Christophe Le Caillec
Chief Financial Officer at American Express
Thank you, Steve, and good morning, everyone. It's good to be here to talk about our second quarter results, which reflect another quarter of strong performance.
Starting with our summary financials on Slide 2. Second quarter revenues were $16.3 billion and grew 9% year-over-year on an FX adjusted basis. Net income was $3 billion in the quarter, generating earnings per share of $4.15. Our second quarter results also reflect the sale of our certified business, which closed during the quarter. We recognized an after tax gain on the sale of $479 million, equating to $0.66 of EPS impact. Excluding this gain, EPS grew 21%, reflecting the power of the business to generate strong earnings growth even in a slower growth environment, as Steve noted.
On Slide 3, Billed Business grew 6% versus last year on an FX adjusted basis, reflecting stable growth and in-line with the softer spend environment we've seen in the past few quarters. The stability in spend growth was also visible by category where we saw 6% growth in goods and services, 7% growth in travel and entertainment spending. We did see some slower growth in certain T&E categories versus the prior quarter, such as in airline and lodging. At the same time, growth in our largest T&E category, restaurants remained strong and goods and services strengthened a bit versus the prior quarter when excluding the impact of Leap year.
Stepping back, while spend growth in certain categories was slightly higher or lower versus the prior quarter, overall spend growth was stable and we continue to see strong growth in the number of transactions from our card members, which grew 9% this quarter. There are a few other key points to take away as we then break down our spending trends across our businesses.
Starting with our largest segment on Slide 4. U.S. consumer grew billings at 6% this quarter with balanced growth across both goods and services and T&E. Our premium customer base continues to demonstrate steady growth. We also saw growth across all generations. Millennial and Gen Z customers grew their spending 13% and continue to drive our highest billed business within this segment. These younger card members continue to demonstrate strong engagement and we see that they transact over 25% more on average than our older customers. And in some categories like dining, they transact almost twice as much.
Turning to commercial services on Slide 5. Overall growth came in at 2% this quarter. Spending growth from our U.S. small and medium enterprise customers increased a bit sequentially versus last quarter but remained modest.
Lastly on Slide 6, we see our highest growth again this quarter in international card services, up 13%. We continue to see double-digit growth in spending from international consumers and from international SME and large corporate customers and we are also seeing double-digit growth across all regions. Stepping back, we continue to see stable spend growth across customer segments, spend categories and our U.S. and international geographies. And while we are not in a high growth spend environment, particularly in the U.S., our spending volumes are tracking in-line with our expectations and support our revenue expectations for the year.
Moving on to loans and card member receivables, on Slide 7, we saw year-over-year growth of 11%, demonstrating strong growth but continuing to moderate as expected. As we progress through 2024, we expect loan growth in particular to continue to moderate by a few percentage points, but it still grew in double-digits as we exit the year.
Turning next to credit and provision on Slide 8, through 10, our credit performance remains very strong and is a direct result of our disciplined growth strategy which has been focused on growing our high credit quality premium customer base, including through the younger customers we attract to the franchise. This strategy, coupled with our robust risk management practices are an important aspect of our business models. Going forward, we expect our write-off rates to remain generally stable for the remainder of 2024.
Turning now to the accounting of this credit performance on Slide 9. The quarter-over-quarter reserve build of $101 million is mostly driven by growth in our loan balances, largely offset by lower delinquencies. This reserve build combined with net write-offs drove $1.3 billion of provision expense in the second quarter.
As you see on Slide 10, we ended the second quarter with $5.6 billion of reserves, representing 2.8% of our loans and card member receivables, a slight decrease compared to Q1. It's worth noting that there is a seasonality component to reserves, although we are also encouraged by the strength of the performance we see in the portfolio.
Moving next to revenue on Slide 11. Total revenues were up 9% year-over-year, benefiting from the diversification across revenue streams, customer segments and geographies. Looking at the components of our revenue, our largest revenue line, discount revenue grew 5% year-over-year on an FX adjusted basis, as you can see on Slide 12. This growth is mostly driven by the spending trends we discussed earlier.
