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AXP > SEC Filings for AXP > Form 10-Q on 31-Oct-2012All Recent SEC Filings

Show all filings for AMERICAN EXPRESS CO

Form 10-Q for AMERICAN EXPRESS CO


31-Oct-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Business Introduction

American Express (the Company) is a global services company that provides customers with access to products, insights and experiences that enrich lives and build business success. The Company's principal products and services are charge and credit payment card products and travel-related services offered to consumers and businesses around the world. The Company's range of products and services include:

charge and credit card products;

expense management products and services;

consumer and business travel services;

stored-value products such as Travelers Cheques and other prepaid products;

network services;

merchant acquisition and processing, servicing and settlement, and point-of-sale, marketing and information products and services for merchants; and

fee services, including market and trend analyses and related consulting services, fraud prevention services, and the design of customized customer loyalty and rewards programs.

The Company's products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including direct mail, online applications, in-house and third-party sales forces and direct response advertising.

The Company competes in the global payments industry with charge, credit and debit card networks, issuers and acquirers, as well as evolving alternative payment mechanisms, systems and products. As the payments industry continues to evolve, the Company is facing increasing competition from non-traditional players, such as online networks, telecom providers and software-as-a-service providers, who leverage new technologies and customers' existing charge and credit card accounts and bank relationships to create payment or other fee-based solutions. In 2009, the Company established the Enterprise Growth Group, which focuses on generating alternative sources of global revenues in areas such as online and mobile payments and fee-based services. In addition to the Enterprise Growth Group, the Company is seeking to transform all of its businesses for the digital marketplace, including increasing the Company's share of online spend across all products and enhancing customers' digital experiences.

The Company's products and services generate the following types of revenue for the Company:

Discount revenue, which is the Company's largest revenue source, represents fees charged to merchants when cardmembers use their cards to purchase goods and services at merchants on the Company's network;

Net card fees, which represent revenue earned for annual card membership fees;

Travel commissions and fees, which are earned by charging a transaction or management fee for airline or other travel-related transactions;

Other commissions and fees, which are earned on foreign exchange conversions and card-related fees and assessments;

Other revenue, which represents insurance premiums earned from cardmember travel and other insurance programs, revenues arising from contracts with Global Network Services' (GNS) partners (including royalties and signing fees), publishing revenues and other miscellaneous revenue and fees; and


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Interest on loans, which principally represents interest income earned on outstanding balances.

In addition to funding and operating costs associated with these types of revenue, other major expense categories are related to marketing and reward programs that add new cardmembers and promote cardmember loyalty and spending, and provisions for cardmember credit and fraud losses.

Financial Targets

The Company seeks to achieve three financial targets, on average and over time:

Revenues net of interest expense growth of at least 8 percent;

Earnings per share (EPS) growth of 12 to 15 percent; and

Return on average equity (ROE) of 25 percent or more.

If the Company achieves its EPS and ROE targets, it will seek to return on average and over time 50 percent of the capital it generates to shareholders as dividends or through the repurchases of common stock, which may be subject to certain regulatory restrictions as described herein.

Forward-Looking Statements and Non-GAAP Measures

Certain of the statements in this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Refer to the "Forward-Looking Statements" section below. In addition, certain information included within this Form 10-Q constitute non-GAAP financial measures. The Company's calculations of non-GAAP financial measures may differ from the calculations of similarly titled measures by other companies.

Bank Holding Company

The Company is a bank holding company under the Bank Holding Company Act of 1956 and the Federal Reserve Board (Federal Reserve) is the Company's primary federal regulator. As such, the Company is subject to the Federal Reserve's regulations, policies and minimum capital standards.

Current Economic Environment/Outlook

During the third quarter of 2012 cardmember spending volumes continued to grow in the United States and internationally, and across all of the Company's businesses. The rate of growth was, however, slower than in the first half of the year, reflecting in part the impact of a challenging global economic environment.

The positive impacts of the Company's billings and loan growth and higher other non-interest revenues were partially offset by significantly lower lending reserve releases this quarter as compared to a year ago, and a significantly higher effective tax rate. The growth in spend volumes, combined with a decline in total expenses, allowed the Company to invest in business initiatives. The Company continues to focus its investments on both driving near-term metrics and building capabilities that will benefit the medium- to long-term success of the Company.

The Company's very strong credit performance contributed to lending loss rates that have improved to all-time lows, although provision expense for the third quarter of 2012 increased over the year ago quarter in light of the significantly lower lending reserve releases referred to above.

In the third quarter, the Company achieved its objective to grow operating expenses (i.e., expenses other than marketing, promotion, rewards and cardmember services) more slowly than revenues, and will continue to focus on this objective over the next two to three years.


