American Express Company
Q1 2019 Earnings Call Transcript

Published: 19 Apr 2019

[Operator:]

Ladies and gentlemen, thank you for standing by. Welcome to the American Express Q1 2019 Earnings Call. [Operator Instructions]. As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Head of Investor Relations, Mr. Edmund Reese. Please go ahead.

[Edmund Reese:]

Thank you, Allen. Welcome. We appreciate all of you joining us for today's call. The discussion contains a -- certain forward-looking statements about the company's future financial performance and business prospects which are based on management's current expectations and are subject to risk and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's presentation slides and in the company's reports on file with the Securities and Exchange Commission. The discussion today also contains certain non-GAAP financial measures. Information relating to comparable GAAP financial measures may be found in the first quarter 2019 earnings release and presentation slides as well as the earnings material for prior periods that may be discussed, all of which are posted on our website at ir.americanexpress.com. We encourage you to review that information in conjunction with today's discussion. Today's discussion will begin with Steve Squeri, Chairman and CEO, who will start the call with some remarks about the company's progress and results; and then Jeff Campbell, Chief Financial Officer, will provide a more detailed review of our first quarter financial performance. Once Jeff completes his remark, we'll move to a Q&A session on the financial results with both Steve and Jeff. With that, let me turn it over to Steve.

[Stephen Squeri:]

Thanks, Edmund. Good morning, everyone, and thanks for joining us. As our first quarter results showed, we had a solid start to the year. FX-adjusted revenues grew 9%, which marked the seventh consecutive quarter with FX-adjusted revenues up by at least 8%. Once again, this growth was broad-based and well balanced across spend, lend and fee revenues, reflecting the benefits of our integrated business model. Our adjusted EPS of $2.01 reflected good progress against our strategic imperatives as well as our focus on consistently investing in share, scale and relevance to drive growth. We added 3.1 million new proprietary cards in Q1, driven primarily by our digital acquisition efforts. We continue to expand our merchant network in the U.S. and internationally and billings growth remained solid across customer segments and geographies. Loan growth continued to be strong and credit quality remained at industry-leading levels. As you'll recall, we started the year with mixed signals in the economic environment. Since then, we've seen the economy grow at a steady pace, although not quite as strong as the robust levels we saw in 2018. Consistent with what we said at our Investor Day last month, we are not seeing any broad signals in our business of a significant economic downturn. Looking ahead, we continue to see a number of attractive growth opportunities across our businesses. And as you've heard me say on many occasions, we're continuing to invest to take advantage of those opportunities in order to drive revenue growth over the moderate to longer term. At our Investor Day, I also discussed 3 company-wide initiatives we're focusing on to help accelerate progress on our strategic imperatives. All 3 will build on and strengthen aspects of our business model that differentiate us from our competitors. As a reminder, these initiatives are as follows

[Jeffrey Campbell:]

