American Express Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 20, 2023

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the AmeriXpress Q1 2023 Earnings Call. At this time, all participants are on a listen only mode. Later, we will conduct a question and answer session. You may remove yourself from the queue at any time by pressing star then 2.

Operator

If you are using a speakerphone, 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, Ms. Carrie Bernstein. Please go ahead.

Speaker 1

Thank you, Donna, and thank you all for joining today's call. As a reminder, before we begin, Today's discussion contains forward looking statements about the company's future business and financial performance. These are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these statements are included in today's presentation slides and in our reports on file with the SEC. The discussion today also contains non GAAP financial measures.

Speaker 1

The comparable GAAP financial measures are included in this quarter's earnings materials as well as the earnings All of these are posted on our website at ir.americanexpress.com. We'll begin today with Steve Squarey, Chairman and CEO, who will start with some remarks about the company's performance and results. And then Jeff Campbell, Chief Financial Officer, We'll provide a more detailed review of our financial performance. After that, we'll move to a Q and A session on the results with both Steve and Jeff. With that, let me turn it over to Steve.

Speaker 2

Thanks, Carrie. Good morning, everyone, and thanks for joining us today on our Q1 earnings call. Back in January, we laid out our guidance for 2023 A 15% to 17% revenue growth and double digit earnings per share growth, our first quarter results are tracking to this full year guidance. Revenues were a record $14,300,000,000 in the quarter, up 22%, which is well above our full year expectations. Stronger spending growth outside the U.

Speaker 2

S. And in T and E offset some softness in U. S. Small business spending. EPS came in a bit higher than our original Plan expectation, our plan calls for quarterly EPS to grow sequentially through the year as our revenue growth continues.

Speaker 2

Billed business was up 16% globally year over year on an FX adjusted basis. T and E spending was up 39% year over year on an FX adjusted basis Due to the grow over effect due to grow over benefit from the impact of the Omicron variant in last year's results, we saw strong demand across all T and E categories Spending at restaurants continues to be a bright spot with growth accelerating to 28% on an FX adjusted basis year over year. In fact, March was a record month for reservations booked through our resi platform. The platform now has more than 40,000,000 users globally, an increase of 5,000,000 in the last 6 months. Consumer travel demand also remains high with Q1 bookings through our consumer travel business reaching their highest levels since pre pandemic.

Speaker 2

As you'll recall, we reorganized our international business last year, bringing together our consumer, small business and large corporate management teams outside the U. S. To increase agility, scale and efficiency and accelerate our growth. Our international issuing businesses were the fastest growing before the pandemic, And we're seeing a return to those trends. International card services billings continued to accelerate in the quarter, up 29 on FX adjusted basis.

Speaker 2

Results were driven by robust growth in T and E spending, which increased 58% year over year on an FX adjusted basis. We also saw continued momentum in card acquisitions with 3,400,000 new cards acquired in the quarter. U. S. Consumer Platinum and Gold Business Platinum and Delta Co Brand account acquisitions all reached record levels.

Speaker 2

Notably, over 70% of the new accounts acquired globally in the quarter are on fee based products.

Speaker 3

As noted for

Speaker 2

some time, millennial and Gen Z consumers Driving our growth in billings and acquisitions of premium fee based products. More than 60% of consumer new accounts acquired globally came from millennial and Gen Z. These customers also continue to contribute the highest growth in build business from our old age cohorts in the U. S, up 28% in the quarter. On credit, our metrics remain best in class supported by the premium nature of our customer base, our strong risk management capabilities and the thoughtful underwriting actions we've taken on an ongoing basis.

Speaker 2

Our customers have been resilient thus far in the face of Slow growth and higher inflation economic environment. While the near term economic outlook is mixed, our customer spending and credit performance to date, Along with the continued strong demand for our products from high quality new customers reinforces our confidence in our ability to achieve our long term aspirations. Our capital, funding and liquidity positions are strong and we continue to have significant flexibility to maintain a strong balance sheet in periods of uncertainty expressed. As you know, we run our company for the long term. We have a strategy in place to deal with swings in the economy, which has enabled us to be successful in navigating through the pandemic, Initial recovery period and the current environment of elevated inflation and higher interest rates.

Speaker 2

Through it all, we've continued to attract and retain high quality customers And our strategic investments have resulted in the momentum we've seen throughout last year and into 2023. We feel good about the decisions we're making around growth, risk management Our key metrics are strong. The market opportunities we see in our core businesses are plentiful, and our strategy of investing in value proposition innovations, Customer acquisitions and global merchant coverage continues to drive our growth. Based on our performance to date, We are reaffirming our full year guidance of delivering between 15% 17% revenue growth and earnings per share of between 11% and 11.40 We remain committed to focusing on achieving our aspiration of delivering sustainable revenue growth greater than 10% And it's EPS growth as we get to a more steady state macro environment. Thank you, and now I'll turn it over to Jeff.