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Competition remains extremely intense across all of the Company's businesses and the global economic environment remains very uneven. The Company expects that it will take some time for the U.S. economy to get back onto a steady, upward growth track. Moreover, in the absence of legislative action, there continues to be growing concerns about the potential impact of the "fiscal cliff" arising from scheduled federal spending cuts and tax increases set for the end of 2012. Also, the failure of the U.S. Congress to renew legislation regarding the Company's active financing income could increase its effective tax rate and have an adverse impact on net income in 2013 and beyond. The current instability in Europe could further adversely affect global economic conditions, including continued pressure on consumer and corporate confidence and spending, and disruptions of the debt, equity and foreign exchange markets. Europe accounted for approximately 11 percent of the Company's total billed business for the quarter ended September 30, 2012.

As described in the Critical Accounting Estimates section of the Company's 2011 Annual Report, the Company continually evaluates its Membership Rewards reserve methodology and assumptions taking into consideration developments in redemption patterns, costs per point redeemed, contract changes and other factors. The Company is currently reviewing the ultimate redemption rate (URR) estimation process for its U.S. Membership Rewards program, which is expected to result in a refinement to the URR models used to estimate future redemption rates. This review is expected to be completed by the end of 2012 and will likely lead to an increase in the balance sheet reserve for Membership Rewards and a corresponding increase in cardmember rewards expenses in the fourth quarter. The amount of the expected increase in the reserve has not yet been determined. As disclosed in our 2011 Annual Report, a 100 basis points increase in the global URR assumption would have an immediate impact on the balance sheet reserve and a corresponding increase in cardmember rewards expenses of approximately $330 million for points previously earned but not yet redeemed by cardmembers. In addition, based on the current Membership Rewards program and level of cardmember spend, a 100 basis point increase in the global URR assumption would result in an increase in annual cardmember rewards expenses of approximately $40 million.


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                            American Express Company

                        Selected Statistical Information

Refer to "Glossary of Selected Terminology" for the definitions of certain key
terms and related information appearing in the tables below.






                                                 Three Months Ended                           Nine Months Ended
                                                    September 30,                               September 30,

                                           2012           2011         Change           2012           2011       Change
Card billed business: (billions)
United States                         $   146.9      $   136.4          8 %        $   435.2      $   397.3        10%
Outside the United States                  73.2           71.3          3 %            217.7          205.9         6%

Total                                 $   220.1      $   207.7          6 %        $   652.9      $   603.2         8%

Total cards-in-force: (millions)
United States                              51.8           50.2          3 %             51.8           50.2         3%
Outside the United States                  49.6           45.6          9 %             49.6           45.6         9%

Total                                     101.4           95.8          6 %            101.4           95.8         6%

Basic cards-in-force: (millions)
United States                              40.2           38.9          3 %             40.2           38.9         3%
Outside the United States                  39.8           36.4          9 %             39.8           36.4         9%

Total                                      80.0           75.3          6 %             80.0           75.3         6%

Average discount rate                      2.53 %         2.54 %                        2.53 %         2.54 %
Average basic cardmember spending
(dollars)(a)                          $   3,885      $   3,739          4 %        $  11,606      $  10,947         6%
Average fee per card (dollars)(a)     $      39      $      40         (3)%        $      39      $      39        -%
Average fee per card adjusted
(dollars)(a)                          $      44      $      43          2 %        $      43      $      43        -%

(a) Average basic cardmember spending and average fee per card are computed from proprietary card activities only. Average fee per card is computed based on net card fees, including the amortization of deferred direct acquisition costs divided by average worldwide proprietary cards-in-force. The adjusted average fee per card, which is a non-GAAP measure, is computed in the same manner, but excludes amortization of deferred direct acquisition costs. The amount of amortization excluded was $65 million and $52 million for the three months ended September 30, 2012 and 2011, respectively, and $194 million and $162 million for the nine months ended September 30, 2012 and 2011, respectively. The Company presents adjusted average fee per card because the Company believes this metric presents a useful indicator of card fee pricing across a range of its proprietary card products.


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                            American Express Company

                        Selected Statistical Information

                                  (continued)






                                                  Three Months Ended                        Nine Months Ended
                                                    September 30,                             September 30,

(Billions, except percentages and
where indicated)                            2012          2011        Change          2012          2011       Change
Worldwide cardmember receivables
Total receivables                       $   42.3      $   39.8          6 %       $   42.3      $   39.8         6 %
Loss reserves (millions)
Beginning balance                       $    392      $    415         (6)%       $    438      $    386        13 %
Provisions(a)                                151           125         21 %            434           404         7 %
Other additions(b)                            39            49        (20)%             97           129       (25)%
Net write-offs(c)                           (141 )        (146 )       (3)%           (487 )        (406 )     20 %
Other deductions(d)                          (32 )         (55 )      (42)%            (73 )        (125 )     (42)%

Ending balance                          $    409      $    388          5 %       $    409      $    388         5 %

