American Express Company — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results. American Express is a global payments and financial services company operating U.S. Consumer Services, International Consumer and Network Services, Global Commercial Services, and Global Merchant Services.
Financial performance and position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Revenue net of interest expense | $32.119 billion | $32.818 billion | Down 2% |
| Net income | $5.408 billion | $5.163 billion | Up 5% |
| Diluted EPS | $5.65 | $5.05 | Up 12% |
| Provisions for losses | $2.026 billion | $1.988 billion | Up 2% |
| Total expenses | $21.997 billion | $22.892 billion | Down 4% |
| Net interest income | $5.771 billion | $5.922 billion | Down 3% |
| Operating cash flow | $8.224 billion | $10.611 billion | Down $2.387 billion |
| Cash and cash equivalents at year-end | $25.208 billion | $22.762 billion | Up $2.446 billion |
| Total assets | $158.893 billion | $161.184 billion | Down 1% |
| Total debt | $52.6 billion | $52.9 billion | Down $0.3 billion |
| Customer deposits | $53.0 billion | $55.0 billion | Down $2.0 billion |
Fourth-quarter 2016 revenue net of interest expense was $8.022 billion, net income was $825 million, and diluted EPS was $0.88. The comparable 2015 quarter reported $8.391 billion, $899 million, and $0.89, respectively.
Worldwide billed business was $1.038 trillion, essentially flat year over year; it was up 1% on a foreign-exchange-adjusted basis. The average discount rate declined to 2.45% from 2.46%. Card Member loans were $65.3 billion, up 11%, while receivables were $47.3 billion, up 7%. The loan reserve was $1.223 billion, or 1.9% of loans, versus $1.028 billion, or 1.8%, a year earlier. Loan delinquency and write-off measures showed modest deterioration.
Reported regulatory capital ratios at year-end included a 12.3% CET1 ratio, 13.5% Tier 1 ratio, and 15.2% total capital ratio. The company reported compliance with applicable capital and liquidity requirements, including the liquidity coverage ratio. Shareholders’ equity was $20.501 billion, compared with $20.673 billion.
Changes versus prior periods
- Revenue declined primarily because prior-year Costco-related revenue was higher and the U.S. Costco cobrand relationship ended in June 2016. U.S. billed business fell 3%; non-U.S. billed business grew 6% reported and 10% on an FX-adjusted basis.
- American Express completed sales of the JetBlue and Costco loan and receivable portfolios in March and June 2016, recognizing gains of $127 million and $1.1 billion, respectively. These gains reduced reported expenses; they are significant non-recurring items in assessing earnings.
- Net income increased despite lower revenue, helped by lower total expenses, including portfolio-sale gains and the absence of the prior-year Prepaid Services impairment charge. 2016 also included $410 million of net restructuring charges.
- Marketing and promotion expense rose 17% to $3.650 billion as the company increased growth investment. Net card fees rose 7% to $2.886 billion; discount revenue fell 3% to $18.680 billion.
- Cash flow from investing activities was positive $1.868 billion, versus cash use of $8.193 billion in 2015, principally reflecting portfolio sales. Financing activities used $7.532 billion, including share repurchases and dividends.
Outlook, commentary, risks, and contingencies
- Management’s priorities were accelerating revenue growth, optimizing investment, and resetting costs. It targeted $1 billion of cost-base reductions by the end of 2017, expected to spend less on marketing and promotion in 2017, and anticipated rewards and Card Member service costs to continue rising with billings and product enhancements.
- Management expected modest, gradual upward pressure on delinquency and write-off rates, mainly as newer loan portfolios seasoned, and expected provisions to grow faster than loans in 2017.
- The 2017 funding plan included approximately $7 billion to $15 billion of unsecured term debt and $5 billion to $12 billion of secured term debt issuance. These are plans, subject to market, business, and regulatory conditions, not guaranteed outcomes.
- Key business risks include intense payments competition, merchant discount-rate pressure, cobrand partner retention and renewal costs, consumer and corporate spending trends, foreign exchange movements, credit performance, cyber and operational risks, and regulatory changes affecting payments, data, capital, and liquidity.
- The DOJ antitrust appeal concerning merchant anti-steering provisions was resolved favorably to American Express in the Second Circuit, and the district court entered judgment for the company in January 2017; further review remained possible. Merchant litigation and arbitration matters continued. Management estimated a possible loss range of zero to $440 million above recorded reserves for specified legal and VAT matters, while cautioning that the range was not a maximum exposure.
- Other notable exposures include approximately $48 billion of maximum potential undiscounted guarantee payments, largely cardholder protection plans, and approximately $242 billion of unused lending-product credit lines, a significant portion of which management said was unlikely to be drawn.
- Management and the auditor concluded that internal control over financial reporting was effective as of December 31, 2016. The auditor issued an unqualified opinion on the consolidated financial statements.
Most important facts for investors to verify
- Underlying revenue, billed-business, and U.S. consumer trends after separating the Costco exit, portfolio-sale gains, and foreign exchange effects.
- Whether the targeted cost savings and lower 2017 marketing spend are achieved without weakening customer acquisition, spending growth, or card value propositions.
- Credit quality as loan balances grow, especially delinquency, write-off, reserve coverage, and the seasoning of newer accounts.
- Merchant discount-rate trends and the commercial impact of competition, OptBlue expansion, regulation, and cobrand contract renewals.
- Capital distributions and funding plans, including regulatory approval, deposit stability, and the company’s ability to maintain capital and liquidity buffers.
- Developments in merchant litigation, VAT and other tax matters, and the potential impact of the disclosed contingency range.