AXP

Business Context and Reporting Period

Company: American Express Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: A leading global payments, network, and travel company organized into four reportable segments: U.S. Card Services, International Card Services, Global Commercial Services, and Global Network & Merchant Services. The Company became a bank holding company in Q4 2008, subject to Federal Reserve regulations.

Key Financial Metrics

Liquidity: As of March 31, 2009, the Company held $28.7 billion in cash and readily-marketable securities, resulting in $24.9 billion of excess liquidity after covering short-term obligations.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues net of interest expense decreased 18% ($1.3 billion) year-over-year, driven by a 16% drop in billed business volumes and lower discount revenue.
• Profitability Impact: Net income fell 56% ($554 million) to $437 million. Income from continuing operations dropped 58% to $443 million.
• Credit Deterioration: Provisions for losses increased 49% ($592 million) to $1.8 billion due to higher delinquency and write-off rates. U.S. Card Services (USCS) write-off rates rose to 8.5% from 4.5% in the prior year.
• Expense Reduction: Total expenses decreased 22% ($989 million) to $3.6 billion, reflecting cost-cutting reengineering initiatives, lower marketing spend, and reduced employee levels.
• Capital Structure: Shareholders' equity increased significantly due to the issuance of $3.39 billion in Series A Preferred Shares and warrants under the U.S. Treasury Capital Purchase Program (CPP).

Guidance, Outlook, and Risks

• Economic Outlook: Management expects economic conditions to deteriorate further in 2009, with continued softness in cardmember spending and rising write-offs. The U.S. lending write-off rate is projected to increase by 200-250 basis points in Q2 2009.
• Reengineering: The Company is implementing additional staff reductions and cost-cutting measures, expecting to recognize further restructuring charges in Q2 2009. Total projected benefits from reengineering initiatives are approximately $1.8 billion for 2009.
• Capital Targets: Due to the CPP participation and higher capital requirements, the Company suspended share repurchases and dividend increases. Long-term Return on Equity (ROE) targets are adjusted; management currently believes it can deliver an ROE in excess of 20% over time.
• Regulatory Risks: Potential FASB accounting changes regarding off-balance sheet securitizations could require the consolidation of the Lending Trust, potentially reducing regulatory capital ratios. New credit card regulations (effective July 2010) may materially impact operations.
• Rating Actions: Credit rating agencies (Moody's, S&P, Fitch) have downgraded the Company's debt ratings or placed them on negative outlook, which may increase funding costs and restrict borrowing capacity.

Investor Verification Checklist

• Credit Metrics: Verify the trajectory of U.S. and International write-off rates and delinquency levels against management's Q2 and Q3 forecasts.
• Liquidity Position: Confirm the sufficiency of the $24.9 billion excess cash position to cover debt maturities and potential early amortization of securitization trusts.
• Reengineering Execution: Monitor the realization of the projected $1.8 billion in cost savings and the timing of additional restructuring charges.
• Regulatory Capital: Assess the impact of potential FASB rule changes on the consolidation of the Lending Trust and the resulting effect on risk-weighted assets and capital ratios.
• ICBC Investment: Note the sale of a portion of the Industrial and Commercial Bank of China (ICBC) stake, expected to generate a $210 million gain in Q2 2009.