Speaker 3

Well, thanks Steve and good morning everyone. It's good to be here to talk about our Q1 results which are tracking in line with the guidance we gave for the full year and reflects steady progress against our long term growth aspirations. Starting with our summary financials on Slide 2, Our first quarter revenues were $14,300,000,000 reaching a record high for the 4th straight quarter, up 23% on an FX adjusted basis. This revenue momentum drove reported net income of $1,800,000,000 and earnings per share of $2.40 Given we had a sizable credit reserve release of pandemic driven reserves in the Q1 of last year, we've also included pre tax Pre provision income is a supplemental disclosure again this quarter. On this basis, pretax pre provision income was $3,200,000,000 up 20% versus the same time period last year, reflecting the growth momentum in our underlying earnings.

Speaker 3

So now let's get into a more detailed look at our results, which in our spin centric business model always begins with a look at volumes, which you see on Slides 3 through 7. Total network volumes and build business were both up 16% year over year in the Q1 on an FX adjusted basis. Given that most of our spending categories have fully recovered versus pre pandemic levels, we saw the more stable growth rates we expected this quarter With 1st quarter build business growth of 16%, just above last quarter's growth of 15%. As Steve noted earlier, we did see particularly strong growth in travel and entertainment spending in Q1 of 39% driven by continued demand for travel and dining experiences. As expected, this growth rate was elevated early in the quarter as we lap the impact of Omicron in January of the prior year.

Speaker 3

I would expect to see growth moderate moving forward, but to remain high given the strong demand we are seeing across geographies, Customer types and T and E categories. We also saw solid growth in goods and services spending for the quarter, up 9% year over year. I would note that we did see this growth rate slow sequentially in the U. S. For both SME and consumer As we went through the quarter, so we are continuing to monitor these spending trends.

Speaker 3

That said, Overall bill business reached a record level in the month of March and our largest segment, U. S. Consumer, grew billing 16% in the 1st quarter, Accelerating a bit above last quarter's growth. Millennial and Gen Z customers again drove our highest billed business growth within this segment Overall, U. S.

Speaker 3

SME growth came in at just 6% this quarter, but was somewhat offset by a really good growth in U. S. Large and global corporates, up 34% year over year. And lastly, you see our highest growth in international card services. We are seeing the early benefits of the organizational changes we announced last year start to play out, demonstrated by strong growth Across geographies and customer types, spending from international consumer and international SME and large corporate customers We're among our fastest growing pre pandemic, grew 27% and 34% year over year, respectively.

Speaker 3

International card services, travel and entertainment growth was especially robust at 58% for the quarter. This segment is still in a recovery mode given it started its pandemic recovery later than other segments. Overall, our spending volumes are currently tracking to support our revenue guidance for the year and our long term aspirations for sustainable growth rates greater than what we were seeing pre pandemic. Now moving on to loans and card member receivables on Slide 8, we saw year over year growth of 25% in our loan balances as well as continued sequential growth. This growth continues to come mostly from our existing customers who are rebuilding balances And as a result, the interest bearing portion of our loan balances is growing faster than the 25% growth we see in total loans.

Speaker 3

Specifically, over 70% of this growth in the U. S. Is coming from our existing customers. We are pleased with this growth and with the overall lending economics we are generating. That said, looking forward, you May see the growth rate of our loan balances moderate a bit as we progress through 2023, but we would expect it to remain elevated versus pre pandemic levels.

Speaker 3

If you then turn to credit and provision on Slides 9 which you can see on Slide 9. We view these consolidated write off and delinquency rates as more comparable to pre pandemic rates than the individual loans and receivable rates because as we talked about last quarter, our charge products in many instances now has embedded lending functionality. Going forward, we continue to expect these delinquency and write off rates to increase over time, They are likely to remain below pre pandemic levels in 2023. Turning now to the accounting for this credit performance on Slide 10. The expected increases in delinquency rates combined with the quarter over quarter growth in our loan balances resulted in a $320,000,000 reserve bill.

Speaker 3

This reserve build combined with net write offs Grew $1,100,000,000 of provision expense in the Q1 as we move past much of the volatility in this line Item that CECL reserve builds, releases caused during the pandemic. As you see on Slide 11, we ended the first quarter with 4 point This reserve rate remains about 40 basis points and below the levels we had pre pandemic or day 1 CECL. We expect this reserve rate to continue to increase as we move through 2023, but to remain below pre pandemic levels. Moving next to revenue on Slide 12, total revenues were up 22% year over year in the Q1 or 23% on an FX adjusted basis. Before I get into more details about our largest revenue drivers in the next few slides, I would note that service fees and other revenue was up 34% in the quarter, driven largely by the year over year increases in travel related revenues that accompanied the tremendous demand we've seen for travel.

