American Express Q1 2023 Earnings Call Transcript

Presentation

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the American Express Q1 2023 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, Ms. Kerri Bernstein. Please go ahead.

[Kerri S. Bernstein, Head of Investor Relations at American Express]

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. The comparable GAAP financial measures are included in this quarter's earnings materials as well as the earnings materials for the prior periods we discussed. All of these are posted on our website at ir.americanexpress.com. We'll begin today with Steve Squeri, Chairman and CEO, who will start 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 financial performance. After that, we'll move to a Q&A session on the results with both Steve and Jeff.

With that, let me turn it over to Steve.

[Stephen J. Squeri, Chairman and Chief Executive Officer at American Express]

Thanks, Kerri. Good morning, everyone, and thanks for joining us today on our first quarter earnings call. Back in January, we laid out our guidance for 2023 of 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 $14.3 billion in the quarter, up 22%, which is well above our full year expectations. Stronger spending growth outside the U.S. and in T&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.

Billed business was up 16% globally year-over-year on an FX-adjusted basis. T&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&E categories and customer types. 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 Resy platform. The platform now has more than 40 million users globally, an increase of 5 million in the last six months.

Consumer travel demand also remains high with Q1 bookings through our consumer travel business reaching their highest levels since pre-pandemic. 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 an FX adjusted basis. Results were driven by robust growth in T&E spending, which increased 58% year-over-year on an FX adjusted basis.

We also saw continued momentum in card acquisitions with 3.4 million new cards acquired in the quarter. U.S. Consumer Platinum and Gold Business Platinum and Delta co-brand account acquisitions all reached record levels. Notably, over 70% of the new accounts acquired globally in the quarter are on fee-based products. As we noted for some time, Millennial and Gen Z consumers are 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 billed business among all 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. Our customers have been resilient thus far in the face of slower growth and higher inflation economic environment. While the near-term economic outlook is mixed, our customers' 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 uncertain [Indecipherable].

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, the initial recovery period and the current environment of elevated inflation and higher interest rates. 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 and the economic environment. 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% and 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 mid-teens EPS growth as we get to a more steady-state macro environment.

Thank you, and now I'll turn it over to Jeff.

[Jeff Campbell, Vice Chairman and Chief Financial Officer at American Express]

Well, thanks, Steve, and good morning, everyone. It's good to be here to talk about our first quarter results, which are tracking in line with the guidance we gave for the full year and reflect steady progress against our long-term growth aspirations. Starting with our summary financials on Slide 2, our first quarter revenues were $14.3 billion, reaching a record high for the fourth straight quarter, up 23% on an FX adjusted basis. This revenue momentum drove reported net income of $1.8 billion and earnings per share of $2.40. Given we had a sizable credit reserve release of pandemic-driven reserves in the first quarter of last year, we've also included pretax pre-provision income as the supplemental disclosure again this quarter. On this basis, pretax pre-provision income was $3.2 billion, up 20% versus the same time period last year, reflecting the growth momentum in our underlying earnings.

So now let's get into a more detailed look at our results, which in our spend-centric business model always begins with a look at volumes, which you see on Slides 3 through 7. Total network volumes and billed business were both up 16% year-over-year in the first quarter 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 first quarter billed 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 lapped the impact of Omicron in January of the prior year. So 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&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. That said, overall billed business reached a record level in the month of March, and our largest segment, U.S. Consumer, grew billings 16% in the first quarter, accelerating a bit above last quarter's growth. Millennial and Gen Z customers again drove our highest billed business growth within this segment with their spending growing 28% year-over-year this quarter.

Turning to Commercial Services. We saw a year-over-year growth of 10% overall. U.S. SME growth came in at just 6% this quarter, but was somewhat offset by 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, who were among our fastest-growing pre-pandemic, grew 27% and 34% year-over-year, respectively. 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. 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.