Thanks, Steve, and good morning, everyone. Good to be here today to talk about our first quarter results, which reflect a solid start to 2019. Let's get right into our summary financials on Slide 3. First quarter revenues of $10.4 billion grew 9% on an FX-adjusted basis, with this growth again driven by a well-balanced mix of growth across discount revenue, fee revenue and net interest income. As Steve mentioned, but it bears repeating, this is now the seventh consecutive quarter with FX-adjusted revenue growth of 8% or better. I would point out that as we continue to see a stronger U.S. dollar relative to last year against most major currencies in which we operate, our reported revenue growth is around 200 basis points below our FX-adjusted revenue growth. Now as you know, FX rates tend to move over time, and so we focus on FX-adjusted revenue growth trends. In fact, you might remember that just a year ago on this call, I was talking about 200 basis points of FX going in the other direction with our reported revenue growth in the first quarter of 2018 up 12% versus our FX-adjusted revenue growth of 10%. Moving down to net income. Our reported net income of $1.6 billion includes an increase to our legal reserves related to certain merchant litigation that was scheduled for trial in June and has now been resolved. Our reported EPS of $1.80 includes a $0.21 impact related to this matter. Given the discrete nature of this $0.21 charge, we are going to focus today on our adjusted Q1 EPS of $2.01, up 8% from the prior year, as we think it is a better reflection of our operating performance. Looking now at the details of that performance. I'll start with billed business, which you see several views of on Slides 4 through 6. Starting on Slide 4, we have broken out our billings growth between AXP proprietary and Global Network Services, our network business. As we continue to exit the network business in Europe and Australia due to certain regulatory changes, we think it's important to show these 2 trends separately. Our proprietary business, which makes up 86% of our total billings and drives most of our financial results, was up 9% in the first quarter on an FX-adjusted basis. The remaining 14% of our overall billings which come from our network business, GNS, was down 4% in the first quarter on an FX-adjusted basis, consistent with the prior few quarters. Turning to Slide 5, you will recall that during our earnings call in January and again at our Investor Day in March, I noted the growth in spending from our existing customers showed a step-up beginning late in Q4 of 2017 that became even more evident in Q1 of 2018. We attributed this acceleration, which occurred across geographies and the customer segments, to an increase in confidence in our customer base. As we got to the end of 2018, we began to lap that step-up. And in the first quarter, we see the full impact of that lapping dynamic resulting in a sequential deceleration in growth. Now to keep this in perspective, Steve noted in his opening remarks that we've been seeing the economy grow at a solid, steady pace this year. And though I don't want to get into the habit on commenting on intra-quarter trends, I think it is important to note that we did see relatively stable growth throughout the first quarter. If you then turn to Slide 6 to look at the billings by customer type for the first quarter, I would start by reminding you that our Global Commercial and Global Consumer segments are roughly the same size, representing 42% and 44% of Q1 billings, respectively, while Global Network Services makes up the remaining 14% of billings. Starting on the left with a large and global customer segment, we saw a 5% growth on an FX-adjusted basis in the first quarter. I've mentioned before that growth in this segment can vary a bit quarter-to-quarter due to the large volumes a few customers can drive and due to the fact that this segment remained heavily T&E-oriented. More broadly on T&E, you can see in our earnings tables that we had solid growth in U.S. T&E spend of 5% in the quarter. Moving on to our small and mid-sized enterprise Card Members, or SMEs, U.S. SME grew 8% in the first quarter. We feel good about our continued leadership position in the U.S. SME space and the continued strong acquisition performance we are seeing in the segment. International SME remains our highest-growth customer segment with 19% FX-adjusted growth in the first quarter. During Investor Day, we highlighted the long-term growth opportunity in this segment given the low penetration we have in the top countries where we offer international small business products. And we continue to feel good about our long runway for growth in this segment. Moving to U.S. consumer, which made up 32% of the company's billings in the first quarter, billings were up 7%, reflecting continued strong acquisition performance and solid underlying spend growth from existing customers despite the lapping impact that we've repeatedly discussed now as well as the Hilton portfolio acquisition in the first quarter of last year. Moving to the right, international consumer growth remained in the high teens as it was for all of 2018 at 16% on an FX-adjusted basis. We continue to have widespread growth across countries, with double-digit growth in Mexico and Australia and growth of 20% and 18% for the U.K. and Japan, respectively. Finally, on the far right, as I mentioned earlier, Global Network Services was down 4% on an FX-adjusted basis driven by the impacts of regulation in the European Union and Australia, where we are in the process of exiting our network business. Although network billings are down in these regions, if you were to exclude the European Union and Australia, the remaining portion of GNS was up 6% on an FX-adjusted basis. Overall then, we continue to feel good about the breadth of our billings growth and the opportunities we see across the range of geographies and customer segments in which we operate. Turning next to loan performance on Slide 7. Total loan growth was 12% in the first quarter with nearly 60% of that growth, again, coming from our