Speaker 3

As you can see on Slide 13, our largest line discount revenue grew 17% year over year in Q1 on an FX adjusted basis, which similar to spending volumes growth, is just above last quarter's growth rate. Net card fee revenues were up 23 percent year over year in the Q1 on an FX adjusted basis as you can see on Slide 14. Growth, which did moderate slightly this quarter as expected from the Extremely high level we saw last quarter remains quite strong. This growth continues driven largely by bringing new accounts On to our fee paying products as a result of the investments we've made in our premium value propositions. This quarter, we acquired 3,400,000 new cards demonstrating the demand we're seeing, especially for our premium fee based products.

Speaker 3

Moving on to Slide 15, you can see that net interest income was up 36% year over year on an FX adjusted basis, Accelerating versus last quarter, primarily due to the growth in our revolving loan balances. I'd also note that net yield on our card member loans Increased 50 basis points sequentially reaching pre pandemic levels this quarter as our customers increase their revolving balances. We have been able to increase our net yield while maintaining net write off rates below pre pandemic levels, expanding our net credit Margin. To sum up on revenues on Slide 16, we're tracking well against our expectations and looking forward, We still expect to see revenue growth of 15% to 17% for the full year of 2023. The revenue momentum we just discussed has been driven by the investments we've made.

Speaker 3

Those investments show up across the expense lines you see on Slide 17. Starting with variable customer engagement expenses, these costs came in at 43% of total revenues in the Q1 tracking right with our expectation For them to run around 43% of total revenues on a 4 year basis. On the marketing line, We invested $1,300,000,000 in the quarter on track with our expectation to have marketing spend that is fairly flat to our full year 2022 expense $5,500,000,000 We remain focused on driving efficiencies so that our marketing dollars grow far slower than revenues as we did for many years prior to the pandemic. Moving to the bottom of Slide 17 brings us to operating expenses, which were 3 point $1,000,000,000 in the Q1. There's usually some quarterly volatility in this number.

Speaker 3

In this quarter, for example, we saw a $95,000,000 impact from net mark to market losses on our Amex Ventures investment portfolio. But you can see based off our Q1 results that similar to marketing, We are tracking with our expectation for operating expenses to be around $14,000,000,000 for the full year. We continue to see operating Turning next to capital on Slide 18, we ended the Q1 with our CET1 ratio at 10.6% with our target range of 10% to 11%. I would note that AOCI already flows through our regulatory capital today. So any unrealized gains or losses on our investment Portfolio are fully reflected in the 10.6% that I just quoted.

Speaker 3

I'd also point out that we hold only $4,000,000,000 of investment Securities, most of which are short dated U. S. Treasuries. In the Q1, We returned $600,000,000 of capital to our shareholders. With our strong capital position, we have both the capacity and the intent To continue to return to shareholders the excess capital we generate while supporting our balance sheet growth.

Speaker 3

I'd also note that our liquidity position remains extremely strong as we ended the quarter with $41,000,000,000 of cash, our highest ever balance excluding the pandemic period. We also saw a 10% increase in our deposits this quarter, including the inflows in the weeks following recent volatility in the banking sector. On Slide 25 of the appendix, We have provided a bit more detail on deposits than we typically do, if you'd like to look at some of the numbers. That brings me then to our growth plan and 2023 guidance on Slide 19. For the full year 2023, we are reaffirming our guidance of having revenue growth of 15% to 17% and earnings per share between $11 $11.40 At this level, year over year revenue growth, we expect to see a significant sequential increase in the amount of revenues as we go through the year.

Speaker 3

In contrast, our marketing and operating expenses were already more in line with the run rate for the year in the Q1, but there's always some quarter to quarter volatility. So the simple math then gets you to the sequential growth in our underlying earnings consistent with our full year EPS guidance. There is clearly uncertainty as it relates to the macroeconomic environment. But as Steve discussed, our Customers have remained resilient thus far in the face of the slower growth, higher inflation economic environment. Our outlook is based on the blue chip macroeconomic consensus, which continues to expect slowing growth, though not a significant recession.

Speaker 3

In any environment though, we are focused on running the company for the long term. Looking forward, we remain committed to focusing on achieving our aspiration of sustainably delivering revenue growth in excess of 10% and mid teens EPS growth as we get to a more steady state environment. With that, I'll turn the call back over to Keri to open up the call for your questions.

Speaker 1

Thank you, Jeff. And before we open up the lines for Q and A, I will ask those in the queue to please limit yourself to just one question.

Operator

One moment please for the first question. Our first question is coming from Sanjay Sakhrani of KBW. Please go ahead.

Speaker 4

Thanks. Good morning. Steve, I think the number that's pretty striking is the strong growth among millennials and Gen Z, which seem like 3rd of the U. S. Spending volumes.

Speaker 4

I've heard some worry about like this cohort because they're relatively new to credit. But obviously, it seems like the spending remains quite strong. So I'm just curious sort of how you're seeing things trend for them, Whether or not you feel like there's more risk or less risk and then maybe Jeff you can elaborate a little bit more on the weaker spending trends that you saw in March. Thanks.