If you then turn to credit and provision on Slides 9 through 11, the high credit quality of our customer base continues to show through in our best-in-class credit performance. Our card member loans and receivables write-off and delinquency rates remain below pre-pandemic levels, though they did continue to move up this quarter as we expected, 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 have embedded lending functionality. Going forward, we continue to expect these delinquency and write-off rates to increase over time, but 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 million reserve build. This reserve build, combined with net write-offs, drove $1.1 billion of provision expense in the first quarter as we moved past much of the volatility in this line item that CECIL reserve builds the releases caused during the pandemic.

As you see on Slide 11, we ended the first quarter with $4.4 billion of reserves representing 2.5% of our total loans and card member receivables. This reserve rate remains about 40 basis points and below the levels we had pre-pandemic or day one CECIL. 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 first quarter 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.

As you can see on Slide 13, our largest [Indecipherable] 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% year-over-year in the first quarter 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 onto our fee paying products as a result of the investments we've made in our premium value propositions. This quarter, we acquired 3.4 million new cards demonstrating the demand we're seeing, especially for our premium fee-based products.

Moving on to Slide 15, you can see that net interest income was up 36% year-over-year, on a 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 right 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 15% to 17% for the full year of 2023.

The revenue momentum we just discussed has been driven by the investments we've made. 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 first quarter, tracking right with our expectation for them to run around 43% of total revenues on a full year basis. On the marketing line, we invested $1.3 billion in the quarter on track with our expectation to have marketing spend that is fairly flat to our full year 2022 expense, $5.5 billion. 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 $3.6 billion in the first quarter. There is usually some quarterly volatility in this number and this quarter, for example, we saw a $95 million impact from net mark-to-market losses on our Amex Ventures investment portfolio. But you can see based off our first quarter results that similar to marketing, we are tracking with our expectation for operating expenses to be around $14 billion for the full year. We continue to see operating expenses as a key source of leverage. And moving forward expect to have far less growth in opex relative to our high level of revenue growth.

Turning next to capital on Slide 18, we ended the first quarter 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. I would also point out that we hold only $4 billion of investment securities, most of which are short-dated U.S. treasuries.

In the first quarter, we returned $600 million 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 regenerate, while supporting our balance sheet growth.

I'd also note that our liquidity position remains extremely strong as we ended the quarter with $41 billion 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 and $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. In contrast, our marketing and operating expenses were already more in line with the run rate for the year in the first quarter. There is 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 phase 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. 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.

And with that, I'll turn the call back over to Kerri to open up the call for your questions.

[Kerri S. Bernstein, Head of Investor Relations at American Express]

Thank you, Jeff. And before we open up the line for Q&A, I will ask those in the queue to please limit yourself to just one question. Thank you for your cooperation. And with that, the operator will now open up the line for questions. Operator?

Questions and Answers

[Kerri S. Bernstein, Head of Investor Relations at American Express]

[Operator Instructions] Our first question is coming from Sanjay Sakhrani of KBW. Please go ahead.

[Sanjay Sakhrani, Analyst at Keefe, Bruyette & Woods]

Thanks. Good morning. Steve, I think, the number that's pretty striking is the strong growth among millennials and Gen Z, which seemed like a third of the U.S. spending volumes. I've heard some worry about like this cohort because they are relatively new to credit, but obviously it seems like the spending remains quite strong. So I'm just curious sort of how you are seeing things trend for them whether or not you feel like there is more risk or less risk. And then, maybe Jeff, you can collaborate a little bit more on the weaker spending trends that you saw in March? Thanks.

[Stephen J. Squeri, Chairman and Chief Executive Officer at American Express]

Yeah. 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 of the company. So feel free to elaborate on that, Jeff. 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 are growing at, I mean, last quarter they grew at 30%, this quarter they grew at 28%. And we're acquiring 60% of our new cards acquired. I think from 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 need to watch, you watch that, but right now we don't have any concerns with that.

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 an 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 have said on these calls before we continue to raise the bar in the phase of an uncertain economic environment, we continue to read the bar on who we are acquiring.

The last point that I will make, because I think, it's really relevant, and stay with me on this for a second. If you go back to 2018 and look at all the cards that we acquired in 2018 and looked at what the first quarter spending was in 2019, and you did the same thing in 2022 and looked at what the first quarter 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 carder 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 -- it's a long sort of answer, but I think it's really is relevant to what you were talking about in terms of millennials because I think that gives you a pretty good picture of just how we are looking at that segment and just how that segment is performing and how we believe it will continue to perform. So you want to talk about March, Jeff?

