American Express Company — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; unaudited. American Express is a global payments and travel services company. Unless noted otherwise, amounts are U.S. dollars.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue, net of interest expense | $7.965B | $7.618B | $15.579B | $14.649B |
| Provisions for losses | $461M | $357M | $873M | $454M |
| Total expenses | $5.625B | $5.496B | $11.054B | $10.698B |
| Net income | $1.339B | $1.331B | $2.595B | $2.508B |
| Diluted EPS | $1.15 | $1.10 | $2.22 | $2.07 |
| Operating cash flow | — | $6.742B | $3.976B |
- Q2 revenue net of interest expense rose 5%; expenses increased 2%, while provisions rose 29%. Net income increased 1% and diluted EPS increased $0.05.
- For the first half, revenue net of interest expense rose 6%, expenses 3%, and provisions 92%; net income rose 3% and diluted EPS 7%.
- Q2 non-interest revenue was $6.844B; net interest income was $1.121B. The filing does not present a single consolidated profit-margin measure.
- Q2 card billed business increased 7% to $221.6B; U.S. volume grew 9% and non-U.S. volume 3%. The average discount rate was 2.54%, unchanged year over year. Worldwide cards-in-force rose 6% to 100.1M.
- Q2 segment income: U.S. Card Services $718M, International Card Services $178M, Global Commercial Services $219M, and Global Network & Merchant Services $372M. Corporate & Other reported a $148M net expense.
Balance sheet, liquidity and capital
- At June 30, total assets were $148.1B, down from $153.3B at year-end 2011; shareholders’ equity was $19.3B, up from $18.8B.
- Cash and cash equivalents were $22.1B. Customer deposits were $36.0B, short-term borrowings $3.6B, and long-term debt $56.0B, versus $37.9B, $4.3B and $59.6B, respectively, at December 31, 2011.
- Management reported $16.3B of cash and readily marketable securities available to fund maturities after commercial paper. Approximate debt and CD maturities over the next 12 months totaled $14.8B. The company targets liquidity sufficient to meet expected obligations for at least 12 months.
- First-half financing cash outflow was $7.8B, including $1.949B of share repurchases and $446M of dividends paid. The company repurchased 30.3M shares in Q2 at an average $58.27 and was pursuing up to $4B of repurchases in 2012, subject to market conditions and regulatory approval.
- At June 30, reported capital ratios included a 12.8% Tier 1 risk-based ratio, 14.8% total risk-based ratio and 10.7% Tier 1 leverage ratio. Management estimated Basel III ratios under proposed rules, but emphasized these estimates could change.
Changes, outlook and risks
- Higher card spending, loan balances and other non-interest revenue supported growth. Management said spending growth slowed versus recent quarters amid a challenging global economy; it described credit trends as favorable, with lending loss rates near historic lows.
- Higher provisions primarily reflected substantially lower lending reserve releases than in 2011, not a comparable deterioration in reported credit trends. Q2 cardmember-loan provision rose to $277M from $176M; first-half loan provision was $489M versus $56M.
- Expenses benefited from lower rewards costs versus 2011, when changes to Membership Rewards assumptions materially increased expense. Conversely, other expense rose, in part because 2011 included Visa and MasterCard settlement payments; 2012 also included customer-refund accruals related to regulatory reviews and investment impairments.
- Management’s longer-term targets, described as averages over time, are at least 8% growth in revenue net of interest expense, 12–15% EPS growth and ROE of at least 25%. It said it intended to grow operating expenses more slowly than revenue over the next two to three years.
- Key risks include uncertain global conditions and European instability, intense payments competition, regulatory and compliance costs, CFPB and other reviews of U.S. card practices, and litigation. A DOJ/state antitrust case challenging merchant acceptance rules could adversely affect the business if similar restrictions were imposed on American Express.
- For specified legal and regulatory matters where a loss was reasonably possible and estimable, the company disclosed an aggregate range of $0–$520M in excess of accrued liabilities; this is not a maximum exposure. Management did not expect pending matters to materially affect consolidated financial condition or liquidity, but said a particular period’s results could be materially affected.
- The company noted that proposed U.S. Basel III rules could increase capital requirements. European billed business was about 11% of Q2 total; airline partners also represented significant exposure. No securitization trust triggering events occurred in the first half.
Important facts for investors to verify
- Whether card spending growth and revenue trends sustain amid the economic slowdown and foreign-exchange pressure.
- Whether improving credit indicators persist, and how reserve releases, write-offs and loan provisions develop relative to 2011 comparisons.
- The amount and timing of customer refunds, penalties or practice changes arising from ongoing regulatory reviews, and developments in the DOJ/state antitrust litigation.
- Liquidity against scheduled maturities and access to deposit, unsecured debt and securitization funding, including ratings and regulatory developments.
- Execution of the expense-growth and capital-return plans, including repurchases, dividends and potential effects on capital ratios.
- Tax exposures: the filing said unrecognized tax benefits could decrease by as much as $846M within 12 months, with uncertain impact on net income for a portion of that amount.