Speaker 2

Yes. I think that well, Jeff can elaborate a little bit more, but March was a record spending month for us overall, it was the highest month we ever had in the history

Speaker 3

of the company.

Speaker 2

So feel free

Speaker 3

to elaborate on that, Jeff.

Speaker 2

But Millennials have been a big part of our growth story. And if you go back Pre pandemic, they represented about 20% of our billings. Now they represent 30% of our billings. And they're growing at I mean, last quarter, they grew at 30%. This quarter, they grew at 28%.

Speaker 2

And we're acquiring 60% Of our new cards acquired. I think from a risk perspective, they play out much like low tenure plays out. And so we really have not seen Anything different with millennials than we have seen with any of our other card acquisitions. And so like anything, you watch that. But right now, we don't have any concerns with that.

Speaker 2

And the other thing that I will point out is that this whole concept of Getting more millennials really started with our focus on generational relevance And making sure that our products and services were attractive across Entire cohort. And so that is really working for us as you've seen the composition of our base change. And so that gives me a lot of confidence as we move forward that we're making the right moves from a value proposition perspective and continuing to invest In the right benefits and we are acquiring the right customers. And as I've said on these calls before, we continue to raise the bar In the face of an uncertain economic environment, we continue to raise the bar on Who we're acquiring. The last point that I'll make because I think it's really relevant and stay with me on this for a second.

Speaker 2

If you go back to 2018 And look at all the cards that we acquired in 2018 and looked at what the Q1 spending was in 2019. And you did the same thing in 2022 and looked at what the Q1 spending was in 2023, We are 50% higher, meaning we are acquiring higher spending card members. And so I think the teams Have done a phenomenal job of really sort of getting through the clutter and getting not only more card members, But getting card members that spend, getting card members that are paying fees and getting card members that will be with us For a long time. So that's a long sort of answer, but I think it's it really is relevant to what you were talking about in terms of millennials how we believe it will continue to perform. So if you want to talk about March, Jeff?

Speaker 3

Well, the only thing I would add is we're just trying to be transparent, Sanjay, I think a lot of people describe the current economic environment as mixed. And so March was our strongest month ever Across the globe in terms of volumes as a company in the U. S. Spending customer types on travel and entertainment is really strong. But you did see in goods and services as you went from January to February to March, spending slow a little bit, the growth rate Sequentially, on the other hand, you've also got to sort through how does Omicron last January, February fit into that.

Speaker 3

So we're just trying to be transparent about Sorting through all the mixed signals, but I think we've come back to our customers overall have shown great resilience in the face of All the mixed signals in the economy and that's what we are running the company on.

Operator

Thank you. The next question is coming from Mihir Bhatia of Bank of America. Please go ahead.

Speaker 5

Hi. Thank you Thank you for taking my question. I was curious if you could elaborate a little bit more on the slowdown that you've seen, I think you mentioned in the U. S. Are there particular types of spending you're seeing?

Speaker 5

Is it broad based across customers? And I think you mentioned both on the consumer and small business side, so if you could just elaborate on that. And then when you have any date on April, you can say?

Speaker 2

Well, on the consumer side, just look at sequentially, consumer In the Q4, grew 15%. We're growing 16%. So there was really no slowdown there. When you look at U. S.

Speaker 2

SME, we grew 8%, we're growing 6% now. So I think it was a little bit of a slowdown in U. S. SME. And remember, When you look at our consumer business, our consumer business, I don't believe is really representative of the entire economy.

Speaker 2

Our consumer business is representative of a really high end premium consumer base. Our small business, Because of the volumes that we have are probably a little bit more representative and where you are We do see a slowdown in small businesses, goods and services. What I'll remind people is small businesses are small businesses because they're small. And what happens is to a level of spending and then unless that business is really going to grow, you can only spend for what You're taken in. But I think what we've seen and this is a continuing trend is you've seen a slowdown in a lot of the advertising spending.

Speaker 2

But I will point out that that's not any different than what you've seen in from a lot of corporations, I mean, and ours ourselves. I mean, if you look at it, our plan Has been to spend the same amount of marketing that we spent last year this year. And that number is $5,500,000,000 And when you look at that number, we try and get more and more efficient with that. And We push our partners to become more and more efficient as well. And so you get to a point of scale where you just don't spend anymore.

Speaker 2

And I think we're seeing a little of that in small business as well. But look, 6% growth in the U. S. Small business for the amount of volume that we have, Right now, we're okay with that and it's in line with us making our overall plan. What I would point out from a small business perspective is International is not like that.

Speaker 2

International is growing much, much faster than that and international is back to Our fastest growing segment. So we'll keep watching it, but really happy with the consumer. And right now, I think small businesses kind of in line with where we have it going for the rest of our plan for the rest of the year.

