American Express Company
Q2 2012 Earnings Call Transcript

Published: 19 Jul 2012

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Follow-up Second Quarter 2012 Earnings Release Conference Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the conference over to your host, Vivian Zhou.

[Vivian Zhou:]

Thank you. Welcome, we appreciate all of you joining us for today's discussion. The discussion today contain certain forward-looking statements about the company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today. The words believe, expect, anticipate, estimate, optimistic, intend, plan, aim, will, should, could, likely and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements, including the company's financial and other goals, are set forth within yesterday's earnings press release and earnings supplement, which are filed in an 8-K report and in the company's 2011 10-K and first quarter 2012 Form 10-Q report, already on file with the Securities and Exchange Commission. In the second quarter 2012 fixed income presentation slides, which are now posted on our website at ir.americanexpress.com, we have provided information that describes certain non-GAAP financial measures used by the company and the comparable GAAP financial information. We encourage you to review that information in conjunction with today's discussion. Today's discussion will begin with David Yowan, Executive President and Corporate Treasurer, who will provide a second quarter 2012 capital and funding update, including some key points related to the quarter's financial performance through the series of slides distributed and provide some brief summary comment. Once Dave completes his remarks, we will move to Q&A. With that, let me turn the discussion over to Dave.

[David L. Yowan:]

Thanks, Vivian. We're pleased to host this Fixed Income Investor Conference Call this quarter. We hope you'll find informative and helpful a separate discussion that focuses on elements of our business that are of particular interest to fixed income investors. As always, we appreciate any feedback you have on how we can best provide you with the information you need to make investment decisions. Today, we're going to provide you with a capital and funding and liquidity management update. Some of you may have joined us on our earnings call yesterday, and there are some key points from that call that I would like to reemphasize. Then I'll take you through some specifics on our capital position and liquidity profile. Turning to Slide 2. We report our second quarter results, which included a 5% increase in total revenues net of interest expense on an FX-adjusted basis that was 7%. In the call yesterday, you saw how the stronger dollar has had an impact on some of our key metrics. Income from continuing operations increased 3%, while diluted EPS from continuing ops increased 7%. That faster growth of EPS relative to income is a consequence of the share repurchase activity that we've conducted. And you can see at the bottom of this slide, you see the average diluted shares outstanding have declined 4% over this period. Lastly, our return on average equity was 27% in the quarter. If you turn to Slide 3, we describe some of the key metric performance for the quarter. Billed business at $221 billion was up 7% compared to the prior quarter last year and 9% on an FX-adjusted basis. That billed business growth was driven by a 6% increase in total cards in force. There was a little faster growth in that in the GNS business and a growth of -- in the issuance of proprietary cards was a little slower than that. Average basic cardmember spending increased 5%, demonstrating our ability to continue to penetrate our existing customers' wallet -- spending wallet. Lastly, cardmember loans increased roughly 4%, up to $61 billion at the end of the second quarter. Turning to Slides 4 and 5. These are slides that we use to describe how the billed business metric turns into loans and assets on our balance sheet. Slide 4 shows on the solid line the change, year-over-year change, percentage change in billed business on our charge card products across consumer, small business and corporate card. The dotted line shows the change in ending receivables associated with that spending. And as you would expect, given the pay-in-full nature of the product, the relationship between those 2 lines is very strong. If you turn to Slide 5, here, we show the growth in spending on our credit card products as well as the growth in loans as well. So again, the solid line is the year-over-year change in proprietary credit card billed business. The dotted line is the year-over-year growth in ending loans on a managed basis. While spending growth has slowed somewhat, you'll see that loan growth, which had been quite negative in the period from -- in '09 and '10, was positive and there is a convergence between spending growth and loan growth here. Slide 6 puts our spending and loan balances into a competitive framework. This is data for the first half of the year based on results reported to date. Our total billed business of $433 billion is well above all the other major issuers, and you can see the growth rates on a year-over-year basis compared to prior year at the bottom of that graph on the left-hand side. On the right-hand side of the chart, you'll see our ending loans at $61 billion, again with the growth rates there down below. So it gives you a sense of our relative performance. Starting on Slide 7, we describe the credit performance in our charge and credit card portfolios. Slide 7 gives you a sense of the write-off rates in our charge card portfolios. The left-hand side is U.S. consumer and small business charge card, where our 2% write-off rate is above the 1.5% rate from a year ago, but down on a sequential basis from 2.3%. The write-off rates on the left-hand side of the page represent write-offs as a percentage of charge card receivables. On the right-hand side of Slide 7, we show the net loss ratio for charge card products issued in our international consumer and small business segment as well as in our global corporate segment. Here, the metric -- the loss metric is shown as a percentage of billed business. But you could see a similar pattern to the write-off rates in the U.S. consumer segment. So write-offs are slightly higher than a year ago, but have declined on a sequential basis. Turning to Slide 8. We show the write-off rates, including leading competitor write-off rates as well. Our second quarter write-off rate was 2.2%. That's down from 3.1% a year ago and down sequentially as well. If you look at our monthly disclosures in the second quarter, our write-off rate in the second quarter released in April was 2.4%. It was 2.2% in May, and then it ended the quarter, exited the quarter in June, at a 2% rate to average out to 2.2%. Page 9 shows a similar pattern in delinquency rates. Again, this is on our lending business. The delinquency rate in the second quarter at 1.3% is down from 1.6% a year ago as well as shows a decline on a sequential basis. These credit metrics are at historically low levels for our company. Slide 10 describes the credit quality, as disclosed in the FICO scores, in our 2 securitization trusts and compared to the FICO distributions as disclosed in the most recently available information from the other major card trusts. You'll see on the left-hand side, that gives you a percentage of our 2 trusts, the AXP charge trust, the Credit Account Master Trust -- I'm sorry, that's the American Express Issuance Trust, and then the lending trust is the Credit Master Trust, the percentage of those accounts and balances that have a FICO below 660. On the right-hand side, for the same 2 trusts, we show the percentage that has a FICO score above 720. So both of those are leading the industry in that respect. On Slide 11, we turn to our capital ratios. We ended the second quarter with a Tier 1 common risk-based ratio of 12.8%. Not on the page, but you remember that we ended last year, 2011, at 12.3% on this metric. Then in the first quarter, the ratio increased 110 basis points to 13.4%. It increased because we had a limited amount of share buyback activity in the first quarter as we only received the approval from the Fed to our capital distribution plan late into the first quarter. In the second quarter, we accelerated and increased the amount of shares that we repurchased. We repurchased 1.8 billion of shares in the second quarter, bringing the first half of the year amount to $2 billion. That share buyback amount helped influence and drive the decrease in our Tier 1 risk-based capital ratio down to 12.8% at the end of the quarter. We've also disclosed that the impact of the proposed rules on Basel III that were released in June would have, on a pro forma basis, reduced our Tier 1 common risk-based ratio by roughly 30 basis points. That compares to some of the prior quarters where I think the range that we've disclosed on net impact is somewhere between 20 and 80 basis points, so still within the range that we have disclosed historically, given the release of the proposed rules. Turning to Slide 12, we just review our principal objectives and strategies for funding and liquidity. We continue to maintain a target to hold, I should say, sufficient cash and readily marketable securities to meet all of our maturing funding obligations for the next 12 months. And that's in case we don't have access to the unsecured or secured debt capital markets or are able to raise additional deposit funds. Our strategy with respect to funding is to continue to focus on diversifying our funding sources between deposits, unsecured debt and ABS. We're focused on laddering out our maturities to avoid any large concentrations of maturities in any onetime period or with any one particular funding source and to continue to maintain substantial levels of cash and readily marketable securities as well as additional contingent funding sources, such as bank lines, conduit facilities and discount window. We are striving for a well-diversified funding mix and trying to achieve scale and relevance in each of our 3 long-term funding markets

