American Express Company — Q3 2009 Form 10-Q
Business context and reporting period. American Express is a global payments, card, network and travel company, reporting four operating segments: U.S. Card Services, International Card Services, Global Commercial Services, and Global Network & Merchant Services. This unaudited filing covers the quarter and nine months ended September 30, 2009; comparisons are with the corresponding 2008 periods. Dollar figures below are in millions unless stated otherwise.
Financial performance and key metrics
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Revenue, net of interest expense | $6,016 | $7,164 | $18,034 | $21,859 |
| Provisions for losses | $1,178 | $1,359 | $4,565 | $4,394 |
| Total expenses | $3,920 | $4,727 | $11,589 | $14,152 |
| Income from continuing operations | $642 | $861 | $1,427 | $2,565 |
| Net income | $640 | $815 | $1,414 | $2,459 |
| Diluted EPS from continuing operations | $0.54 | $0.74 | $0.95 | $2.20 |
| Diluted net EPS | $0.53 | $0.70 | $0.94 | $2.10 |
| Operating cash flow | — | $5,592 | $8,743 |
- Q3 revenue net of interest expense fell 16%; continuing income fell 25%. For the first nine months, those measures fell 17% and 44%, respectively. Nine-month common diluted EPS from continuing operations included a $0.18 per-share charge from accelerated preferred-dividend accretion; management reported adjusted EPS of $1.13 excluding that item.
- Q3 billed business was $156.6 billion, down 11%; nine-month billed business was $447.2 billion, down 14%. Q3 average discount rate was 2.54%, compared with 2.56% a year earlier.
- Credit costs remained elevated: nine-month cardmember lending provisions rose 12% to $3,706, and owned lending net write-off rate was 8.8% for the nine months versus 5.2% a year earlier. The lending reserve was $3,359, or 10.7% of owned loans, compared with $2,640, or 5.8%, a year earlier. Q3 charge-card provisions improved, while lending provisions increased slightly year over year.
- Expenses declined as the company reduced marketing, rewards and staffing costs. Nine-month total expenses fell 18%; the filing attributes this largely to lower discretionary investment and reengineering savings.
- Cash flows for the first nine months included $5,592 operating cash provided, $902 investing cash used, and $6,596 financing cash used. Cash and cash equivalents were $18,648 at September 30, 2009.
- At September 30, total assets were $120,445 and shareholders’ equity was $13,943. Short-term borrowings were $2,202 and long-term debt $52,850, down from $8,993 and $60,041 at December 31, 2008. Customer deposits rose to $23,863 from $15,486.
- Management reported $28.2 billion of cash and readily marketable securities for liquidity purposes, $3.2 billion of short-term obligations, and $25.0 billion of excess liquidity. It believed resources were sufficient for at least 12 months, excluding a potential securitization-trust early-amortization event.
- Trailing 12-month return on equity was 11.7%, versus 27.8% a year earlier. Actual company Tier 1 and total risk-based capital ratios were 9.7% and 11.8%; pro forma ratios assuming Lending Trust consolidation were 8.2% and 10.4%.
Material changes versus the prior comparable period
- Lower spending, cardmember balances and travel activity reduced major revenue streams. Q3 discount revenue fell 12%, interest income 29%, travel commissions and fees 23%, and securitization income 65% year over year. Nine-month securitization income fell 76%, reflecting lower excess spread and increased credit losses.
- Lower interest costs and operating expenses partly offset revenue pressure. Q3 interest expense declined 39%; nine-month expenses declined 18%.
- Credit performance showed mixed trends: charge-card losses and past-due indicators improved, but lending write-offs and reserves remained high. The company reduced its owned cardmember loan balance to $31.5 billion from $45.7 billion at year-end 2008.
- U.S. Card Services recorded a $116 million segment loss for the first nine months, versus $788 million of income a year earlier. International Card Services reported nine-month income of $230 million, Global Commercial Services $273 million, and Global Network & Merchant Services $713 million.
