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Executives

Ron Stovall – Senior Vice President of Investor Relations

Daniel T. Henry – Executive Vice President and Chief Financial Officer

Analysts

Brian Foran - Goldman Sachs

Robert Napoli - Piper Jaffray

Craig Maurer - Calyon Securities (USA) Inc.

Donald Fandetti - Citigroup

Sanjay Sakhrani - Keefe, Bruyette & Woods

Christopher Brendler - Stifel Nicolaus & Company, Inc.

Andrew Wessel - J.P. Morgan

David Hochstim - Buckingham Research

Bill Carcache - Fox-Pitt Kelton

Richard Shane - Jefferies & Co.

Bruce Harting - Barclays Capital

John Stilmar - Suntrust Robinson Humphrey

Scott Valentin - FBR Capital Markets & Co.

Robert Napoli - Piper Jaffray

American Express Company (AXP) Q1 2009 Earnings Call April 23, 2009 5:00 PM ET

Operator

Ladies and gentlemen thank you very much for standing by. Welcome to today’s American Express Q1 ’09 earnings conference call. (Operator Instructions) As a reminder today’s conference is being recorded and will be made available for replay, and information regarding accessing that replay will be given at the end of today’s conference.

With that I’d like to turn our conference over to our host today, Senior Vice President of Investor Relations Mr. Ron Stovall. Please go ahead sir.

Ron Stovall

Okay. Thank you Dave and welcome to everyone. We appreciate all of you joining us for today’s discussion.

As usual it’s my responsibility to remind you that the discussion today contains certain forward-looking statements about the company’s future financial performance and business prospects which are subject to risks and uncertainties and speak only as of today. The words believe, expect, anticipate, optimistic, intend, plan, aim, will, should, could, likely and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements including the company’s financial and other goals are set forth within today’s earnings press release which was filed in an 8-K report and in the company’s 2008 10-K report already on file with the Securities and Exchange Commission.

In the first quarter 2009 earnings release and earning supplement on file with the SEC in an 8-K report, as well as the presentation slides all of which are now posted on our website at ir.americanexpress.com, we have provided information that describes the company’s managed basis and other non-GAAP financial measures and the comparable GAAP financial information and we explain why these presentations are useful for management and to investors. We urge you to review that information in conjunction with today’s discussion.

Dan Henry, Executive Vice President and Chief Financial Officer, will review some key points related to the quarter’s earnings through the series of slides included with the earnings documents and provide some brief summary comments. Once Dan completes his remarks we will turn to the moderator who will announce your opportunity to get into the queue for the Q&A period where Dan will be available to respond to your questions. Up until then, no one is actually registered to ask questions.

While we will attempt to respond to as many of your questions as possible before we end the call, we do have a limited amount of time. Based on this we ask that you limit yourself to one question at a time during the Q&A.

With that let me turn the discussion over to Dan.

Daniel T. Henry

Okay. Thanks Ron and I will start by taking us through the slides that we have provided. And I’ll start on Slide 2, the summary of financial performance. So our revenues were 18% lower than last year on a GAAP basis. On a managed basis they were 11% lower and if you adjust for FX they were 7% lower than last year.

Income from continuing operations was $443 million. That’s down 68% but it does represent positive earnings. It also reflects the flexibility in our business model during these difficult economic times, and also the diversity of our businesses where we participate in the issuer, card processor and network pieces of the payment stream.

Diluted EPS from continuing operations was $0.32 and that is after our preferred dividend. Return on common equity came in at 16.7% and that’s a calculation of rolling 12 months, so it’s benefiting from the higher earnings that we had in the middle of 2008.

Moving to Slide 3, our business metrics, you can see that billed business is down 16% on a reported basis and 12% on an FX adjusted basis. Now the decline in FX adjusted revenue growth from the third quarter to the fourth quarter was from a positive 7 to a negative 5 or a drop of 1,200 basis points and the change from the fourth quarter to the first quarter is a drop of 700 basis points, so the rate of decline has lessened from the fourth quarter to the first quarter.

Looking at cards in force, network partner cards increased 18% and proprietary card growth was flat to average out to a 4% growth in cards in force. If we look at average basic cardmembers spend it decreased 14% on an FX adjusted basis, although I’ll note on a positive note that transactions are only down 3%.

If we look at cardmember loans, you can see that managed loans are down 11% on an FX adjusted basis, really in line with the decrease in FX adjusted billed business. Now later when we look at capital ratios, this relationship between the decrease in loans as relates to the slower spending will be very important when you think about a slowing economy and thinking about our capital ratios.