Operator

Thank you. The next question is coming from Mark DeVries of Barclays. Please go ahead.

Speaker 6

Yes, thanks. Just wanted to get into what drove the acceleration of growth in international card services. Jeff, I heard you allude to the fact of seeing results from the reorg. But could you talk a little bit more specifically about Kind of what you did in that business segment to really drive the improvement?

Speaker 2

Well, I think so there's a couple of things, right. Number 1, there was no place We're always more impacted by the pandemic than international. And when you look at our card base internationally, it is A really high T and E orientated card base. And correct me if I'm wrong, I think this is a 59% T and E increase in our international part. So That's number 1.

Speaker 2

I mean, I think you just have you have just some built up demand That had been pushed down, number 1. Number 2, we continue to improve our merchant coverage tremendously In international, so there are more and more places to use the card. And I think coverage cannot be understated or overlooked And how it drives growth, especially in international. And I think that's really important. I think we continue to acquire new card members In international as well.

Speaker 2

And as far as the reorganization, what the reorganization does for us is makes us a lot more efficient. And so let me give you an example. Sometimes it's really hard to determine whether a potential customer is a small business Whether a potential customer is a consumer and what you do is you put resources and you go against you attack them both ways. Well, now what we're doing is we're looking at that in a more holistic way. And so instead of having what I like to refer to as the Noah's Ark syndrome of 2 of everything, We now have someone in a market focused on card acquisition, both small business, consumer and international and large market and And so I think what we've done is we've been able to become more efficient with our marketing.

Speaker 2

We've been able to share intellectual property across Business lines, and we've been able to, in a given market, make Better trade off decisions from an investment perspective because we're running it much more as a market as opposed to running it as global segments. And I think that's really Given the team a lot more flexibility and given them a lot more ability to achieve their goals. So and look, the reality is international was This is growing part of our business pre pandemic. And this was these moves were made to become more efficient to get it back to where it was And go beyond that. And so we feel good about the start that international is on at the moment.

Speaker 3

The only comment I'd add, Mark, is it is remarkable the breadth of the strength right now when you look across geographies. It's Europe, it's the UK, It's where we are in Latin America, it's Asia. It's really broad based. So we feel really good about the progress.

Operator

Thank you. The next question is coming from Betsy Graseck of Morgan Stanley. Please go ahead.

Speaker 1

Hi, good morning. Good morning, everyone.

Operator

Hi, good morning. Hi.

Speaker 1

I did want to just ask an overarching question On top line growth drivers from here, and I know we have already spoken about a couple of different line items. I think U. S. And large corporate is still something we could unpack a little bit. But I would also like if you could just from your vantage point give us where you think the growth drivers are from here, which 1Q extremely strong?

Speaker 1

Thanks.

Speaker 3

Well, in many senses, Betsy, I would almost just point you to the Q1 results I think one of the drivers of our confidence is the breadth of strength we see across all the lines Of the P and L. So discount revenues, when you look forward and look at growth, are going to look about like they did this quarter. Think you'll see a tail down slightly because you have a little bit of an omicron tailwind maybe in January February, But volumes look good and that's going to continue to be a nice double digit driver of growth. We have grown net card fees In double digits consistently for years right through every single quarter of the pandemic. And they've been above 20% for the last couple of quarters.

Speaker 3

That's going to continue because What we constantly have to remind people of is it's not particularly increases in fees for any given card that drive that, although it helps. It's mostly the steady acquisition that Steve talked about of more people on our higher fee paying cards. Net interest income, as I said, I think our overall loan balance growth will probably Continue to be higher than it was pre pandemic, but moderate a bit as our customers kind of get through the process of rebuilding balances. I think I don't want to pretend to suggest I can predict exactly what interest rates do the rest of the year. That will have some impact on the growth rate.

Speaker 3

Although I'd remind you, Unlike most banks, the impact of rates moving one way or another on us is very, very modest. We're reasonably hedged. There's a 10 ks disclosure about that for anyone who's interested, but we're not that heavily impacted. And then you have the service fee and other revenue line, which is benefiting from travel related strength, and I think that will continue. I think as you think about the drivers of revenue growth across the rest of the year, it doesn't look that different than what you saw in the Q1.

Speaker 3

It's Very broad based and that's what gives us confidence. Yes. So

Speaker 2

I could just say what he said, but Let me just take it up a level. And I think that one of the things that we do in looking for Opportunities is we try and make sure we're investing in those opportunities which have the greatest return. And You just said this many, many times on these calls. We have more good opportunities to invest in than we have dollars to invest. And I think nothing Is a better example of how good our opportunities, how much better our opportunities have become than what I and how I answered the first question For Sanjay, in talking about how the cards that we're acquiring now are 50% in this Q1, anyway, 50% better Than they were back in 2018.

