Christophe Le Caillec
Chief Financial Officer at American Express
Thank you, Steve, and good morning, everyone. I'm excited to have my first earnings call, be one where we discuss our continued strong momentum, which is reflected in our record revenue and EPS in the third quarter.
I would like to take a minute at the outset to share my perspective on the company as someone who has been here for a long time and through various business environments. The company is very focused on driving high levels of profitable revenue growth. A key enabler of that growth has been the discipline we use to deploy our resources. As a result, the underlying quality of our business is very strong, and I have confidence in the sustainability of the growth drivers that we are seeing.
We have accelerated the pace of our revenue and EPS growth since before the pandemic. That acceleration is a direct result of the strategy that underpins our growth plan, which Steve described. In the quarter, that strategy has driven $27 billion more in billings versus last quarter. The company is also generating almost $2 billion more in revenue and about $600 million more in net income compared to a year ago. This demonstrates the earnings power of our business model.
Now, let's take a look at the details of this quarter's performance, starting with our summary financials on Slide 2. Third quarter revenues were $15.4 billion. They reached a record high for the sixth trade quarter and were up 13% year over year. This revenue momentum drove reported net income of $2.5 billion and earnings per share of $3.30, which grew 34% year over year.
Let's now go to a more detailed look at the drivers of these results. In our spend-centric business model, that begins with a look at billed business, starting on Slide 3. Total billed business grew $27 billion this quarter versus last year, up 7% on an FX adjusted basis as we continue to see the more stable growth rates that we expected. This growth was driven by 6% growth in goods and services spending, consistent with last quarter's growth rate and sustained double-digit growth in travel and entertainment spending. This double-digit T&E growth has been driven by continued demand for travel and dining experiences, with restaurant spending, our largest category, up 13% this quarter.
Total network volumes grew 6% year over year on an FX adjusted basis. As you look at these results, I'd note that we exited a small product last quarter that was reported in our processed volumes. This is reflected in the Q3 growth rate and expect to see the impact of the year-over-year growth rate continue for the next few quarters until we lap this exist. As a reminder, processed volume includes volumes from cards where we play more of a network role and from alternative payment solutions that we facilitate. The revenue associated with these volumes makes up a small portion of our total revenue, which you can see on Slide 11.
As we then break down our spending trends across our businesses, there are a few other key points to take away, starting with our largest segment on Slide 4, U.S. Consumer grew billing strongly at 9% this quarter. Our focus on attracting, engaging and retaining our premium card members is driving growth across all generations and age cohorts, Millennial and GenZ customers continue to drive our highest billed business growth within this segment, with their spending up 18% this quarter.
Looking at Commercial Services on Slide 5, U.S. SME growth came in at 2% this quarter, consistent with last quarter's growth rate. As Steve discussed on our Q2 call, organic growth in this segment has slowed given unique dynamics seen by small businesses over the past few years. Importantly, we do continue to see strong, high-quality demand for new accounts within this segment. Looking forward, we focus on continuing to help SME clients run their businesses.
Billings from our U.S. large and global corporate customers were flat year over year. As we have said for many years, these customers are not a major growth driver for our business, but they remain an important foundation for the company's business model.
And lastly, on Slide 6, you see our highest growth again this quarter in International Card Services. We saw strong growth across our geographies and customer types. Spending from international consumers and from international SME and large corporate customers each grew 15%. Overall, strength in spending growth from our U.S. consumers and card members outside of the U.S. continues to offset the softness with commercial services that we've been talking about for the past few quarters.
Taking everything into account, our spending volumes are tracking to support our revenue guidance for the full year and our long-term aspirations for sustainable growth rates greater than what we were generating pre-pandemic.
Now, moving on to loans and card member receivables on Slide 7, we saw year-over-year growth of 15% as well as good continued sequential growth. As our customers continue to rebuild balances, the interest-bearing portion of our loans and receivables balances continues to grow faster than the overall growth you see. Importantly, over 70% of our revolving loan growth in the U.S. continues to come from our tenured customers.
As you then turn to credit and provision on Slide 8 through 10, the high credit quality of our customer base continues to show in our best-in-class credit performance. As you can see on Slide 8, our card member loans and receivables write-offs and delinquency rates both remained fairly flat till last quarter and below pre-pandemic levels. Going forward, as we've talked about for many quarters now, we continue to expect this delinquency and write-off rates to increase over time, and they're likely to remain below pre-pandemic levels in the fourth quarter.
Turning now to the accounting of this credit performance on Slide 9. The quarter-over-quarter growth in our loan balances, combined with a modest increase in our card member loans and receivables delinquency rate, resulted in a $321 million reserve build. This reserve build, combined with net write-offs, drove $1.2 billion of provision expense in the third quarter.