If we move to Slide 4, you can see that discount revenue was down 18% although on a positive note our discount rate stayed at 2.56 which is only down 1 basis point from last year and is holding up very well. You can see that net card fee revenues are flat and that reflects the flat, proprietary cardmember that I cited a minute ago.

When we look at net interest and securitization income, within that number securitization income decreased 68% as there were lower excess spread due to the higher write-off rates. Net interest income decreased only 5% on a GAAP basis. On a managed basis net interest income was actually up as lower loan balances were more than offset by wider spreads.

If you look at travel commissions and fees, that is decreasing based on the economy and less spending both on a consumer and business basis. Other revenue decreases are really driven by just lower volumes. And I’ll repeat that the total decrease of 18% is 7% when you do it on a managed FX adjusted basis.

Let me move to Slide 5, provision for losses. You can see in total it increased 49%. Charge card while delinquency rates and write-off rates are up somewhat is really offset by the lower receivable levels which are being driven by lower spending levels. Cardmember lending rate is up – provision is up 75% on an owned basis as it’s based on higher write-off rates, slightly higher delinquencies and a reserve build of over $400 million. And we’ll cover this in more detail in a few slides.

So looking at Slide 6 and our expense performance you can see that marketing function is down 42% and that reflects the difficult economic environment we have and the lower revenues that caused us to decide to reduce our marketing levels. The decrease in rewards expense of 18% is driven by volumes – the lower volumes. Lower salaries and benefits are a direct result of the reengineering actions that we launched in the fourth quarter of last year and is down 16%.

Other operating expenses are down. Now this year includes the MasterCard payment that we received of $150 million that was not in the ’08 quarter, and it also this year includes a $63 million benefit from fair valuing of hedges. But it also reflects the benefits of our reengineering actions.

Now at the financial community meeting in February I spoke about the flexibility of our business model and this quarter is an execution of that flexibility as part of our focus to stay profitable. I also note that we’re on track to achieve our $1.8 billion benefit that we targeted for 2009. That’s a reengineering target. This reflects very strong expense control in the quarter.

Moving to Slide 7, which are the USCS metrics, you can see that there is a 15% decrease in billed business. Now this decrease is in line with what we’ve seen at our competitors and given the level of corporate spending and discretionary consumer spending in our business, you might think that we would come in below the competition but we did not.

Now cards in force in this segment are down 1% and that reflects the impact of lower investment levels and the credit and collection actions that we’ve taken. And to the extent we cancel inactive cards in the future, you know, this level of decrease may pick up a little bit in the coming quarters.

Now the lower level of billed business is clearly being driven by the lower average spend by our customers as customers are simply spending less on each transaction. And again here you can see that the decrease in loans is tracking to the decrease in volumes that we see, which is a very good thing.

Moving to Slide 8 ICS, international consumer, you can see billed business is down 5% on an FX adjusted basis. On an absolute basis this is better than the U.S. but it actually reflects similar trends. International spending held up pretty well through the third quarter of ’08, which was 8% growth, then dropped to 1% growth in the fourth quarter and now is down 5%. And the decrease is really across all the regions at pretty consistent levels.

If we look at cards in force its also being impacted by investment levels and the credit actions that we’re taking, and if you look at average spend again this is a primary driver of the reduction in billed business. Again here cardmember loans are decreasing in line with lower volumes and travel is being impacted by the economy.

We move to Slide 9 which is corporate services. Here billed business is down 18%. Again here this had held up pretty well through the third quarter but we saw some sharp drops in the fourth quarter and again in the first quarter as the decision by corporations to hold back on spending is being reflected in these numbers. Now if we look at this by geography, volumes of billed business are down 19% in the U.S. and on an FX adjusted basis 15% outside the U.S. And again here its’ across most regions. The one exception is Latin America was actually up a small amount.

If we look at cards in force which actually increased by 6% we’re seeing the benefits of card moving onto the American Express network as part of the CPS acquisition that we did last year. Again you can see that average spend is a large contributor to the drop in billed business and travel is being impacted by corporations restricting travel.

Moving to Slide 10, which is global network and merchant services, here you can see that billed business is down 16%, 12% on an FX adjusted basis. U.S. retail and everyday spend, which represents about 71% of U.S. billings, decreased by 12% and U.S. [P and E] decreased by 20%. And here again you can see the average discount rate at 2.56% down only 1 basis point reflecting the value of our brand and our cardmember base.

Now global network services billed business is down 6% on a reported basis, but is actually up 8% on an FX basis as cards issued by our partners riding on the American Express network increased by 18%. Now I note that the GNMS segment had net income of $237 million in the first quarter of ’09 and that compares to $223 million in the first quarter of ’08. And so you can see this segment is not impacted in a significant way by credit losses. It also shows the benefit of the diversity of our businesses.

