 billion in 2018, largely due to the timing of payments.
- Balance sheet and funding: Cash and cash equivalents were $23.9 billion; total assets were $198.3 billion and shareholders’ equity was $23.1 billion. Total debt was $64.2 billion and customer deposits were $73.3 billion. Company CET1 capital ratio was 10.7%, down from 11.0%; management’s target range was 10%–11%.
- Shareholder returns: The company returned $5.9 billion in 2019 through $4.6 billion of repurchases and $1.4 billion of common dividends. It repurchased 40 million shares; dividends declared per common share were $1.64.
Fourth quarter: Revenue, net of interest expense, was $11.37 billion, pretax income was $1.99 billion and net income was $1.69 billion. Diluted EPS was $2.03, compared with $2.32 in Q4 2018.
Material changes versus 2018
- Revenue growth slowed to 8% from 9%; worldwide billed-business growth slowed to 5% from 9%. Proprietary billings grew 7%, while GNS billings declined 6% (down 2% after foreign-exchange adjustment), partly reflecting exits from network businesses in Europe and Australia.
- Expenses grew faster than revenue, with Card Member services expense up 25%, marketing and business development up 10%, and rewards expense up 8%. Management attributed increases to customer benefits, rewards, technology and partner investments.
- Loan provisions increased 9%, and the combined loan net write-off rate rose. Net income declined despite higher revenue and pretax income, while diluted EPS increased modestly.
- The company adopted new lease accounting in 2019, with no material reported financial impact. It planned to adopt CECL on January 1, 2020; estimated opening adjustments included a $1.7 billion increase in loan reserves and a $0.5 billion decrease in receivable reserves, with an estimated $0.9 billion after-tax reduction to opening retained earnings.
Outlook, commentary and risks
- Management described double-digit EPS growth as an objective supported by sustained revenue growth, but the filing does not provide specific formal 2020 EPS or revenue guidance. Management cited economic and geopolitical uncertainty, regulation and intense competition as headwinds.
- The 2020 funding plan included approximately $0–$3 billion of unsecured term debt and $7–$10 billion of secured term debt issuance. The company reported undrawn $3.5 billion committed bank and $5.0 billion secured borrowing facilities at year-end.
- Management flagged the emerging coronavirus outbreak and related travel restrictions as potential risks to travel spending, business volumes and credit performance. Travel and entertainment represented about 25% of U.S. billed business; airline spending was about 8% of worldwide billed business.
- Delta is a significant partner: its cobranded portfolio represented about 8% of worldwide billed business and 22% of worldwide Card Member loans. American Express renewed the relationship for 11 years, through 2029. Outstanding minimum commitments to certain cobrand partners totaled $5 billion.
- Other material risks include credit deterioration, competition and pressure on merchant discount pricing, partner concentration, merchant steering or surcharging, cyber and operational disruptions, regulatory change, litigation, funding costs, interest-rate and foreign-exchange exposure, Brexit uncertainty and LIBOR transition.
- In a merchant antitrust matter, the company’s motion to compel arbitration and dismiss certain claims was granted in January 2020. For disclosed material proceedings where loss was reasonably possible and estimable, the estimated range was $0–$190 million in excess of accruals; the filing cautions actual outcomes could vary significantly. A separate FX international payments review resulted in approximately $1.5 million of voluntary customer remediation; management did not expect a material impact.
Important facts for investors to verify
- Whether loan losses and delinquencies continue to rise, and how CECL affects reserves, earnings and capital.
- Whether revenue growth can outpace expense growth as rewards, benefits and partner costs increase.
- The sustainability of billed-business growth, the average discount rate and GNS performance after international network exits.
- Exposure to Delta and other cobrand partners, including the economics and fulfillment of the $5 billion of commitments.
- Developments in merchant litigation, regulatory requirements, coronavirus-related travel disruption and the company’s 2020 funding and capital-return plans.