Speaker 2

And the other thing that I would say, which I think is really important is When we look at acquiring a customer and we report cards, but we look at acquiring revenue. And when we look at a customer, revenue for us is a 3 legged stool. We acquire card members and a majority, 70% of the cards we're acquiring right now Paying fees, that's a huge differentiator for us. Then what we do, you pay that fee, you use the product And then as Jeff said, that discount revenue and that discount revenue is going to grow pretty much in line with where it was now. And then the 3rd leg of the stool is interest income.

Speaker 2

And we've modified our products so that We have planted on it. We have pay over time. And so we're giving our customers lots and lots of choices And how they want to manage their financial lives with us and then how they want to manage their credit card payments. And so we really focus a lot on revenue for our customers. And that's what gives us a lot of confidence because when we acquire a customer, it's not, We're

Speaker 3

going to acquire this customer and

Speaker 2

they're going to drive lending revenue. We're going to acquire this customer and it's going to be fee. We really look at that entire basket. And as we look at the ROIs, all of that is taken into account.

Operator

Thank you. The next question is coming from Rick Shane of JPMorgan. Please go ahead.

Speaker 7

Thanks guys for taking my question this morning. I'd like to discuss the accounting and strategy on fee waivers. When fees are waived, I'm assuming that the fees are recognized and there's an offsetting expense in terms of marketing. Are both the fees and expenses accreted and amortized quarterly? Is that the way we should think about it?

Speaker 3

Well, I think can I maybe step back, Rick? So when you because in many ways, I think sometimes there's a misnomer about What we have a line called marketing, what's actually in the marketing line, right? So there are a variety of incentives that we offer to customers and sometimes to partners to acquire customers that are involved in bringing new card members into the franchise. And when you look at the $5,500,000,000 that we spend in marketing, there's Very small portion of that, that is ads that probably people talk about more. But the overwhelming majority of what's in that 5,500,000 Are the costs of the many kinds of incentives that we offer to customers.

Speaker 3

And so fee waivers Can be incentive or interest rates on balances that are at promotional levels. But in general, the cost of those welcome incentives are going to be amortized over varying periods, right? We offer lots of different kinds Marketing incentives, so I can't generalize to the exact period, but generally they're going to be amortized over So one of the things we always wrestle with is when you look at it in total, as you're bringing more customers into the franchise, You generally are recognizing the costs of bringing them in more quickly than their spending and their revenues ramp up. And Like many companies, you sometimes have a good problem that the more you bring new customers in, which is a good thing for the long term. In the short run, that can create a little bit of an economic headwind.

Speaker 3

So that's the way I would Think about this.

Operator

Thank you. The next question is coming from Craig Maurer of Tea Partners, please go ahead.

Speaker 8

Hey, good morning. Thanks for taking the call.

Speaker 3

Good morning, Greg.

Speaker 2

Hey, welcome back.

Speaker 8

Thanks. It's been fun getting the business up and running for Feet Partners. And again, I appreciate you taking the question. So with thinking about credit, if we look at what drove the Provisioning expense in the quarter, it looks like the allowance build was actually materially less than it was in 4th quarter Despite the relatively similar provisioning provision amount, so it seems like you were soaking up the losses that were Driven by the rise in delinquencies in the back half of last year, but you only saw a very small increase in delinquencies In the quarter. So I guess the question is, are you comfortable with where allowance levels are Now, especially considering they're materially higher than where they were going into the pandemic?

Speaker 3

Well, can I work backwards? I think the simple way because this is such a complex subject as you know, Craig, that I always encourage people to think about this, Just take the reserves on the balance sheet divided by the total loans and receivables, that ratio is 2.5% at the end of this quarter. Compare that number to what was day 1 CECL, it was 2.9%. You can compare that same number to every other financial And I think that's a simple way to both track us versus history and us versus other companies. And as you know, our 2.5% is by a long shot best in class relative So what others have.

Speaker 3

When you think about sequential CECL accounting, what I would say is the Q4 of last year was probably One of the last quarters that still what I will refer to as pandemic seasonal noise. In other words, all of the financial institutions Builds all these big reserves, release them at different times. For us, and I think this is different from any other institutions, we're kind of past that. And so what you see starting in the Q1, not in the Q4 of last year is really not influenced By all the noise that the pandemic drove as we all built and then released reserves. It's why in some ways, I think going forward from here, you're back to I don't know if there's such a thing as a BAU view of CECL Accounting because none of us have done CECL accounting in a normal world.

Speaker 3

But for us, we're sort of back at a fairly steady state run rate. So if you think about it, we expect loan balances to continue to build. We expect credit metrics to continue to moderate up a little bit and that will cause us to continue to build A little bit of reserve each quarter and all of that is built into the guidance that we're earning today.

Operator

Thank you. The next question is coming from Dominic Gabriel of Oppenheimer. Please go ahead.

Speaker 9

Hey, guys. Good morning. Good morning. Thank you so much for taking my questions. So I know a lot of the business obviously depends on the Sumer, but you do have a very large, unique commercial business.