Moving to Slide 11, so this is charge credit net write-off rate, so the write-off rate in the first quarter is higher and it is a combination of lower receivables which decreased 19% over last year and so that’s impacting the denominator in the calculation. And it’s also reflecting higher write-offs related to the environment. It also reflects the seasonal build up of delinquencies which I’ll show you on the next slide that are writing off in the first quarter, but I note that we have a provision for these as delinquencies billed.

So moving to Slide 12, this is the charge card 30 day past due slide, and you can see that there’s been an increase in 30 day past due in both the fourth quarter and the first quarter of this year because of the difficult environment. But it also reflects a seasonal build up. If you look at this as instead of percentage actually look at past due dollars, you can see there were 3.7% in the first quarter of ’09 and the write-off [inaudible] delinquency dollars are $571 million. That compares to the first quarter of last year. Even though it’s the same rate delinquency dollars were $714 million. So you can see it’s being heavily influenced by the lower volumes and the denominator impact.

If we move to Slide 13, this is the charge card net loss rate for international consumer and commercial card. At international consumer you can see that the rate is increasing. This is really broad based across all countries and we have increased our provision accordingly. And again here the denominator is having a big impact as balances are down 21%. In global commercial card, again its up somewhat but it’s really being heavily influenced by the denominator as receivables are down 25%.

If we move to Slide 14, charge card 90 day past due for international consumer and commercial card, again here the denominator effect is having a large impact. If you look at delinquent dollars and you look at the fourth quarter, delinquent dollars were $173 million. And even though the percentage is higher in the fourth quarter delinquency dollars are lower at $155 million. If you look at global commercial card, again the rate is up from 1.7 last year in the first quarter to 2.4%, but if you look at the dollars in the first quarter of ’09 and at 229, and that compares to 218 last year. So again a strong impact by the balance levels.

A major point I want to make here as relates to charge provision this has really behaved very well as we can tightly control charge spending. So let me move to lending.

Slide 15. So this is lending management write-off rate and as I indicated in January the first quarter was going to increase compared to the fourth quarter and as you’ve seen already in the

8-Ks we filed at the time that we released the trust data, first quarter write-off rates are up. The 180 basis point increase is largely consistent with what we’ve seen in the industry. And it’s a combination of an increase in write-off dollars which increased about $200 million compared to the fourth quarter, but here too you’re seeing the denominator impact as average loans in the fourth quarter were $63 billion and in the first quarter dropped to $59.1 billion. If you look at international consumer, again we see an increase in the write-off rate but it’s more modest and it’s really spread across all geographies.

If we move to Slide 16, this is looking at our numbers both on a reported basis and a lag basis. So by a lag basis I mean we’ve compared the write-offs in this quarter with the balances six months ago. Now I know we always show coincidental numbers, and I don’t want to just switch to lag because it’s convenient for us, but I thought by showing you the slide you can see – we could demonstrate the impact that falling assets are having on the write-off rate. So if you go back to the first quarter of ’08 the reported number was 4.3 but we were in a rising balance environment and if you did it on a lag basis it would be 4.7. But when you look at the first quarter of ’09 and you look at it on a lag basis where we have falling assets, the calculation goes from 8.5% to 7.8%. So it has a pretty dramatic impact.

So let me move to Slide 17. This is lending managed 30 day past due and again in the first quarter we have had an increase in 30 day past due, but I note that it’s at a slowing rate. So if we went back to the second quarter the rate was 3.3% and it increased to 3.9 in the third quarter or a 60 basis point increase. It then increased to 4.7 in the fourth quarter, an 80 basis point increase. And now it’s increased to 5.1 so it slowed to a 40 basis point increase. If you look at ICS, international consumer, internationally the economic environment has lagged the U.S. somewhat and so the fourth quarter is higher than we’ve seen in past quarters in terms of growth rate and it’s up 60 basis points.

If we move to Slide 18, this is looking at our roll rates. So the top chart looks at current to 30 day past due and you can see that in January and February and March that it has improved. Now part of this improvement is seasonal, but we also think part of it is due to the credit and collection actions that we have taken. So if you are 30 days past due in March it means you were current in January. Okay? Now not on this chart current to just 30 days past billing. So that would be you haven’t paid us in March but you were current in February. That percentage is also improving and in fact is at really historic lows. So that could be a positive sign, but it doesn’t mean that it’s a trend because it’s one month. But it is something to note.