Net card fee revenues were up 16% year-over-year on an FX adjusted basis. As you can see on Slide 13, we're now generating over $2 billion in quarterly card fee revenue as the differentiated value and experiences we offer on our products continues to resonate with our card members globally. This is an important metric for us because it also reflects the choice that our costs -- that our customers make each year to renew their membership. We're pleased with the growth and expect to exit the year with further momentum.
In the quarter, we acquired 3.3 million new cards, demonstrating the demand we're seeing for our products and the investment we've made. Acquisition of our premium fee based products continued to account for around 70% of new accounts. And importantly, as we have increased the total number of cards acquired, we have maintained disciplined underwriting standards.
Moving on to Slide 14, net interest income was up 20% year-over-year. This growth is driven by the increase in our revolving loan balances, which also contributes to the continued net yield expansion versus the prior year. As we've shared before, we continue to expect this growth to further moderate as we progress through the year.
To sum up, revenues on Slide 15, the power of our diversified model continues to drive strong revenue momentum even in a slower growth environment, as our results in this quarter were fueled by growth in all our major revenue lines across each of our different business segments and across geographies.
Moving to expenses on Slide 16, starting at the top of the page, variable customer engagement expenses came in at 42% of the total revenues for the second quarters. Looking forward, I expect variable customer engagement expenses as a ratio of revenues to be in-line with this level for the balance of the year.
On the marketing line, we continue to invest at an elevated level at $1.5 billion in the second quarter. Given the strong performance in the core business, we now anticipate our full year marketing spend to be around $6 billion or 15% higher versus last year as we plan to invest at high levels to sustain our growth momentum.
To put this in perspective, this is an incremental $800 million above what we spent in 2023. At the same time, we intend to deploy those investments in a disciplined way. As I discussed at Investor Day, our investment optimization engine is engineered to make profitability based decisions at the margin and there is a high bar for returns on these substantial incremental investments.
Moving to the bottom of Slide 16, brings us to operating expenses. Operating expenses were $3 billion in the second quarter, down 13% versus last year due to the $531 pre-tax gain we recognized from the sale of our Accertify business. Excluding the gain, operating expenses were up 3% in the quarter, well below the pace of revenue growth even as we continue to invest in technology and our control management capabilities. Excluding the impact of the Accertify gain, we continue to expect operating expenses for the year to be fairly flat to 2023.
This quarter's results demonstrate how the scale of the business and strong expense discipline enable us to generate significant efficiencies and those efficiencies are enabling us to invest at elevated levels while still generating significant levers to drive strong earnings growth.
Turning next to capital on Slide 17. Our CET1 ratio was 10.8% at the end of the second quarter within our target range of 10% to 11%. We also returned $2.3 billion of capital to our shareholders, including $1.8 billion of share repurchase. This is the highest level in over two years. And the recent CCAR results further demonstrate the strength of our portfolio and the resilience of our business model.
The stress test results show that under a severely adverse scenario, our portfolio remains profitable. In fact, we are the most profitable financial institution as a percentage of asset growth across all the banks subject to CCAR and have the lowest credit card loss rate under stress as well. These results in our stress capital buffer remaining at 2.5%, the lowest prescribed level. We plan to continue to return to shareholders the excess capital we generate while supporting our balance sheet growth. We do not expect any material near-term changes to our capital management approach.
This brings me to our 2024 guidance on Slide 18. Let me step back and make a few observations about the growth in the business and the way, we see the balance of the year unfolding. First, we have a core business that is comfortably generating mid-teens EPS growth, even in a slower growth environment and before the gain from the Accertify sale.
Second, the pace of earnings generation in the core business, combined with the strong demand we are seeing in the market for our products, is enabling us to invest around 15% more in marketing compared to last year. As a result, we are able to fund significantly more investments from our core business than our expectation at the start of the year without relying on the one-off gain from Accertify.
With that, as Steve mentioned, we are raising our guidance for EPS for the year to a range of $13.30 to $13.80, and within that range, we now expect to drop all $0.66 of the Accertify gain to the bottom line. This is a departure from our usual practice of reinvesting a significant portion of one-off gains in growth initiatives. But we are confident in the ability of our business to support the year-over-year growth of around $800 million in marketing while delivering mid-teens EPS growth. Finally, we still expect to deliver revenue growth in the year in-line with our initial 9% to 11% range.
With that, I turn the call back over to Kartik to open up the call for your questions.
