AXP

American Express Company: Q1 2007 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2007. American Express Company is a leading global payments, network, and travel company. The filing reflects modifications to reportable operating segments, moving Travelers Cheque and Prepaid Services and international banking businesses into the "Corporate & Other" segment. The company operates under a "spend-centric" business model, focusing on driving spending on its cards.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 21% to $1.057 billion, and diluted EPS rose 26% to $0.87. Income from continuing operations grew 22% to $1.065 billion.
• Revenue Growth: Total revenues increased 14% to $7.631 billion. Discount revenue rose 13% to $3.355 billion, driven by a 15% increase in worldwide billed business ($146.2 billion).
• Lending: Cardmember lending finance revenue surged 44% to $1.368 billion, reflecting a 31% growth in average worldwide cardmember lending balances.
• Provisions: Provisions for losses and benefits increased 30% to $866 million, primarily due to a 79% increase in the cardmember lending provision ($574 million) as write-off and delinquency rates rose.
• Unusual Items (2007): Results included an $80 million gain from the adoption of SFAS No. 155, a $63 million gain from U.S. pension plan amendments, and a $60 million charge for regulatory/legal exposure at American Express Bank International (AEBI).
• Unusual Items (2006): Prior year results included a $112 million charge for Membership Rewards reserve adjustments and an $88 million gain from the sale of an investment in Egyptian American Bank.

Guidance, Outlook, and Risks

• Long-Term Targets: Management targets 12-15% EPS growth, at least 8% growth in revenues net of interest expense, and a Return on Average Equity (ROE) of 33-36%.
• Capital Allocation: The company aims to return approximately 65% of generated capital to shareholders via dividends and share repurchases. In Q1 2007, it returned 89% of capital generated ($180 million in dividends and $951 million in share repurchases).
• Interest Rate Outlook: The company has reduced its fixed-rate debt and hedges by $11 billion compared to 2006. This shift to short-term rates resulted in approximately $60 million of incremental interest expense in Q1 2007. Management expects approximately $200 million in incremental interest expense over the next three quarters if rates remain constant.
• Credit Risk: The company expects write-off rates in 2007 to be less favorable than in 2006, as the positive impact of the 2005 U.S. bankruptcy law changes will not persist.
• Legal/Regulatory: A $60 million reserve was established for AEBI regarding anti-money laundering compliance. The company is also involved in antitrust litigation against Visa and MasterCard.

Investor Verification Checklist

• Credit Quality Trends: Verify the trajectory of net write-off rates (4.1% owned basis in Q1 2007 vs. 3.3% in Q1 2006) and delinquency rates to assess the sustainability of the increased provision for losses.
• Interest Rate Sensitivity: Confirm the impact of the reduced hedge portfolio on future earnings, specifically the projected $200 million incremental interest expense over the next three quarters.
• Regulatory Exposure: Monitor the status of the AEBI regulatory matter and the potential for additional reserves beyond the initial $60 million charge.
• Accounting Changes: Review the impact of the SFAS No. 155 adoption ($80 million gain) and FIN 48 adoption ($127 million charge to retained earnings) on future comparability.
• Segment Performance: Analyze the "Managed Basis" metrics for U.S. Card Services to understand the full economics of the lending portfolio, including securitized loans.