If you look at the bottom part of the chart this is 30 days to write-off and as you can see the numbers here have stabilized in the fourth quarter, although we recognize it’s at a high level. The one thing I want to note here is that there has been a change in systems so the calculation of this chart is slightly different than what we’ve done in the past, but it doesn’t change the fact that in the first quarter these rates have stabilized. I guess one other thing I’d note before leaving this chart is we have changed some of our collection practices to move more towards industry standards and have done some reengineering. But I want to note that that has not had a material impact on our delinquency levels.

So let me move to Slide 19. Now since write-off rates have been receiving a significant amount of focus, we thought we would provide some additional information as it relates to write-off rates. Although obviously these are forecasts and subject to the environment, which could impact the assumptions we’ve made here, but looking at our roll rates we would estimate that the first quarter of this year will increase between 200 and 250 basis points compared to the first quarter of ’09. In the third quarter we think the increase will moderate and that the increase in the third quarter compared to the second quarter will be less than 50 basis points.

Now as I said in the past, it is difficult to estimate write-off rates once you go beyond the next two quarters. So here we’ve in looking at the fourth quarter based our estimate on where unemployment would go. So assuming unemployment reaches 9.7% in December, the fourth quarter write-off rate would be similar the third quarter. Now these reflect what we expect over the balance of the year based on roll rates with an eye to the blue chip forecast of unemployment and projected asset levels. At these write-off levels our goal is to generate profits in excess of our dividend.

Moving to Slide 20, this looks at provision and if you look at the first quarter provision takes into account our models, our key metrics that we look at, the economic outlook. And we have increased our provision as a result of that based on the inherent risk in the portfolio. As you’ll see on the next schedule, as a result of this we have increased our coverage ratios. So looking at Slide 21, now this is U.S. lending reserve coverage related to total loans outstanding. And as you can see, this coverage ratio has increased significantly over the last four quarters and in particular in this quarter, moving from 4% in the first quarter of ’08 up to 8.9% in the first quarter of this year. Now not on this slide if we looked at reserves as a percentage of delinquencies on a worldwide basis, our coverage in the first quarter of ’08 was 118% and now stands at 168%.

Now some analysts look at coverage in terms of month’s coverage of write-offs. If you were to look at that metric it has increased this quarter as well. The other thing I’d note is that our reserve covers interest, principal and fees. Now some of our competitors have a reserve only related to principal, and we are looking at the possibility of in fact splitting our reserve between principal only and a separate reserve for interest and fees, and if we do that we may share that information in the second quarter. If you will look at it on that basis, then the reserve coverage ratio actually increases.

Moving to Slide 22 and our capital ratios, as you can see here are tangible common equity to risk weighted assets which is one of the ratios that is being focused on in terms of capital strength, increased significantly this quarter from 8.5 in the fourth quarter up to 10.1% in the first quarter. Now there are a number of factors that contribute to this. First we have positive earnings. We have lower asset levels which helped the ratio. In addition to that, this includes OCI in capital and the mark to market on our [T3] portfolio is included in equity and that improved substantially during the quarter and had a positive impact on this ratio. In addition to that, the at risk weighted assets included amount for off balance sheet assets that we have and because we have higher levels of capital, the amount of risk weighted assets included in the first quarter is lower than the amount included in the fourth quarter and that’s also having a positive impact on the ratio. But 10.1 is a very positive ratio compared to the industry.

Now we’ve also done a calculation on a pro forma basis of what tangible common equity over risk related assets would look like if the revisions to FAS 140 were actually in effect in the first quarter of ’09 and you can see that on that basis it stands at 7.3% which again is a very strong ratio. I’d also note that the other ratios on this page are comfortably above the well capitalized level. Now one other thing I want to mention again is when you think about capital ratios and you think about stress scenarios, you have a slowing economy which drives lower spending which drives lower asset balances. If you combine that with our flexible business model which can control the decrease in income, it actually has a positive impact on capital ratios.

So let me move to Slide 23. Now what I just described in terms of the relationship between spending and asset balances is not just a theory. What this demonstrates is that when spending drops, asset levels drop with it. So if you look at the blue, solid line which is spending, when it drops the dotted blue line which lending managed loans drops right with it. And when you look at the yellow line and you see the drop in charge billed business, cardmembers receivables drop with it as well. Slide 22. I’m sorry. I’m on Slide 22 not Slide 23.

Now the negative of falling asset levels is that spread revenue is negatively impacted. Also when you look at credit write-off rates you know there’s a negative impact on the calculation because of the lower denominator. On the positive side though as assets drop you have reduced risk and when our assets dropped is a positive impact on capital ratios.