existing customers. We have now lapped the impact of the Hilton portfolio acquisition that took place in the first quarter of last year and contributed 120 basis points to growth in the fourth quarter. On the right-hand side of Slide 7, you see that net interest yield was 10.9%, up 10 basis points relative to the prior year. We've been saying for quite some time now that these increases were going to moderate, and so we are pleased that our yield is still increasing year-over-year. Turning next to the credit metrics on Slide 8. On the left, you can see that in the first quarter, the lending write-off rate was 2.3%, up 30 basis points to the prior year; and on the right, you can see that the charge write-off rate, excluding GCP, was 1.8%, up 20 basis points from the prior year. You also see on the page the delinquency and GCP net loss ratio trends. All of these portfolios are performing in line with our expectations, subject to typical seasonal trends and the fact that there is typically a bit more quarterly volatility in the charge rates. More broadly, as we said last quarter, we still do not see anything in our portfolio that would suggest a significant change in the credit environment. With these metric trends, you can then see on Slide 9 that provision expense was $809 million in the first quarter, up just 4%. Now as you know, the accounting for provision is complex, and as an aside, is about to become much more complex under CECL. And I've often said that even today's complexity can drive some significant quarterly volatility at times. That quarterly volatility is certainly evident in the provision growth trend for the first quarter. The low growth in the quarter is primarily due to the lower level of reserve builds this year versus last year. As you will remember, we saw higher reserve builds in the first quarter of last year driven by acceleration in loan growth and the seasoning of our lending book. In addition, we are lapping the impact of a modest increase in lending reserves in the first quarter of 2018 from the Hilton portfolio acquisition. In contrast, given the relative stability we see in our lending portfolio today, we are not building reserves at the same level this quarter relative to a year ago. More broadly though, stepping back, as you think about the full year during our fourth quarter earnings call, we said we expected provision growth of less than 30% in 2019. Given the positive underlying trends we saw in the first quarter, we now expect to do somewhat better than this with provision growth in the mid-20% range for the full year. Turning now to revenues on Slide 10. FX-adjusted revenue growth was 9% in the first quarter driven by broad-based growth across spend, lend and fee revenues. As I mentioned earlier, the FX impact to our growth rates in the first quarter was significant due to the year-over-year strengthening of the U.S. dollar against the major currencies in which we operate beginning in the third quarter of last year. Assuming the dollar stays roughly where it is today, that effect should lessen as we go through 2019. For those of you interested, I would remind you that we share our exposure to top currencies in the appendix of the earnings slides that you see on our website today. Moving to Slide 11, you see the components of our total revenue. The portion of our revenue coming from discount revenue and fees remained at 80% in the first quarter, in line with 2018. Discount revenue was up 5% on a reported basis and was up 7% on an FX-adjusted basis, which I'll come back to on the next slide. Net card fees grew 14% in the first quarter which is in line with the momentum we saw exiting 2018. We feel very good about our ability to maintain strong growth in net card fees given the breadth of products that drive this momentum and the high engagement that we see with new and existing customers. As just one example, this quarter, we saw 67% of our consumer new account acquisitions come on fee-based products. Net interest income grew at 12% in the first quarter, more in line with loan growth as our yield growth moderates. I would remind you that rising rates do represent a modest headwind for us given the size and scale of our charge business, and we have higher funding cost this year due to the rise in interest rates relative to last year. This impact of rising rates on our funding cost is being partially mitigated though by the great growth we are seeing in our online personal savings deposit program which has increased by 25% over the past year. As we have said, we continue to expect this to be the fastest-growing part of our funding stack. Stepping back, I would point out that unlike many other financial institutions, the latest interest rate outlook for the rest of the year represents a modest upside for us relative to what we saw as we put together our original outlook for 2019. Turning now to Slide 12 to cover the largest component of our revenue, discount revenue. As Steve and I continue to say going forward, our focus will continue to be on driving discount revenue growth, not the average discount rate. And on the right, you see that discount revenue grew 7% in the first quarter on an FX-adjusted basis, roughly following our billing strength, making this the sixth consecutive quarter with discount revenue growth above 6%. Turning now to our expenses on Slide 13. Let me first point you to operating expenses, which were up 10% in the quarter. There are a few discrete items impacting the growth rate, including the increase to legal reserves in the quarter this year and a charge related to the sale of our prepaid operations in the first quarter of last year. Excluding these items, we continue to have well-controlled operating expenses. Our ability to generate steady OpEx leverage continues to be a key part of our financial model and one that we have confidence in sustaining over the long term. We continue to invest in our customer engagement cost which you can see on Slide 14 in which we're up 12% in the first quarter. Starting at the bottom with marketing and business development, I'll remind you that this line has 2 components