Speaker 9

And so if you think about The bank tightening some believe will occur. How do you think this plays out through your large and SMB businesses that Credit access to credit changes. And how do you think those dominoes kind of fall in affecting their spending levels or whatever you think Are the key elements there? That'd be great to hear your perspective. Thanks so much.

Speaker 2

Well, I think let's Looking at let's look at how much it represents, right? Large and global accounts represent about 6% of our overall spending. And Not so sure when you look at that segment that sort of credit spend credit tightening is really going to drive their spending. That is predominantly a T and

Speaker 3

E,

Speaker 2

a T and E game and most companies are trying to get their people out and trying to get them To go out and travel and that spending has been up 34%. We're still not back to where we were. What normally affects that For us is more layoffs and things like that. But even in the face of layoffs, especially in the tech segment or late starts that are going to occur in consulting and things like that, I think it's we're in a unique situation right now where I just don't think credit tightening in that segment is really going to be an issue. I think there it's going to be more Of an earnings story and do they do layoffs, but again, we're in such a crazy spot where most people aren't traveling anyway and people are encouraging to travel, I don't see that.

Speaker 2

Think when you look at small businesses, small businesses go in and out quite a bit. And you could see With some credit tightening, some small businesses having harder access There's some working capital. What I would say is one of the things that we do have from a small business perspective is we are really With our launch of BLUEPRINT and Kabbage and so forth, we have working capital loans, We have short term loans and so forth. And we're not in the same position as a lot of these other Smaller banks are. And so for those creditworthy small businesses, we will continue to extend credit.

Speaker 2

And It could be an opportunity for us actually, provided the credit is good. So I think in general, it can affect the small business economy and our ability maybe to grow, to get working capital. But I think it also provides us with an opportunity, because we may not be the lender of first resort To these small businesses right now and I think it could be an opportunity for us. Again, judiciously, but an opportunity.

Operator

Thank you. The next question is coming from Moshe Orenbuch of Credit Suisse. Please go ahead.

Speaker 2

Great. Thanks. Jeff, you had talked a little bit about the OpEx being kind of flattish over the course of the year. I mean historically that had kind of been seasonally low in the beginning of the year and seasonally high at the end. Is there something that's changed with respect to that?

Speaker 2

Yes. I think,

Speaker 3

look, every year is a little different and you have a higher growth rate year over year most this quarter because If you think about 2022, we really were in a ramp up as were many companies As we came out of the pandemic, as we all dealt with what was some pretty high attrition in late 2021 2022, And we were sort of fully ramped to where we needed to be. I mean, the way we think about OpEx in some ways and this is actually the way we talk about it internally as well We have a lot of confidence in the very high revenue growth rates that we have set out in our guidance, 15% to 17% this year. We built the infrastructure of this company through the end of last year to manage that level Volume and revenue. So we are where we need to be to manage that, which is why we'd expect sequentially this year To find that OpEx pretty flat. So we provided guidance for OpEx of about $14,000,000,000 If you take out the $95,000,000 mark to market Loss we had on our ventures portfolio, which was mainly driven by 1 company.

Speaker 3

We're pretty much tracking right to that. And I think our record, I would suggest, over more than a decade is when we Tell you, we're going to hit a certain OpEx number or control OpEx. I think we have a pretty good track record of doing that. So that's how I would think about it.

Operator

Thank you. The next question is coming from Bob Napoli of William Blair. Please go ahead.

Speaker 10

Thank you and good morning. Good morning, Paul. A question just on big picture, if you will, from If you look at the big tech companies like Amazon and Apple and their involvement in financial services getting a little bit more, And I know that in some ways they're partners, but what are your thoughts around the competitive risk from the large They seem to be getting more and more involved in credit cards and other financial service types that might be competitive.

Speaker 2

Well, they've been involved for a decade. And We obviously we partner with Amazon. We work very, very closely with Apple on Apple Pay and obviously they're a large merchant and a large partner. And It's not just Apple and Amazon we look at. We look at all the Fintechs and the startups and what have you.

Speaker 2

And I think And that's why we always say when you look at competition, it's just not the traditional banks. It's the FinTech, it's the big tech players and so forth. And the reality is the way that you have to compete not only against them, but Compete against everybody else's, you have to give your customers what they want and you have to continually to develop Better value propositions. And so, yes, these are great companies. There are great banks out there.

Speaker 2

They are great. Amazon and Apple are phenomenal companies that know the consumer. We believe we know the consumer as well, and they help us raise our game overall. But we're not Naive enough to think that we can just go on sort of strolling down the street here thinking no one's ever going to compete and No one's going to come after us the way we're paranoid. We think everybody's coming after us.

Speaker 2

And it's one of the reasons that we constantly focus on upgrading our products and services. And it's one of the things that we talk about. We're constantly adding value to our products. Yes, it would be probably easier To not do that, but we challenge the team constantly to develop better value propositions. And We worry about everybody.

