American Express Company (AXP) — 2015 Form 10-K Summary
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2015, with comparisons to 2014 and 2013. American Express operates a global card-issuing, payments-network, merchant-services and commercial-payments business, alongside travel and loyalty services. Its 2015 reporting segments were U.S. Card Services, International Card Services, Global Commercial Services, and Global Network & Merchant Services. The company announced revised segment groupings for reporting beginning in Q1 2016.
Key financial results
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue, net of interest expense | $32.818 billion | $34.188 billion | Down 4% |
| Net income | $5.163 billion | $5.885 billion | Down 12% |
| Diluted EPS | $5.05 | $5.56 | Down 9% |
| Provisions for losses | $1.988 billion | $2.044 billion | Down 3% |
| Total expenses | $22.892 billion | $23.153 billion | Down 1% |
| Operating cash flow | $10.972 billion | $10.990 billion | Approximately flat |
| Net interest income | $5.922 billion | $5.472 billion | Up 8% |
| Average discount rate | 2.46% | 2.48% | Down 2 basis points |
Worldwide billed business grew 2% to $1.040 trillion; growth was 6% excluding foreign-exchange effects. Cards-in-force increased 5% to 117.8 million. Net interest yield on Card Member loans was 9.4%, compared with 9.3% in 2014. Return on average equity was 24.0%, down from 29.1%; return on average assets was 3.3%, down from 3.8%.
At year-end, cash and cash equivalents were $22.762 billion; total assets were $161.184 billion; customer deposits were $54.997 billion; short-term borrowings were $4.812 billion; long-term debt was $48.061 billion; and shareholders’ equity was $20.673 billion. Operating, investing and financing cash flows were $10.972 billion, negative $8.193 billion and negative $2.029 billion, respectively. The company reported Basel III CET1, Tier 1 and total capital ratios of 12.4%, 13.5% and 15.2%, and stated it met applicable LCR requirements at year-end.
Material changes versus 2014
- Revenue and earnings declined despite 2% growth in billed business. Discount revenue was nearly flat, while net interest income rose with loan growth. A stronger U.S. dollar reduced reported international results; foreign-currency movements reduced 2015 net revenues by approximately $1.3 billion.
- Comparability was affected by the 2014 Global Business Travel joint-venture transaction, which removed the travel business from consolidation, and by 2014 gains from the Concur investment sale and the joint venture transaction.
- 2015 included a $419 million pretax ($335 million after-tax) Enterprise Growth charge, primarily goodwill and technology impairments and restructuring. A separate $91 million third-quarter charge related to previously capitalized software costs.
- Costco U.S. and JetBlue card loans and receivables, totaling $14.992 billion at year-end, were reclassified as held for sale. This contributed to the reported decline in loans; the filing notes that other loan and credit metrics may include held-for-sale portfolios.
- U.S. billed business rose 5%, while reported non-U.S. billed business fell 5%; non-U.S. billed business increased 8% on an FX-adjusted basis. International results also reflected the end of Costco Canada arrangements.
Outlook, management commentary, risks and contingencies
- Management expected strong growth in loans held for investment in 2016, while noting that loan growth could increase provisions and that seasoning of newly acquired Card Members could put upward pressure on write-off rates.
- The average discount rate was expected to decline more in 2016, reflecting OptBlue expansion, international regulatory changes and competition. Management also cited cautious corporate spending, lower airline volumes, low gas prices and currency headwinds.
- The company expected the Costco U.S. portfolio sale around mid-2016 and estimated a gain of approximately $1 billion. At filing, no definitive sale agreement had been signed; the timing, portfolio transferred and final gain remained uncertain. JetBlue portfolio sale was expected in Q1 2016.
- In Q1 2016, the company launched initiatives intended to reduce its overall cost base by $1 billion by the end of 2017; restructuring charges were expected in 2016. Management said proceeds from the anticipated Costco sale would partly fund 2016 growth initiatives, potentially making quarterly results uneven.
- Legal exposure includes the DOJ and state antitrust case over merchant-contract provisions. The trial court judgment was stayed pending appeal. For disclosed matters with estimable reasonably possible losses, the company reported a range of zero to $350 million in excess of related reserves, while warning actual outcomes could differ and the range was not a maximum exposure.
- Other key risks include intense payments competition and merchant pricing pressure; possible partner losses or less favorable cobrand renewals; regulatory changes in the U.S., EU and Australia; litigation and consumer-protection enforcement; cyber and data-security incidents; credit, liquidity, funding, interest-rate and foreign-exchange risks; and potential limits on dividends or repurchases from regulatory capital planning.
Most important facts for investors to verify
- Whether the Costco and JetBlue portfolio sales closed as expected, the amount of loans transferred, and the realized gain versus the approximately $1 billion estimate.
- How the end of the Costco U.S. relationship affected billed business, cards-in-force, loan balances, merchant acceptance and customer retention.
- Whether discount-rate erosion, OptBlue growth and international regulatory developments affected revenue and margins as management anticipated.
- Whether loan growth, delinquencies, write-offs and reserve levels remained consistent with management’s outlook, accounting for held-for-sale classification and charge-off timing changes.
- Progress, restructuring costs and realized savings from the $1 billion cost-reduction plan, as well as spending on growth initiatives.
- Developments in the DOJ appeal, merchant claims and other legal matters, and any impact on merchant steering, acceptance terms or financial reserves.
- Capital and liquidity levels, funding costs, regulatory approvals for shareholder distributions, and the effects of changing interest rates and foreign exchange.