[Edmund Reese:]

Thank you, Jeff. [Operator Instructions]. We will be ending the call a few minutes before 9

[Operator:]

[Operator Instructions]. Our first question will come from the line of Craig Maurer with Autonomous Research.

[Craig Maurer:]

First, congrats, Edmund, and congrats, Rosie. My question is about Delta. I was hoping you could sort of couch the comments that were made both by Delta and you guys today to help us understand how much of this new agreement relies on enhanced economics for Delta versus just what would be standard kind of improvements in the contract for Delta as the portfolio grew.

[Jeffrey Campbell:]

Well, let me start, Craig, by making a few financial comments then I'll let Steve comment a little more broadly. So we have had tremendous growth over the years with Delta. And in fact, if you were to look at the things we said at the time of the last renewal in 2014, you would see tremendous growth between the numbers that both we and Delta talked about in 2014 and today. And in fact, if you look at some of the numbers that Delta has publicly talked about over the last few weeks, and you run that forward, you basically see about the same growth rates. So this has been a tremendous part of our business model for many years, faster growing than the company average. And what this agreement does is lock in both of our commitments to keeping this as one of the fastest-growing parts of our company for many years. And that's the key source of economics for both of these things. Now sure, when you renew these agreements, as we talked about in 2008 and 2014 and today, as we talked about with Hilton and Marriott last year, there is always some update to market terms. But we have a long track record of growing right through those modest updates to market terms and this is really about the partnership growing and driving value for both of us.

[Stephen Squeri:]

Right. So let me just make a couple other comments. When you -- when Ed and I sort of met for the first time and started talking about our partnership, we realized just how critical this was to both companies. And when we got to November, what we both had said was let's put this sort of off the table for not only the foreseeable future but potentially forever, and that's why we decided to do this 11-year deal. And when you think about sort of that comment that I just made about forever, our intent is to invest side-by-side, our intent is to integrate from a technological perspective, to continue to integrate and leverage the huge amount of assets that we both have from a travel perspective, both business and personal travel, lounges, technological app integration, so forth and so on. And my view is, and I think Ed would say the same thing, we're going to grow this thing so big and we'll be in each other's DNA so much that come renewal time in January 1st of 2030, it will probably be much more of a formality to renew this versus any protracted negotiation. In 2030 I'm sure that there will be some economics that we'll talk about. Maybe it won't be Ed and I talking about them, but somebody will be talking about them. And we're really excited about it. The other thing I'll point out, and Jeff mentioned this, we're going to have a $200 million headwind this year. And that happens when you do this. But I think what's really important here is that will be the last time you hear us talk about this. We'll have this $200 million headwind this year and we're going to just continue to grow. And I'll refer to my remarks where I said this is about billings growth, it's about lending growth, it's about revenue growth and it's about profitability growth. And so I think this is a great deal for us, I think it's a great deal for Delta, but probably most importantly, it's a great deal for our existing customers, both of them, as they're going to get a better product and we're going to avoid that sort of dance that you tend to do two years before the deal is up and we're going to invest right through this. And so avoiding that, I think, is probably the biggest win for both companies and for our customers.

[Operator:]

Our next question will be from the line of Sanjay Sakhrani with KBW.

[Sanjay Sakhrani:]

And congratulations to Edmund. Can you hear me?

[Edmund Reese:]

Thank you, Sanjay.

[Stephen Squeri:]

Yes, Absolutely.

[Sanjay Sakhrani:]

Sorry about that. Yes. Congratulations to Edmund and Rosie and congratulations on renewing Delta and thank you for not having us talk about it for the next 3 years. I guess I wanted to drill down on the spending volume stats that Jeff mentioned and sort of the fact that they were even through the quarter. Jeff, could you just talk about how we expect that to continue as we move through the year? Because there were certain onetime items in the quarter related to holidays and such and gas prices. I mean, does that rebound as we move forward? And then as we think about the FX optics, too, I think those subside as well, right?