% of receivables                             1.0 %         1.0 %                       1.0 %         1.0 %
Net write-off rate - principal -
USCS(e)                                      1.6 %         1.8 %                       2.0 %         1.7 %
Net write-off rate - principal and
fees - USCS(e)                               1.7 %         1.9 %                       2.1 %         1.8 %
30 days past due as a % of total -
USCS                                         1.8 %         2.0 %                       1.8 %         2.0 %
Net loss ratio as a % of charge
volume - ICS/GCS                            0.10 %        0.10 %                      0.10 %        0.09 %
90 days past billing as a % of
total - ICS/GCS                              0.7 %         0.8 %                       0.7 %         0.8 %

Worldwide cardmember loans
Total loans                             $   61.8      $   58.2          6 %       $   61.8      $   58.2         6 %
Loss reserves (millions)
Beginning balance                       $  1,547      $  2,560        (40)%       $  1,874      $  3,646       (49)%
Provisions(a)                                231            16          # %            669            23         # %
Other additions(b)                            33            32          3 %             84            81         4 %
Net write-offs - principal(c)               (292 )        (383 )      (24)%           (970 )      (1,375 )     (29)%
Net write-offs - interest and
fees(c)                                      (36 )         (44 )      (18)%           (121 )        (159 )     (24)%
Other deductions(d)                          (24 )         (42 )      (43)%            (77 )         (77 )      - %

Ending balance                          $  1,459      $  2,139        (32)%       $  1,459      $  2,139       (32)%

Ending Reserves - principal             $  1,411      $  2,080        (32)%       $  1,411      $  2,080       (32)%
Ending Reserves - interest and fees     $     48      $     59        (18)%       $     48      $     59       (18)%
% of loans                                   2.4 %         3.7 %                       2.4 %         3.7 %
% of past due                                182 %         238 %                       182 %         238 %
Average loans                           $   61.4      $   58.9          4 %       $   61.0      $   58.7         4 %
Net write-off rate - principal
only(e)                                      1.9 %         2.6 %                       2.1 %         3.1 %
Net write-off rate - principal,
interest and fees(e)                         2.1 %         2.9 %                       2.4 %         3.5 %
30 days past due as a % of total             1.3 %         1.5 %                       1.3 %         1.5 %
Net interest income divided by
average loans(f)                             7.7 %         7.5 %                       7.5 %         7.4 %
Net interest yield on cardmember
loans(f)                                     9.3 %         9.1 %                       9.2 %         9.1 %

# denotes a variance greater than 100 percent.


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American Express Company

Selected Statistical Information

(continued)

(a) Provisions for principal (resulting from authorized transactions) and fee reserve components.

(b) Provisions for unauthorized transactions.

(c) Consists of principal (resulting from authorized transactions) interest and/or fees, less recoveries.

(d) For cardmember receivables, includes net write-offs resulting from unauthorized transactions of $(37) million and $(46) million for the three months ended September 30, 2012 and 2011, respectively; foreign currency translation adjustments of $6 million and $(5) million for the three months ended September 30, 2012 and 2011, respectively; and other adjustments of $(1) million and $(4) million for the three months ended September 30, 2012 and 2011, respectively. For cardmember loans, includes net write-offs for unauthorized transactions of $(31) million and $(29) million for the three months ended September 30, 2012 and 2011, respectively; foreign currency translation adjustments of $10 million and $(14) million for the three months ended September 30, 2012 and 2011, respectively; and other adjustments of $(3) million and $1 million for the three months ended September 30, 2012 and 2011, respectively. Refer to Note 4 to the Consolidated Financial Statements for the components of other deductions for the nine months ended September 30, 2012 and 2011.

(e) The Company presents a net write-off rate based on principal losses only (i.e., excluding interest and/or fees) to be consistent with industry convention. In addition, because the Company's practice is to include uncollectible interest and/or fees as part of its total provision for losses, a net write-off rate including principal, interest and/or fees is also presented.

(f) Refer to the following table for calculation of net interest yield on cardmember loans, a non-GAAP measure, net interest income divided by average loans, a GAAP measure, and the Company's rationale for presenting net interest yield on cardmember loans.