- Debt and cash funding shifted: deposits increased while short-term and long-term borrowings declined. The company repurchased the $3.39 billion Treasury CPP preferred shares in June and the related warrant for $340 million in July; the preferred-share repurchase reduced nine-month common EPS through accelerated accretion.
Outlook, management commentary, risks and unusual items
- Management said spending comparisons remained negative but monthly trends had stabilized and improved. If Q3 spending levels persisted, easier comparisons could further narrow declines in growth measures; this outlook was expressly conditional on economic and consumer-confidence trends.
- Management expected sequential improvement in loan-loss provision in Q4 and, assuming delinquencies continued to improve and bankruptcies did not rise significantly, U.S. managed lending write-off rates below Q3. It also anticipated greater incremental investment in Q4 than in Q3.
- The company said its historical targets—at least 8% revenue growth, 12%–15% EPS growth and 33%–36% ROE—were unlikely to be achieved while difficult economic conditions persisted. It expected ultimately to be positioned for ROE above 20% over time, but set no new formal target. Share repurchases remained suspended.
- Cost-reduction programs were expected to eliminate approximately 11,000 positions. The company initially estimated approximately $2.6 billion of combined 2009 savings, including $1.5 billion of reduced investment spending; higher-than-expected credit trends were expected to reduce the investment-spending portion of savings. Nine-month restructuring charges were $183 million, with a $356 million reserve remaining.
- FASB changes effective January 1, 2010 were expected to require consolidation of the Lending Trust. The company was assessing the effect; its pro forma capital ratios indicated lower company-level ratios after consolidation. Rating-agency treatment and the future availability or cost of highly rated asset-backed funding remained uncertain.
- Lending Trust excess spread rates were above stated reserve-funding triggers at quarter-end, and no reserve funding was required. Early amortization could require rapid repayment of trust obligations and create a substantial alternative-funding need.
- The filing highlights the 2009 CARD Act and possible further financial-services, consumer-protection and securitization regulation as risks to pricing, revenue, practices and compliance costs. Other key risks include unemployment, bankruptcies, consumer and business spending, funding-market access, ratings, credit losses, interest-rate and foreign-exchange movements, and litigation.
- Unusual accounting and other items affected results. Q3 included a $180 million pretax benefit tied to foreign subsidiary net-investment accounting, including a $135 million prior-period translation-accounting correction and a $45 million foreign-exchange contract valuation benefit. The filing also disclosed a $59 million year-to-date benefit from an account-reconciliation correction and stated that corrections of errors overstated nine-month 2009 pretax income by an aggregate $254 million; it said the errors were not material to the individual prior quarterly or annual periods. Nine-month results also included a $211 million pretax ICBC investment-sale gain and MasterCard and Visa litigation settlement income.
- AEIDC’s sale to Standard Chartered closed on September 10, 2009; its results were reported as discontinued operations. Management said it was not aware of proceedings expected to materially adversely affect consolidated financial condition or liquidity, while noting outcomes could materially affect results in a particular period.
Important facts for investors to verify
- Whether spending, cardmember balances and credit trends continued to stabilize after quarter-end, and whether Q4 managed lending write-offs and provisions met management’s conditional expectations.
- The quality and adequacy of lending reserves as write-offs remained elevated and the reserve-to-loan ratio rose substantially.
- The full earnings impact and presentation of the $254 million nine-month pretax error corrections, including the reported $0.18 preferred-dividend accretion charge and adjusted EPS measure.
- The effect of Lending Trust consolidation on regulatory capital, balance-sheet leverage, securitization ratings and funding access when the new accounting standards took effect.
- Liquidity and refinancing capacity, including upcoming maturities and the potential funding consequences of any securitization early-amortization trigger.
- Implementation and financial effects of the CARD Act and other proposed regulatory changes, as well as the resolution of pending legal and tax matters.