[Jeffrey Campbell:]

Well, so let me work backwards. On FX, of course, we don't try to predict FX rates. My comments earlier were just pointing out that if you take today's rates and you assume that they were to stay for the rest of the year, then you would see naturally just given what happened last year, the FX impact moderate as you go through the year. Look, we absolutely did see stable growth throughout the course of the first quarter, so we feel good that we are at a steady-state level consistent with the growth we see in the economy. In terms of -- when we net out all the various kinds of onetime items you talk about, I don't think there is anything that particularly drove the first quarter differently than what I'd expect to see in the rest of the year. So we feel good about the trends. I think perhaps more importantly, Sanjay, on the revenue growth side, which is ultimately what this is all about, we were right in the middle of our guidance of 8% to 10% for the year and we feel great about that start and we are very confident in our ability to sustain the kind of strong revenue growth that you've heard us talk about as our key first goal in terms of driving sustainable share, scale and relevance. So we feel good about the trends.

[Operator:]

We'll go next to the line of Mark DeVries with Barclays.

[Mark DeVries:]

I actually wanted to follow up on Craig's question. I want to commend you on renewing Delta. I think most people will recognize it's a valuable partnership for both you and for them. And clearly, they were pretty happy with the outcome. They had mentioned a contribution from Amex by 2023 of $7 billion, up from $3.4 billion this year. And that implies, if you just kind of straight-line that over the period, about $5 billion in 2021 versus their prior disclosure of $4 billion. So I guess what I'm trying to get a sense of is how much of that is them and you feeling like the new partnership is going to help you expand the pie? And how -- or how much of that is them just getting a larger share of that pie?

[Jeffrey Campbell:]

So let me start, Mark, but just maybe level-setting everyone with some numbers. And while I don't always like to quote numbers from other people, if you go back to when we last renewed with Delta, they do talk about what they call the overall remuneration, which I would remind people are payments we make to Delta for lots of things that we then use in our value propositions, as we buy miles from them, as we pay for lounge access, as we pay for things like free baggage, et cetera. So in 2014, they talked about a $2 billion number. If you run that forward to the numbers they've been talking about for this year, you're at a compound annual growth rate in the mid-teens. And if you look at the numbers they talked about for the future, you're pretty much at about the same growth rate. So this -- what we keep coming back to is this has been a great partnership where we have had very high rates of growth for some number of years. And with the 11-year deal now locked in so we're both comfortable continuing to invest, we're both very confident we can continue to grow at these kind of great rates. And that's the source of the economics. It's not particularly an inflection point from the path we have been on. You can also triangulate, if you like, on this by just looking at the numbers we provided at our Investor Days the last 2 years talking about the size of Delta relative to our overall billings and volumes. And again, if you just triangulate on those numbers, you're going to see growth rates all in the same kind of range.

[Operator:]

Our next question will come from the line of Betsy Graseck with Morgan Stanley.

[Betsy Graseck:]

I just wanted to talk a little bit about the loan growth. I know we've already talked about spend and how that trajected throughout the quarter. I wanted to get a sense as to how you're thinking about the demand from your customers. And do you expect that there's an incremental upside to the loan growth as we go through the next couple of quarters here as the economy the markets obviously have done better? Or do you feel that at pace with recent trend is more likely? And then if you could speak a little bit about the international component versus the U.S. component as well. Like to understand if there's any incentives going on in the international side for spurring a little bit more loan growth.

[Jeffrey Campbell:]

Maybe I'll start, Betsy, and Steve can add some business color. Look, we feel great about the now 5 years of growth that we've had a little bit above the industry. And as, Betsy, you've heard me say many times, we see that as color -- or driven by the unique opportunity that we have to correct our historical under-penetration of our own customers' borrowing behaviors. And we feel pretty great about 5 years of growing a little faster than the industry while growing our net interest yield and while maintaining best-in-class credit metrics. All that said, I don't particularly see an inflection point in the environment. I think the rates that we're at, and I'd remind you, most of our lending is still driven by U.S. consumer, we feel good about those rates. I don't know that we're particularly looking to accelerate. And in fact, if you look at some of the things I said at Investor Day, I talked a little bit about some of the risk actions we've taken over the past year. We are seeing really good growth outside the U.S. as we have only more recently begun to focus a little bit on capturing a greater share of our customers' card borrowing behaviors outside the U.S., that's still a pretty modest portion of the total. So while the growth rates are good, it's still not a particularly large driver of the overall growth in the portfolio.

