American Express Company — Q2 2016 Form 10-Q
Business context and period: Unaudited quarterly report for the three and six months ended June 30, 2016. American Express provides payment cards, network and merchant services, lending and travel-related services. The filing presents four operating segments: U.S. Consumer Services, International Consumer and Network Services, Global Commercial Services, and Global Merchant Services.
Financial performance
Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Revenue, net of interest expense | $8,235 | $8,284 | $16,323 | $16,234 |
| Provisions for losses | $463 | $467 | $897 | $887 |
| Total expenses | $4,756 | $5,587 | $10,226 | $10,801 |
| Net income | $2,015 | $1,473 | $3,441 | $2,998 |
| Diluted EPS | $2.10 | $1.42 | $3.54 | $2.90 |
| Net interest income | $1,449 | $1,423 | $3,029 | $2,870 |
- Q2 revenue net of interest expense declined 1% year over year; H1 increased 1%. Discount revenue fell 2% in Q2 and 1% in H1, while net card fees rose 7% and 6%, respectively.
- Worldwide billed business increased 3% in both Q2 and H1 (FX-adjusted growth was 4% and 5%). The average discount rate was 2.43%, versus 2.49% a year earlier.
- Reported net income rose 37% in Q2 and 15% in H1. Results included a $1.091 billion Q2 gain on the Costco portfolio sale, recorded as an expense reduction; the first half also included a $127 million JetBlue portfolio-sale gain in Q1. Management reported a Q2 restructuring charge of $232 million pretax.
- Reported provision expense was broadly stable: down 1% in Q2 and up 1% in H1. Management said credit quality remained strong, while expecting modest upward pressure on write-off rates, partly from seasoning of loans to new Card Members.
- Trailing-period return on average equity was 26.4%, versus 28.1% a year earlier; return on average tangible common equity was 34.5%, versus 35.4%.
Cash flow, balance sheet and capital
- For H1, operating cash flow was $3.1 billion, down from $4.2 billion; investing cash flow was $12.1 billion provided, versus $2.9 billion used in H1 2015, primarily reflecting the JetBlue and Costco portfolio sales. Financing cash outflow was $4.3 billion, compared with $2.4 billion.
- Cash and cash equivalents were $33.8 billion at June 30, 2016, up from $22.8 billion at year-end 2015. Total assets were $159.6 billion and shareholders’ equity was $20.7 billion.
- Total debt was $52.9 billion, unchanged from December 31, 2015, comprising $2.3 billion short-term borrowings and $50.6 billion long-term debt. Customer deposits were $54.4 billion, down from $55.0 billion.
- Regulatory capital ratios at June 30 included a 13.5% Common Equity Tier 1 ratio and 16.4% total risk-based capital ratio. The company reported compliance with applicable liquidity requirements, including the Liquidity Coverage Ratio, and targets liquidity sufficient for at least 12 months under stress conditions.
- H1 share repurchases totaled $2.8 billion and dividends paid were $0.6 billion. The Federal Reserve did not object to a plan for up to $3.3 billion of repurchases from Q3 2016 through Q2 2017; a proposed quarterly dividend increase to $0.32 from $0.29 was subject to Board approval.
Material changes, outlook and risks
- Substantially all U.S. Costco and JetBlue cobrand card loan and receivable portfolios held for sale were sold in H1. Costco’s sale closed June 17; its end, and the JetBlue sale, affected card counts, loan balances and billed business comparisons. U.S. cards-in-force fell 15% year over year; worldwide cards-in-force fell 5%.
- Management said second-half earnings were expected to be lower than first-half earnings, reflecting the end of the U.S. Costco relationship and continued investment in growth initiatives. It expected 2016 growth spending, including marketing, to exceed 2015 levels.
- Management cited ongoing pressure on discount rates from OptBlue expansion, merchant negotiations, competition and regulatory changes. It expected the average discount rate to decline more in 2016 than in 2015. The filing also notes increased cash-rebate rewards can reduce discount revenue.
- Key exposures include the DOJ antitrust case and merchant litigation, European and Australian payment regulation, CFPB oversight and proposed arbitration rules, competitive pressure, foreign exchange and economic uncertainty, and Brexit-related market and business uncertainty. The estimated reasonably possible legal loss range was zero to $350 million above recorded reserves for matters where a range could be estimated; this is not the maximum possible exposure.
- The company was evaluating newly issued accounting standards, including the expected-credit-loss (CECL) model, which management said may materially change credit reserve assumptions. The filing also reports a non-material reclassification in prior-period cash-flow presentation; it had no income-statement or balance-sheet impact.
Important facts for investors to verify
- How much of the earnings and expense improvement is attributable to the Costco and JetBlue sale gains, restructuring, and other unusual items rather than ongoing operations.
- Post-Costco trends in billed business, card acquisitions, card-member spending, loan growth and revenue, including any continuing effects from the cobrand portfolio sales.
- Discount-rate and merchant-incentive trends, including the effects of OptBlue, cash rebates and regional regulation.
- Credit performance, especially the reported increase in loan delinquency measures and management’s expectation of modest upward pressure on write-offs.
- Developments in merchant litigation, regulatory proceedings and the potential effect on merchant acceptance, partner economics, costs and legal reserves.
- Execution of the cost-reduction and growth-investment plans, second-half earnings performance, and the authorized buyback and proposed dividend increase.