[Jeff Campbell, Vice Chairman and Chief Financial Officer at American Express]

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. So, we're just trying to be transparent about sorting through all the mixed signals. But I think we 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're running the company on.

[Operator]

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

[Mihir Bhatia, Analyst at Bank of America]

Hi. Thank you for taking my questions. 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. a bit. Are there particular types of spending you're seeing? 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 if you have any data on April you can share?

[Stephen J. Squeri, Chairman and Chief Executive Officer at American Express]

Well, on the consumer side, just look at sequentially, consumer in the fourth quarter grew 15%. We're growing 16%. So there was really no slowdown there. When you look at U.S. SME, we grew 8%, and we're growing 6% now. So, I think there 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. 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 -- where you do see a slowdown in small business is 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 you -- unless that business is really going to grow, you can only spend for what you're taking 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. 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 $5.5 billion. 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. 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 with 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. International is growing much, much faster than that, and international is back to our fastest growing segments. So, we'll keep watching it, but really happy with the consumer. And right now, I think small business is 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.

[Mark DeVries, Analyst at Barclays Capital]

Yeah, thanks. Just wanted to get into what drove the acceleration of growth in International Card Services. Jeff, I heard you alluded to the fact of seeing results from the re-org. But could you talk a little bit more specifically about kind of what you did in that business segment to really drive the improvement?

[Stephen J. Squeri, Chairman and Chief Executive Officer at American Express]

Well, I think -- so there's a couple of things, right? Number one, there was -- no place in the world is more impacted by the pandemic than International. And when you look at our card base internationally, it is a really high T&E orientated card base. And correct me if I'm wrong, I think this is a 59% T&E increase in our international part. So that's number one. I mean, I think you just have -- you have just some built-up demand that had been pushed down, number one. Number two, 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 in 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.

And as far as the reorganization, what the reorganization does for us is it 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 or whether a potential customer is a consumer. And what you do is you put resources in, 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 two of everything, we now have someone in a market focused on card acquisition, both small business, consumer and international and large market and corporate as well.

And so I think what we've done is, we've been able to become more efficient with our marketing. 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 giving the team a lot more flexibility and giving them a lot more ability to achieve their goals. So -- and look, the reality is international is the fastest-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.

[Jeff Campbell, Vice Chairman and Chief Financial Officer at American Express]

Yeah. 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 U.K., 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.

[Betsy Graseck, Analyst at Morgan Stanley]

Hi, good morning.

[Stephen J. Squeri, Chairman and Chief Executive Officer at American Express]

Good morning, Betsy.

[Betsy Graseck, Analyst at Morgan Stanley]

Hi. 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? Thanks.

[Jeff Campbell, Vice Chairman and Chief Financial Officer at American Express]

Well, in many senses Betsy, I would almost just point you to the first quarter results, because I think one of the drivers of our confidence is the breadth of strength we see across all the lines of the P&L. So discount revenues, when you look forward and look at growth, are going to look about like they did this quarter. I think you'll see a tail-down slightly, because you have a little bit of Omicron tailwind maybe in January and 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 year's right through every single quarter of the pandemic, and they've been above 20% for the last couple of quarters. 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 to drive that, although it helps. It's mostly the steady acquisition that Steve talked about; more people are on 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 through the rest of the year. That will have some impact on the growth rate. Although I'd remind you, unlike most banks, we're -- the impact of rates moving one way or another on us is very, very modest. We're reasonably hedged. There's a 10-K 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. So, 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 first quarter. It's very broad-based, and that's what gives us confidence.

[Stephen J. Squeri, Chairman and Chief Executive Officer at American Express]

Yeah. So 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 Jeff 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 been come 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 first quarter, anyway, 50% better than they were back in 2018.

And the other thing that I would say, which I think is really important is when we looked 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 three-legged stool. We acquire card members and a majority 70% of the cards we're acquiring right now are 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 at discount revenue is going to grow pretty much in line with where it was now.