[Stephen Squeri:]

Yes. I would just go back to what I said in my remarks and what I said at Investor Day. I think this sort of the loan growth and offering more loans to our customers really focuses on the whole concept the customer is a platform for growth. And so if you even look at sort of how we're treading, we're even trending now even up even more with loans to our existing customers. So we're up almost 60%. So if you look at the 12% loan growth that we had in our consumer business, 60% of that growth has come from existing customers. And we're going to continue that. I mean, we're going to continue to focus on the product and services that our customers need. There's no reason to cede that to the competition. And we're looking at obviously working capital. And we continue to grow loans internationally for our consumer business as well, but it's a very, very small part of our overall loan book. So not much change going forward. It's steady as she goes, staying on course, and obviously looking at all the guide rails as we go along and managing the credit quality as it comes in. And you even saw at Investor Day how our overall FICO score has gone up to 740, which we talked about. So we feel good about where we are.

[Operator:]

We'll go next to the line of Jamie Friedman with Susquehanna.

[James Friedman:]

So as we start getting closer to the end of 2019, can you provide any updates on where you are relative to your U.S. coverage parity goal? And on that same topic, are there an incremental -- is there any incremental spending you think you'll have to make to drive yourselves over the finish line there?

[Stephen Squeri:]

So boy, you're coming up on the end of 2019. But my grandfather used to say that July 4th, that the summer's over. But I guess for you, the whole year's over in April, huh? But anyway, look, we're still right on track. Virtual parity coverage by the end of 2019 in the U.S. We don't anticipate spending any more money than we already have in our plan or that we've -- or have been articulating. And so we feel really good about where that is. Now having said that, let me just explain what virtual parity coverage is. It doesn't mean that we might not find the restaurant here or the small retail shop there, but we're looking at sort of maybe triple 9s, five 9s, 99.99%, coverage here. And we feel really good about it. And when we find those places that just opened and may not accept the card, we'll jump right on it with our partners, which is -- the reason we feel so good about what we can do in international now, as I talked about at Investor Day, because of what we've done in the United States. And why we're taking a country focus and a city focus in international, is to really drive that coverage up using a lot of the same tools that we've used here in the U.S. to drive coverage. So bottom line, we feel good about it and we feel we're right on track.

[Operator:]

Our next question will come from the line of Moshe Orenbuch with Crédit Suisse.

[Moshe Orenbuch:]

Jeff, your comments about spending during Q1, some economists have talked a little bit about the fact that people who are kind of higher income but not wealthy might see unexpected kind of tax payments in April. Have you seen in the first couple of weeks any impact from that? Is that something we should be thinking about in Q2?

[Jeffrey Campbell:]

That is a -- Moshe, I will say, common question we get. And as we look every year at spending patterns, it's really hard to see them impacted all by the timing around tax payments. And while I don't want to get too much into intra-quarter trends, it is April 18 and I certainly see no evidence of any kind of impact from people suddenly looking at what their ultimate tax due was and being surprised. So I think we feel good about the trends we saw in the first quarter. As I said earlier in response to Sanjay, we feel good about the sustainability of those trends. And in the grand scheme of things, I don't think that tax payments have much of an impact.

[Operator:]

Our next question will be from the line of Bill Carcache with Nomura.

[Bill Carcache:]

I wanted to follow up on your comments about the benefit you're generating from lower-cost funding sources with a broad branding strategy question. So we've seen some of your issuing bank partners start offering enhanced credit card rewards to customers who also maintain balances with them. Is there a possibility that we could see Amex do something similar with enhanced Membership Rewards for customers who exceed certain deposit thresholds? And then separately but still on the topic of funding strategies, Amex in the past has concluded that debit products, that the offering didn't really make sense for you. But do you think there -- with the digitization that's taking place in the industry, could there -- could the debit offering perhaps become a bit more viable today than you thought in the past, particularly when you factor in the Durbin exemption that I believe you would qualify for?