Speaker 2

And the only thing that we can do about it is continue to do what we've done for years, offer the best service, Offer the best products and make sure that our customers are happy.

Operator

Thank you. The next question is coming from Don Fandetti of Wells Fargo. Please go ahead.

Speaker 2

Good morning, Jeff. I was wondering if you can

Speaker 3

talk about the bank Hi. The banking crisis, do you expect that to impact your ability to buy back stock? And also was there any impact from the Delta So, 2 very different questions. So capital and liquidity, Donnie, We are in a very strong position. Our capital target of 10% to 11% on a CET1 basis is actually Well above the regulatory requirement.

Speaker 3

Our target is really driven by the rating agency view. So let us know exactly what's going to happen from the regulatory perspective, but even some change in the regulatory environment that significantly increased The capital we need to hold is unlikely to have any impact on what we actually hold today. And so look, our company has a ROE of 30% or better, we generate a tremendous amount of capital. We don't need that much capital to support our organic growth. So you'll see us continue to Aggressively buy back shares, which is why I think our Board, in fact, approved a huge new multi year target for share repurchase earlier in the quarter.

Speaker 3

Our liquidity position is also very strong as I talked about in our remarks. When you think about headwinds in 2023, I'd remind you on the January call, I pointed out that a 500 basis point Increase in interest rates in a year is a headwind for us year over year in 2023, which won't really exist in 2024. They're unlikely to do another 500 basis points. For that matter, I just talked in response to Craig's question about the fact that our provision This year is kind of back to a steady state level, whereas last year you had it still greatly impacted by CECL reserve releases. So those are 2 headwinds in 2023 we will not have in 2024.

Speaker 3

You have put your finger on the 3rd headwind, Which is we have a fabulous partnership with Delta, works great for them, works great for us. We work together all the time. You seem to see Steve and Ed together like every week practically. But it is true that when we renewed Early, the partnership backed in 2019 and extended it through 2,030. We agreed to a change in the rates Of how some of the economic sharing work effective the year the original contract is going to expire, which is 2023.

Speaker 3

So there is a step up This year, that flows through various lines in the P and L, but generally fall into the variable customer engagement So that's part of what drove us up a little bit on the 42% to 43% target that we have this year. I would point out that's another sort of headwind to our

Operator

Thank you. Our final question will come from Lisa Ellis of MoffettNathanson. Please go ahead.

Speaker 11

Terrific. Thanks for taking my question. I just had a question on T and E renormalization. With T and E up 39% again year on year. It's still clearly renormalizing a bit post pandemic as you highlighted particularly outside the U.

Speaker 11

S. Do you have a sense like looking under the covers at the spending dynamics, how much further that has to go and when we might see that Piece that's been driving your disproportionate growth moderate a little bit. I think some folks might have been expecting that to start happening already at the beginning of this year, Clearly, it's not happening, so I'm wondering how many how much more we've got to go on that. Thank you.

Speaker 2

I think you still have quite a bit to go on T and E and especially as Operations start to bring back their T and E spending as well. And T and E spending is up in every Single segment that we have, I mean, we talked about total T and A up 39%, the consumers up 30%, commercials up 41%. It just keeps growing. And we talked about international Up 59%. So we still think we have more room to grow.

Speaker 2

And I talked about bookings with airlines. And airlines will also expand their capacity. And as they expand their capacity, we'll continue to grow with them. So I think there's still more upside in airlines. And when there's more upside in airlines, it becomes more upside in lodging.

Speaker 2

And people have Gotten used to eating out. And the restaurant spending is If you ask me about anything that surprises me, it would be restaurant spending continuing to be as strong as it is. But I think for us, a lot of that has to do with resi and the fact that we are able to probably even get a larger share Of our card members' restaurant spending as they book their reservations through resi. And the other thing I'd point about resi, resi has been a really nice Addition to our acquisition of new cardholders who have a propensity To want to use to want to eat at restaurants and T and E. So I think you're still going to see very strong T and E Throughout this year, it will certainly outpace our goods and services.

Speaker 2

And we're getting back we're continuing to climb back. Can remember pre pandemic we were around seventythirty in terms of our spending, 70% goods and services and 30% T and E. And there really is no reason that should not go back to the way it was. So we think we should have upside in T and E.

Speaker 1

And with that, the operator will close the call. Thank you again for joining today's call and 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, the webcast replay will be available on our Investor Relations website at ir. Dotamericanexpress.com shortly after the call. You can also access a digital replay of the call at 877 660-6853 or 201-612-7415, access code 1,000,000,000,000 after 1 pm Eastern Time on April 20th through April 27. That will conclude our conference call for today. Thank you for your participation.

Operator

You may now disconnect.

Powered by Quartr
Earnings Conference Call
American Express Q1 2023
00:00 / 00:00