And then the third legged stool is interest income. 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 in how they want to manage their financial lives with us, and 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 -- that's what gives us a lot of confidence because when we acquire a customer it's not, okay, we're going to acquire [Indecipherable] going to drive lending revenue. We're going to acquire this customer, and it's going to be fees. We literally 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 JP Morgan. Please go ahead.

[Richard Shane, Analyst at JP Morgan Cazenove]

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 in amortized quarterly? Is that the way we should think about it?

[Jeff Campbell, Vice Chairman and Chief Financial Officer at American Express]

Well, I think, can I maybe step back, Rick? So when you, because in many ways I think sometimes there's a misnomer about when we have a line called marketing what's actually in the marketing line, right? So there are variety of incentives that we offer to customers and sometimes to partners acquire customers that are involved in bringing new card members into the franchise. And when you look at the $5.5 billion that we spend in marketing, there's a very small portion of that that is -- ads that probably people talk about more, but the overwhelming majority of what's in that $5.5 billion [Phonetic] are the costs of the many kinds of incentives that we offer to customers. 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 of marketing incentives, so I can't generalize to the exact period, but generally they're going to be amortized over a period. 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 cost of bringing them in more quickly than they're spending and their revenues ramp-up. And so like many companies, you sometimes have the 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. So that's the way I would think about this.

[Operator]

Thank you. The next question is coming from Craig Maurer of FT Partners. Please go ahead.

[Craig Maurer, Analyst at FT Partners]

Hey, good morning. Thanks for taking question.

[Stephen J. Squeri, Chairman and Chief Executive Officer at American Express]

Good morning, Craig.

[Jeff Campbell, Vice Chairman and Chief Financial Officer at American Express]

Hey, welcome back.

[Craig Maurer, Analyst at FT Partners]

Thanks. It's been fun getting the business up and running for FT 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 fourth 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 delinquent season 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?

[Stephen J. Squeri, Chairman and Chief Executive Officer at American Express]

Well, let me, 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, is 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-one CECL, it was 2.9%. You can compare that same number to every other financial institution that reports, 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 to what others have. When you think about sequential CECL accounting, what I would say is the fourth quarter of last year was probably one of the last quarter's that's still what I will refer to as pandemic CECL noise.

In other words, all of the financial institutions built all these big reserves, released 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 first quarter, not in the fourth quarter 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. 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 referring today.

[Operator]

Thank you. The next question is coming from Dominick Gabriele of Oppenheimer. Please go ahead.

[Dominick Gabriele, Analyst at Oppenheimer & Co.]

Hey guys, good morning.

[Stephen J. Squeri, Chairman and Chief Executive Officer at American Express]

Good morning.

[Dominick Gabriele, Analyst at Oppenheimer & Co.]

Thank you so much for taking my questions. So I know a lot of the business obviously depends on the consumer, but you do have a very large unique commercial business. And so if you think about the bank tightening, some belief will occur, how do you think this plays out through your large and FMB businesses if credit -- access to credit changes? And how do you think those Domino's 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.

[Stephen J. Squeri, Chairman and Chief Executive Officer at American Express]

Well, I think, let's look 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&E -- a T&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 the tech segment or late starts that are going to occur in consulting and things like that, I think if we're in a unique situation right now where I just don't think credit tightening in that segment is really going to be -- is really going to be an issue.

I think there it's going to be more of a -- of an earning 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. I 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 to some -- to some working capital. What I would say is one of the things that 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 credit worthy small businesses we will continue to extend credit and it could be an opportunity for us actually, provided to credit is, 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 business 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.

[Moshe Orenbuch, Analyst at Credit Suisse Group]

Great, thanks. Jeff, you had talked a little bit about the opex being kind of flattish over the course of the year, I think, 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?

[Jeff Campbell, Vice Chairman and Chief Financial Officer at American Express]

Yeah. I think, look, every year's a little different and you have a higher growth rate year-over-year, Moshe, this quarter because 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 and 2022. And we were sort of fully ramped to where we needed to be. I mean, the way we think about opex in -- and this is actually the way we talk about it internally as well, is 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 of 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 billion. If you take out the $95 million mark-to-market loss we had on our ventures portfolio, which was mainly driven by one company, 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.