[Operator:]

[Operator Instructions] And I do have a question from the line of Ryan O'Connell with Morgan Stanley.

[Ryan O'Connell:]

I'm going to act like a real bond guy now and ask you about share buybacks. I mean, of course, American Express has a very, very good Tier 1 common ratio now, and I'm not going to try to beat you up on that. But when we start talking about payout ratios of 90%, I guess what would be helpful is just how you all as management look at how you're going to manage this. Do you -- I don't know if you publicly disclosed a target Tier 1 common ratio. Could you help me with that?

[David L. Yowan:]

Ryan, so a couple of things, I guess. We have described our payout strategy, which is as follows

[Operator:]

And our next question comes from the line of Ron Perrotta with Goldman Sachs.

[Ron J. Perrotta:]

Just real quick question on the unsecured funding strategy. I mean, historically you guys have issued from several different entities. And the past few issuances have been out of Credco. Any color that you could give us on what the strategy is there, especially as we look at some of the upcoming maturities that you mentioned, some our Credco, some are parent co? I mean, is there a real reason to issue at the hold co and at the bank levels anymore?

[David L. Yowan:]

So I'd say that our issuing strategy in terms of legal entity is really primarily driven by our business needs. So if you, as I know you have, if you look at Credco and look at the businesses and the assets that it funds, it primarily -- it funds a portion of our charge card business as well as it funds through loans and the purchase of assets. It funds a significant part of our international consumer and small business segment as well, both charge and lending products as well. And so you should really look in and think of how those businesses are growing, and our financing strategy will really follow that business growth. The banks, of course, the U.S. banks, you would look at U.S. consumer and small business charge and lending growth. There you'd also have to look at the deposit programs, which we have grown significantly over the last several years as well, along with the lending trust ABS program.

[Ron J. Perrotta:]

Okay. And just a quick follow-up on that. For -- at the bank level, when you talked about -- obviously you've made a lot of progress growing the deposit base. Is there an expectation that as part of your strategy, you're still trying to grow that? Or is it your kind of comfortable where you are, and given where you can issue in the securitization market, we should expect the deposit balance to just -- in a range around the current numbers? Or is there an expectation that you're still trying to push the balance growth there?

[David L. Yowan:]

Yes. So I think what we've -- we've grown deposits rapidly off a small base. And in doing so, we've effectively replaced that. I think we have the chart that shows the difference mix of compositions in the slides that we showed you, in the Slide 16. If you went back even further, it's an even more dramatic shift in composition, where unsecured and ABS are a smaller proportion of the total. It's -- the deposit growth cannot continue to grow as rapidly as it's grown over the last 3 years. And it will, like all of our funding programs, really be expected to grow in the long run in line with our business needs.

[Operator:]

[Operator Instructions] And I have no further questions. Please continue.

[David L. Yowan:]

Terrific. Again, thank you all for joining. We hope you found this informative. And Vivian and I would love to hear any feedback you have on how we could improve upon this. So please feel free to give her a call. Thank you very much.

[Operator:]

And ladies and gentlemen, this call will be available for replay after 7