[Stephen Squeri:]

So let me take this. When -- as we think about sort of debit and we think about enhanced Membership Rewards, we constantly look at sort of the marketplace and the product offerings that we have to determine whether they're the right offerings or not. So you never say never as it relates to debit. I think the point that you bring up as it relates to debit is that with digitization, and I think there's no greater example of what you can do from a digital perspective than what we've done with personal savings and just the 25% growth that we've seen. So could you see a world or a day when you attach a debit to one of those products or attached debit to the Amex product? Possibly. But we're constantly looking. At it at this particular point in time, we don't really have any plans to do anything. We think the products and services that we have right now work just great. As far as sort of linking products together from a rewards perspective, let me take it up one level. And we look at the totality of the value proposition. And the totality of the value proposition encompasses not only the Membership Rewards, but investments that you might make in lounge, in co-funding benefits with partners. And you can go through across our product line and see just the various components, whether it's restaurant credits or airline credits or Uber credits and so forth and so on. And so as we look at it, we try and see what our customers really truly value. And if there comes a point in time where it makes sense to take more rewards and give rewards to personal savings, we'll certainly look at that as we look at things all the time. But right now, we like the value propositions that we have, and we continue to invest in those value propositions. And I'd just point out 2 of the acquisitions that we just made with LoungeBuddy here and with Pocket Concierge in Japan, which provides -- is going to provide more restaurant access. It's going to build upon the Cake acquisition and the Mezi acquisition that we did. And LoungeBuddy builds upon our entire lounge strategy. And we've just decided to make more investments in those areas at this point in time. But we certainly don't have our eyes closed. We really like to sort of manage this business with an external perspective. And if we find that, that becomes either an Achilles' heel or an opportunity, we'll take a look at it.

[Operator:]

We'll go next to the line of Bob Napoli with William Blair.

[Robert Napoli:]

Jeff, I know you wanted some comments on CECL, but I don't want to use up my question on CECL. If you want -- because that's going to be some complications. But I did notice that you guys, on the B2B side, adding Ariba, SAP Ariba, and you have Bill.com. And I was just wondering some updated thoughts on the growth of B2B payments. And I guess you're using SAP Ariba for enterprise and Bill.com for SMB would be my thought.

[Stephen Squeri:]

Yes. As far as -- like I say, I don't know if it was the fourth quarter you asked the question or the third quarter, I talked about how we sort of think about this market in sort of 3s from a B2B perspective. You think about sort of the real small businesses, and that's exactly where Bill.com is focused as we look to integrate working capital and we look to integrate Card. Then you look at some of the AP Automation players, and we think about that in sort of the midsized companies and less-sophisticated maybe larger companies. And then you look at SAP Ariba and you look at sort of the integration there for large and global companies. And what I would say about this sort of the SAP Ariba integration, the interesting part here for us is that what happens is the payment is completely integrated within the existing flow. But what's different is instead of just assigning a virtual account number, what we do is we assign the existing CPC card or the existing Corporate Card will spin off a virtual account number. So bottom line is the existing cardholders don't need to get new virtual card -- virtual account numbers, and that virtual payment sort of token that goes through will be tied back to their existing account. So there's no reissuance of cards and things like that. It's a seamless integration. And so if you have SAP Ariba, you have a Corporate Card, you're authorized to use it. You can put that in and it turns into a virtual payment. And it also provides some more control on the back-end because the supplier will not be able to continue to hit that card, it really becomes a onetime use for that transaction. So we feel really good about that. We feel that like there's good reconciliation capabilities. We feel that what we've done with sort of tying our corporate and CPC products to the virtual account technology works out really well. And that, we feel, is really a value of having, again, the integrated business model that we have. So we're excited about it and it gives us an opportunity to go after that segment. And just to point out, obviously, we're in really good shape from an SME perspective. But 50% of our corporate -- large and global Corporate Card clients use SAP Ariba.

[Jeffrey Campbell:]

And Bob, I will admit we were surprised at Investor Day as well that nobody asked about it. I'll very quickly say this. Obviously, it's super complex as I said earlier. It's a little baffling to us that it doesn't fit very well with credit card and yet seems like credit card may be most impacted by CECL, which I'm not sure is the original goal of the regulators. Look, we have two things to think about. On the credit card side, our results aren't going be that dissimilar to others, although I don't see us at the high end maybe of what some others have said. What's unique for us just because of our charge card franchise, nobody else has that, and there actually reserves will go down. Now because our charge receivables are smaller than our lend receivables, on balance, I'd expect it to be a modest increase in reserves. For us, particularly from a capital perspective, I think this is manageable. But biggest challenge, I think, is going to be the volatility and complexity this is going to drive going forward as well as the pro-cyclicality. So there we go. CECL in 60 seconds. Next question.

