Business context and reporting period
American Express Company’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2021. The company operates a global payments network and issues consumer, small-business and corporate cards, with revenue primarily from merchant discount fees, card fees and interest. Comparisons with 2020 are affected by the severe COVID-19 disruption in the prior-year periods.
Financial performance and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue net of interest expense | $10.243B | $7.675B | $19.307B | $17.985B |
| Net income | $2.280B | $0.257B | $4.515B | $0.624B |
| Diluted EPS | $2.80 | $0.29 | $5.54 | $0.71 |
| Provisions for credit losses | $(0.606)B | $1.555B | $(1.281)B | $4.176B |
| Operating cash flow | Not separately stated | Not separately stated | $5.465B | $(0.089)B |
Q2 diluted EPS was $2.80; revenue grew 33% year over year. Net income increased substantially from the pandemic-affected comparison period. As a simple calculation from reported figures, net income was about 22% of revenue in Q2 versus about 3% in Q2 2020; this comparison reflects unusually large swings in credit provisions and should not be treated as an underlying margin trend.
Q2 worldwide network volumes rose 50% year over year and were 1% below pre-pandemic levels; June volumes exceeded pre-pandemic levels. U.S. volumes were above pre-pandemic levels, while international recovery lagged. G&S billed spending grew 34% year over year and 16% versus pre-pandemic levels; T&E spending more than tripled year over year but remained well below pre-pandemic levels.
Q2 discount revenue rose 58% to $6.327B, net card fees rose 13% to $1.286B, and net interest income fell 4% to $1.818B. Higher card spending and T&E mix supported discount revenue. Higher customer paydowns reduced revolving balances and interest yield. Q2 average discount rate was 2.30%, compared with 2.23% a year earlier. Marketing and business development expense rose 63% to $2.219B, and rewards expense more than doubled to $2.712B, largely with higher spend and benefit usage.
At June 30, total assets were $186.973B, cash and cash equivalents were $30.796B, and the company reported $43.2B of cash and investment securities available as liquidity resources. Card Member loans were $75.6B gross and receivables were $47.6B gross. Total debt was $39.3B, down from $44.9B at year-end 2020; customer deposits were $84.9B, down from $86.9B. Six-month cash flows were $5.5B provided by operating activities, $2.0B provided by investing activities and $9.4B used in financing activities.
Capital remained above regulatory minimums: the company’s CET1 ratio was 14.2%, versus a stated 10%–11% target range. It returned $2.0B to shareholders in the first half through common dividends and repurchases, including $0.9B of repurchases in Q2.
Material changes versus prior period
- Q2 network volumes and revenue rebounded sharply from the peak pandemic impact in Q2 2020; six-month revenue growth was more modest because early 2020 preceded the pandemic’s full effect.
- Credit-loss provisions shifted from builds to net benefits: Q2 included a $606M benefit, primarily from reserve releases and lower write-offs, compared with $1.555B of provisions in Q2 2020. The reserve for Card Member loans and receivables fell to $3.835B and $73M, respectively, from $5.628B and $519M a year earlier.
- Interest income declined as paydowns reduced revolving balances and yields; lower interest expense partly offset the decline.
- Q2 expenses increased with spending-linked rewards, travel benefit usage and higher marketing investment. Unrealized Amex Ventures gains also contributed to lower “Other, net” expenses.
- Cash and investment securities fell by $11.4B from year-end, chiefly due to growth in loans and receivables, debt maturities and lower deposits.
Outlook, commentary, risks and unusual items
Management said it was increasingly optimistic about continued core-business improvement, particularly in the U.S., while emphasizing that recovery remained uneven and pandemic-related uncertainty persisted. It expects marketing investment to remain elevated for the rest of 2021 and expects loan balances and net interest income to recover more slowly than spending. The filing does not provide a numerical earnings or revenue forecast. Management planned to increase repurchases over the next several quarters to move CET1 toward its 10%–11% target range, subject to results, market conditions and regulatory requirements.
Credit performance was strong, but the company cautioned that outcomes for customers exiting financial relief programs remain uncertain; those balances remained above pre-pandemic levels. Management did not expect a material increase in write-off rates during the rest of 2021. Reserve releases depend in part on economic assumptions and could reverse if conditions worsen.
Other notable matters include a $55M first-quarter tax-provision charge from an accounting change for affordable-housing investments, and substantial unrealized gains on Amex Ventures investments ($625M for the first half). The company is responding to regulatory and law-enforcement inquiries into historical small-business card sales practices; it stated it did not expect a material adverse impact. It also disclosed an India restriction preventing certain new customer onboarding by American Express Banking Corp. until local payment-data storage rules are met.
Risks include COVID-19 developments and travel restrictions, slower international and T&E recovery, customer credit performance, competition and pressure on merchant pricing, regulation, cyber and operational security, funding and deposit costs, and litigation. For certain material legal matters where a loss range could be estimated, the company disclosed a possible loss range of zero to $210M in excess of recorded accruals; this is not its maximum exposure. It also recorded a $33M accrual for certain Card Member purchase-protection exposures, with excess exposure not quantifiable from the filing.
Important facts for investors to verify
- Whether spending growth and recovery—especially international and T&E volumes—persist beyond the unusually weak 2020 comparisons.
- How reserve releases, financial-relief-program exits and customer paydown behavior affect credit losses, loan growth and net interest income.
- Whether elevated marketing, rewards and service costs generate durable card acquisition, retention and revenue growth.
- Capital and liquidity trends, including repurchases, deposit balances, debt maturities and progress toward the CET1 target range.
- Developments in the small-business sales-practices inquiries, merchant litigation, India data-localization compliance and other legal or regulatory exposures.
- The sustainability of reported earnings given reserve releases and unrealized investment gains, and the effect of the first-quarter accounting change on comparability.