As you see on Slide 10, we ended the third quarter with $5 billion of reserves, representing 2.7% of our total loans and card member receivables. This reserve rate remained about 20 basis points below the level we had pre-pandemic or Day 1 CECL. We continue to expect this reserve rate to increase a bit in the balance of year, similar to the modest increases we've seen over the past few quarters.
Moving next to revenue on Slide 11. Total revenues were up $1.8 billion or 13% year over year in the third quarter. Our largest revenue line discount revenue grew 7% year over year in Q3, as you can see on Slide 12, driven by spending trends we discussed earlier. Net card fee revenues were up 19% year over year on an FX adjusted basis, as you can see on Slide 13. This growth remains very strong and is powered by the continued attractiveness to both new and existing customers of our fee-paying products due to the investment we've made in our premium value propositions.
As we expected, growth moderated a bit this quarter from the high levels we saw earlier this year, reflecting our cycle of product refreshes. This quarter, we acquired 2.9 million new cards. Importantly, the acquisition levels you see on Slide 13 remain consistent with our long-term growth aspirations. The spend, revenue and credit profiles of our new card members continue to look strong relative to what we saw pre-pandemic.
Moving on to Slide 14, you can see that net interest income was up 33% year over year on an FX adjusted basis, driven mostly by the growth in our revolving loan balances.
To sum up revenues on Slide 15, we are seeing broad-based revenue momentum across our diversified revenue lines. For 2023, we expect revenue growth to be within the range we communicated in January at around 15% growth for the full year.
Moving to expenses on Slide 16, variable customer engagement expenses came in at 40% of total revenues in the third quarter. Therefore, I now expect these costs to run at around 42% of total revenues in the full year base -- on the full year basis. Looking forward, we view this cost as a key driver of our momentum as we continue to innovate our value propositions, to deepen engagement with our premium car members, and to attract new ones, as Steve discussed earlier.
On the marketing line, we invested $1.2 billion in the quarter. I still expect to have marketing spend of around $5.5 billion for the full year, fairly flat to our 2022 expense. We feel really good about the quality of our new card acquisitions, which I talked about earlier, and I continue to see great demand for our products across a wide range of attractive investment opportunities. Given this strong set of opportunities, I would expect to increase our marketing spend in the balance of this year, and we are confident that our sophisticated acquisition engine will continue to do so in an efficient way.
Moving to the bottom of Slide 16 brings us to operating expenses, which were $3.7 billion in the third quarter as we invest in critical areas, such as our talented colleague base and technology. Taking this into account, we now expect our full year operating expenses to be around $14.5 billion. Looking forward, we continue to view marketing and opex as a key source of leverage.
Turning next to capital on Slide 17, we returned $1.7 billion of capital to our shareholders in the third quarter. This included common stock repurchase of $1.3 billion and $438 million in common stock dividends, all on the back of strong earnings generation. As you can see on Slide 17, we target a CET1 ratio between 10% to 11%. We ended the quarter with a CET1 ratio of 10.7%, which is well above our current regulatory minimum of 7%.
As we think about the BASEL III proposal, the RWA increase could consume the buffer above regulatory capital requirements if the proposal is adopted as written. Notably, we believe there are clear opportunities for improvements between the proposal and the final rule. In fact, the regulators themselves have posed questions about potential issues in applying these rules broadly, and we are actively engaged in that dialogue. We plan to continue to return to shareholders the excess capital would generate, while supporting our balance sheet growth. We do not expect any material near-term changes to our capital management approach.
That brings me to our growth plan and 2023 guidance on Slide 18. As Steve and I discussed, in our third quarter results -- our third quarter results, sorry, reflect a continuation of the strong momentum we've built over the last few years, evidenced by our performance across diversified revenue streams. For the full year, we expect revenue growth of around 15%, consistent with the revenue guidance range we provided at the beginning of the year.
As I discussed before, we now expect variable card member engagement expenses to be around 42% of total revenues on a full year basis, modestly below our original expectation. On marketing, we still expect to spend around $5.5 billion for the full year. And lastly, we now expect our operating expenses to be around $14.5 billion this year, modestly above our original expectation as we invest in areas critical to our success.
Taking everything together, on -- our earnings per share guidance remains between $11 and $11.40. Looking forward, we remain committed to focusing on achieving our aspirations of sustainably delivering revenue growth in excess of 10% and mid-teen EPS growth in a steady state macro environment.
With that, we'll open up the call for your questions in a moment. A final point which relates to our investor relations teams here at American Express. Steve and I have decided to move Kerri Bernstein to the critical role of Corporate Treasurer. I'd like to thank Kerri for leading the IR function during a period of strong performance for the company. I'd then like to welcome Kartik Ramachandran, our new Head of Investor Relations. Kartik was most recently a key finance lead in our U.S. Consumer business and has had a number of finance positions over his 11 years with the company.
Now, let me turn it back over to Kerri to open up the call for your questions.