[Operator:]

That will go to the line of David Togut with Evercore ISI.

[David Togut:]

I'd appreciate your updated thoughts on the average discount rate for this year. The discount rate was actually flat year-over-year in the first quarter for the first time in a while, and I'm curious what your thoughts are on discount rate, especially as we approach the rollout of PSD2 in Europe where consumer ACH payments might be widely used for e-commerce transactions. In that environment, does that change your value proposition, especially in Europe?

[Stephen Squeri:]

So let me -- I was going to kick this to Jeff, but let me address the back part of this. I think actually, that's probably an opportunity for us. I don't think it's really going to change our discount rate. I think what it does is gives us an opportunity, like many other financial opportunities, to jump in to some of the debit potentially, some of the ACH transactions and some of the cash transactions which we don't really have access to today. So if you had that under a discount rate model, yes, it would impact the discount rate. But this is why what I've been saying since day 1 is you have to look at the industry, you have to look at the country, you have to look at the economics of the overall transaction. And we have $1.2 trillion, $1.3 trillion of billings. If I put another $1.3 trillion on and it was at 50 basis points of what you would call "discount rate" and that was 50 basis points of profit and the discount rate was cut in half, who cares? So reality is it's all about margin and it's all about making money, but the reality is when you get back to sort of PSD2, and I see it much more opportunity for us to grab more revenue and to grab more margin as we move forward. And I really don't look at that as impacting the discount rate. I certainly don't see it impacting the discount rate that we have on our traditional products with those existing merchants and that might be a new fee structure that we look at. So -- and that's the reason why we haven't really been focused on the discount rate, right? Because as I've said before, this is what everybody has used as a proxy for the margin of the company and that's not really the way to look at it. And so we feel good about discount revenue growth and we're really going to continue to focus on discount revenue growth as we move forward.

[Operator:]

Our last question will come from the line of Don Fandetti with Wells Fargo.

[Donald Fandetti:]

If you look at U.S. small business, the spend volumes have continued to be pretty steady and good. As you think about Amazon and you dig further in terms the penetration opportunity, do you think that billed business growth rates could potentially improve? And then secondarily, as we think about U.S. consumer cards, the view seems to be that competition has stabilized. In small business in the U.S., are you seeing players get more active or more aggressive? Can you comment on that?

[Stephen Squeri:]

Yes, look, I think in small business in the U.S., people have been very competitive for a long time. I just don't think it's been something that everybody has focused on. In a lot of banks, small business is buried within the consumer business. In fact, for us small business was buried within the consumer business until 2 to 3 years ago. So I see that as a very competitive space. Not -- maybe not as crazily competitive as U.S. consumer has been. So -- but look, I mean, has competition reached a plateau? We haven't seen the same step-ups, would say, that we've seen in the past. But look, even with Citi and some of the other banks, what they've done now, and Bank of America as well, is when you -- and Bill Carcache brought this up before, as you then tie sort of your deposits to your credit cards and put rewards on that, that's another form of competition. But we believe our value propositions play well. So I think that when you think about the competition from a small business perspective, it's there. We feel that we have the assets of compete and have been competing very effectively and Amazon saw that same thing. The last point I'll make from a small business growth perspective, we have a very large base from a small business perspective, and small businesses go in and out. And so what you're seeing in that growth rate is not only all the new signings that we get, which is a pretty good number, but also businesses that close and so forth. So we'll continue to push with products and services and hopefully to continue the growth rate that we've seen over the last 3, 4, 5 years in the U.S.

[Edmund Reese:]

With that, we'll bring the call to an end. Thank you, Steve. Thank you, Jeff. Thank you again for joining today's call, and thank you for your continued interest in American Express. The IR team will be available for any follow-up questions. Operator, back to you.

[Operator:]

Ladies and gentlemen, this conference will be made available for digitized replay that begins at 10