AXP

Business Context and Reporting Period

Company: American Express Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Context: The Company operates as a leading global payments, network, and travel company. The reporting period reflects continued pressure from the global economic downturn, resulting in reduced cardmember spending and increased credit losses. The Company undertook significant reengineering initiatives to reduce costs and repurchased preferred shares issued under the U.S. Treasury's Capital Purchase Program (CPP).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues net of interest expense decreased 18% year-over-year for both the quarter and the six-month period, driven primarily by a 16% decline in billed business and lower discount revenue.
• Profitability Impact: Net income decreased 48% for the quarter and 53% for the six months compared to the prior year. Diluted EPS dropped 84% for the quarter and 72% for the six months.
• Provisions for Losses: While quarterly provisions decreased 13% due to lower loan balances, six-month provisions increased 12% to $3.4 billion, reflecting higher reserve levels necessitated by increased net write-offs and past-due loan levels.
• Expense Reduction: Total expenses decreased 16% for the quarter and 19% for the six months, largely due to reengineering initiatives, lower marketing spend, and reduced employee levels.
• Capital Actions: The Company repurchased $3.39 billion of preferred shares issued under the CPP in June 2009, resulting in a $212 million accelerated accretion charge that reduced EPS by $0.18 for the quarter.

Guidance, Outlook, and Risks

• Outlook: Management expects managed lending write-off rates in the U.S. for the next two quarters to be below 10%, assuming delinquency rates remain at current levels. The Company plans to invest in business-building actions, including premium lending strategies and merchant acceptance initiatives, offsetting some reengineering savings.
• Reengineering: The Company recorded approximately $200 million in restructuring charges in Q2 2009, targeting the elimination of 4,000 positions (6% of the workforce). Cumulative savings from reengineering initiatives are targeted at $2.6 billion for 2009.
• Regulatory Risks: The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) is expected to have a material adverse effect on results of operations by restricting pricing and billing practices. Provisions begin taking effect in August 2009 and February 2010.
• Accounting Changes: New accounting standards (SFAS 166 and 167) effective January 1, 2010, will require the consolidation of the Lending Trust assets and liabilities, potentially impacting regulatory capital ratios.
• Liquidity: The Company maintains $21.7 billion in excess cash and readily-marketable securities, sufficient to meet funding needs for at least 12 months without access to unsecured debt markets.

Investor Verification Checklist

• Credit Quality Trends: Verify the trajectory of net write-off rates and delinquency levels, particularly in the U.S. Card Services segment, to assess the adequacy of future loss provisions.
• Impact of CARD Act: Monitor the Company's specific pricing and product adjustments in response to the new federal credit card regulations effective August 2009.
• Securitization Trusts: Review the excess spread rates of the Lending Trust and Charge Trust to ensure they remain above trigger levels that could force early amortization.
• Capital Ratios: Assess the impact of the upcoming consolidation of off-balance sheet securitization assets on the Company's tangible common equity (TCE) ratio.
• Reengineering Execution: Track the realization of the targeted $2.6 billion in cost savings against the backdrop of potential reinvestment in marketing and growth initiatives.