Calculation of Net Interest Yield on Cardmember Loans






                                                  Three Months Ended                    Nine Months Ended
                                                    September 30,                         September 30,

(Millions, except percentages and
where indicated)                                   2012               2011               2012              2011
Net interest income                       $       1,181      $       1,113      $       3,435      $     3,266
Exclude:
Interest expense not attributable to
the Company's cardmember loan
portfolio                                           338                356              1,043            1,094
Interest income not attributable to
the Company's cardmember loan
portfolio                                           (97 )             (113 )             (310 )           (365)

Adjusted net interest income(a)           $       1,422      $       1,356      $       4,168      $     3,995

Average loans (billions)                  $        61.4      $        58.9      $        61.0      $      58.7
Exclude:
Unamortized deferred card fees, net of
direct acquisition costs of cardmember
loans, and other (billions)                        (0.2 )             (0.1 )             (0.2 )           (0.3)

Adjusted average loans (billions)(a)      $        61.2      $        58.8      $        60.8      $      58.4

Net interest income divided by average
loans                                               7.7 %              7.5 %              7.5 %            7.4%
Net interest yield on cardmember
loans(a)                                            9.3 %              9.1 %              9.2 %            9.1%

(a) Net interest yield on cardmember loans, adjusted net interest income, and adjusted average loans are non-GAAP measures. Refer to "Glossary of Selected Terminology" for the definitions of these terms. The Company believes adjusted net interest income and adjusted average loans are useful to investors because they are components of net interest yield on cardmember loans, which provides a measure of profitability of the Company's cardmember loan portfolio.

Consolidated Results of Operations for the Three Months Ended September 30, 2012 and 2011

The Company's consolidated net income for the three months ended September 30, 2012 increased $15 million or 1 percent and diluted EPS increased $0.06, as compared to the same period in the prior year.

The Company's total revenues net of interest expense increased 4 percent, total expenses decreased 2 percent and total provisions for losses increased 92 percent for the three months ended September 30, 2012, as compared to the same period in the prior year.


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Total Revenues Net of Interest Expense

Consolidated total revenues net of interest expense for the three months ended September 30, 2012 increased $291 million or 4 percent from 2011, reflecting increases of 6 percent in U.S. Card Services (USCS), 2 percent in Global Commercial Services (GCS) and 5 percent in Global Network and Merchant Services (GNMS), partially offset by a decline of 3 percent in International Card Services (ICS). The increase in total revenues net of interest expense primarily reflects higher discount revenues, higher other revenues and increased net interest income.

Discount revenue for the three months ended September 30, 2012 increased $207 million or 5 percent as compared to 2011 as a result of 6 percent growth in billed business volumes, partially offset by a slight decline in the average discount rate and higher contra-revenue items, including cash rebate rewards. The average discount rate was 2.53 percent and 2.54 percent for the three months ended September 30, 2012 and 2011, respectively. As indicated in prior quarters, certain pricing initiatives, changes in the mix of spending by location and industry, volume-related pricing discounts and strategic investments will likely result in some erosion of the average discount rate over time.

U.S. billed business and billed business outside the United States increased 8 percent and 3 percent, respectively, for the three months ended September 30, 2012 as compared to the same period in the prior year. The increase in billed business in the United States reflects an increase in average spending per proprietary basic card and an increase in basic cards-in-force. The increase in billed business outside the United States reflects an increase in basic cards-in-force.


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The table below summarizes selected statistics for billed business and average spend during the three months ended September 30, 2012 compared to the same period in the prior year.

                                                                       2012

                                                                              Percentage Increase
                                                                                         Assuming
                                                            Percentage              No Changes in
                                                              Increase           Foreign Exchange
                                                            (Decrease)                   Rates(a)
Worldwide(b)
Billed business                                                      6 %                       8%
Proprietary billed business                                          6                        7
GNS billed business(c)                                               6                       11
Airline-related volume (9% of worldwide
billed business)                                                     -                        2
United States(b)
Billed business                                                      8
Proprietary consumer card billed
business(d)                                                          7
Proprietary small business billed
business(d)                                                         10
Proprietary corporate services billed
business(e)                                                          9
T&E-related volume (27% of U.S. billed
business)                                                            4
Non-T&E-related volume (73% of U.S. billed
business)                                                            9
Airline-related volume (8% of U.S. billed
business)                                                            2
Outside the United States(b)
Billed business                                                      3                        8
Japan, Asia Pacific & Australia (JAPA)
billed business                                                      8                        9
Latin America & Canada (LACC) billed
business                                                             5                       11
Europe, the Middle East & Africa (EMEA)
billed business                                                     (4 )                      3
Proprietary consumer and small business
billed business(f)                                                   1                        5
JAPA billed business                                                 3                        4
LACC billed business                                                 5                        8
EMEA billed business                                                (4 )                      3
Proprietary Corporate Services billed
business(e)                                                         (2 )                      3

(a) The foreign currency adjusted information assumes a constant exchange rate between the periods being compared for purposes of currency translation into U.S. dollars (i.e., assumes the foreign exchange rates used to determine results for the three or nine months ended September 30, 2012 apply to the period(s) against which such results are being compared). The Company believes the presentation of information on a foreign currency adjusted basis is helpful to investors by making it easier to compare the Company's performance in one period to that of another period without the variability caused by fluctuations in currency exchange rates.

(b) Captions in the table above not designated as "proprietary" or "GNS" include both proprietary and GNS data.

(c) Included in the GNMS segment.

. . .

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