[Robert Napoli, Analyst at William Blair & Co.]

Thank you and good morning. 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 tech companies? They seem to be getting more and more involved in credit cards and other financial service types that might be competitive?

[Stephen J. Squeri, Chairman and Chief Executive Officer at American Express]

Well, look, 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. 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 that the way that you have to compete not only against them, but compete against everybody else is, 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. There 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, who is ever going to compete and no one's going to come after us. The way -- we're paranoid. We think everybody is coming after us. 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 so we worry about everybody. 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.

[Don Fandetti, Analyst at Wells Fargo & Company]

Good morning, Jeff. I was wondering if you could talk the banking crisis. Do you expect that to impact your ability to buy back stock? And also, was there any impact from the Delta sharing adjustment? And will there be any this year?

[Jeff Campbell, Vice Chairman and Chief Financial Officer at American Express]

So two very different questions. So capital and liquidity Don, I mean 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. Our target is really driven by the rating agency view. So, I know exactly what's going to happen from a regulatory perspective, but even some change in the regulatory environment that significantly increase 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 -- the Board, in fact, approved a huge new multi-year target for share repurchase earlier in the quarter.

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. And 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 see its reserve releases. So those are two headwinds in 2020 we will not have in 2024.

You have put your finger on the third headwind, which is we have a fabulous partnership with Delta works great for them, works great for us. We work together all the time. Seem to see Steve together like every week practically. But it is true that when we renewed early the partnership back in 2019 and extended it through 2030, we agreed to a change in the rates of how some of the economic sharing work effective the year in the original contract is going to expire, which is 2023. So there is a step up this year that flows through various lines in the P&L but generally falls into the variable customer engagement line. 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 earnings growth this year that we will not face in 2024. So thank you for the question.

[Operator]

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

[Lisa Ellis, Analyst at MoffettNathanson]

Terrific. Thanks for taking my question. I had a question on T&E renormalization. With T&E up 39% again year-on-year, it's still clearly renormalizing a bit post-pandemic, as you highlighted, particularly outside the U.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, but clearly it's not happening. So, I'm wondering how many -- how much more we've got to go on that? Thank you.

[Stephen J. Squeri, Chairman and Chief Executive Officer at American Express]

Well, I think you still have quite a bit to go on T&E and especially as corporations start to bring back their T&E spending as well. And T&E spending is up in every single segment that we have. I mean, we talked about total T&E up 39%, consumer is up 30%, commercial is up 41%. It just keeps -- it keeps growing. And we talked about international, up 59%. So, we still think we have more room to grow. 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. 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 Resy. 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 Resy. And the other thing I'd point about Resy, Resy has been a really nice addition to our acquisition of new cardholders who have a propensity to want to -- eat at restaurants and T&E. So, I think you're still going to see very strong T&E throughout this year. It will certainly outpace our goods and services. And we're getting back -- we're continuing to climb back. If you remember, pre-pandemic, we were around 70%-30% in terms of our spending, 70% goods and services and 30% T&E. And there really is no reason that should not go back to the way it was. So, we think we have upside in T&E.

[Kerri S. Bernstein, Head of Investor Relations at American Express]

Okay. And with that, 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]

[Operator Closing Remarks]

Participants

Corporate Executives

• Kerri S. Bernstein, Head of Investor Relations
• Stephen J. Squeri, Chairman and Chief Executive Officer
• Jeff Campbell, Vice Chairman and Chief Financial Officer

Analysts

• Sanjay Sakhrani, Keefe, Bruyette & Woods
• Mihir Bhatia, Bank of America Co.
• Mark DeVries, Barclays Capital
• Betsy Graseck, Morgan Stanley
• Richard Shane, JP Morgan Cazenove
• Craig Maurer, FT Partners
• Dominick Gabriele, Oppenheimer & Co.
• Moshe Orenbuch, Credit Suisse Group AG
• Robert Napoli, William Blair & Co.
• Don Fandetti, Wells Fargo & Company
• Lisa Ellis, MoffettNathanson