Now turning to liquidity and looking at Slide 24. If you look at the top of this slide, it’s really a roll forward of cash from December through March. So we started out with $21 million in cash. This reflects the proceeds from the issuance of the preferred shares to the government. It reflects the increase in our deposits. Now during this period receivables and loans decreased, so that’s effectively a source of cash for us. We paid down some of our short term debt and we had maturities of long term debt of $9 million and then we took about $5 billion of cash and invested it so it’s included in our investment portfolio.

So cash stood at $21 million at the end of the first quarter. Now we think about excess cash and readily marketable securities, we back out the cash we need for operating purposes of $2 billion. We also assume that we pay off any short term obligations we have in deposits. That’s $4 billion. And then we add in the liquidity investment portfolio of $10. So we have excess cash and readily marketable securities of $25 billion. So for this purpose as we think about deposits, any deposit that at issuance has maturity of less than 12 months we actually include on this line here when we think about excess cash and readily marketable securities.

So with that, let me move to Slide 25 which is the maturities that we’re going to see over the next four quarters. So here you can see the maturities of long term debt. The off balance sheet column reflects the securitizations that will mature over the next 12 months. And in the next column are certificates of deposit which at issuance had a maturity of greater than one year, and this reflects how much of those will mature over the next 12 months. So a total of $23.5 billion. So our excess cash is more than 12 months worth of maturities and we intend to maintain that on a rolling basis as we go forward. So at the bottom of this chart we also just indicated a sensitivity to change in this should really be receivables and loans, so if they decrease by 1% it would actually have a benefit of reducing our funding needs by $1 billion. If they decrease by 10% it would reduce our funding needs by $9.5 billion.

So moving to Slide 26 and just a little bit more information about our brokered retail deposits. So retail CDs we started with $6.2 billion at the beginning of the quarter. $1 billion matured during the quarter. We raised $4.1 billion of new retail CDs so at the end of the quarter we had $9.3 billion outstanding. The average duration was 24 months and the average rate was 2.4%. Now if you’ll look at the $4.1 that we raised during the quarter, the average duration is 25 months and the average rate on that is 2.1%. So when you look at retail CDs plus the brokerage sweep accounts, we had deposits of $17 billion at the end of the first quarter.

And as we look forward in terms of our funding needs, assuming the economy stays weak, the majority of our funding will be met by raising deposits. So if you look at Slide 27 I just wanted to point out the additional funding sources we have. So we have deposits. On the TALF program we have a capacity of $9.8 billion. We would anticipate utilizing a limited amount of TALF during the balance of the year. But we also have the TLGP program and I know it expires later this year but for a large fund year it’s a capacity we have. Certainly if the markets were to rebound we could utilize commercial paper or other unsecured debt. And we have the contingent sources of the discount window plus our bank facilities.

So with that, let me make a few summary comments. So for 2009 we remain focused on our three key priorities, to stay liquid; to stay profitable; and to selectively invest for the long term. We believe we are making good progress against each of these goals. Attaining them should position us to emerge from this slowdown in a strong competitive position. F

From a liquidity perspective we had $25 billion of excess cash and marketable securities on hand at the end of the quarter, an amount well above our projected funding needs over the next 12 months. We continue to build our U.S. retail deposit base as we increased our deposits by $3.5 billion and at the end of March, with total U.S. retail deposits of $17 billion. We are also on track with our previous announced launch of our direct deposit program later in the quarter. This program will further expand our deposit taking capabilities.

During 2009 based on the assumption that the credit markets will remain challenging, we plan to fund our activities primarily through deposits, but we may also utilize a small portion of the $9.8 billion of capacity that we have under the governments’ term asset based security loan facility. We believe this strategy will position us to meet our goals of holding excess cash and readily marketable securities equal to the next 12 months of maturities on a rolling basis. Other funding sources include the government, temporary liquidity guarantee program, the Fed discount window and our bank credit facilities, and these provide further support if needed.

During our quarter when others in the card industry were incurring substantial losses, we remained profitable and generated $443 million of earnings from continuing operations. These results reflect the competitive strength of our diverse business model, given the multiple roles we play as the payment issuer, processor and network provider. Additionally they underscore the flexibility of the model and our ability to adapt to a very difficult economic environment, characterized by slower spending levels and higher unemployment.

As we expected, cardmember spending was under considerable pressure throughout all of our business activities. The overall year-over-year spending decline remained fairly consistent through the quarter and April to date. In light of our proportionately greater level of corporate and consumer discretionary spending, we continue to feel good about the relative level of our business activity compared to other major card competitors.

As we previously reported through our monthly credit related 8-K filings, credit weakened further in the quarter as write-off rate and past due amounts rose well above year end 2008 levels. While these metrics reflect high levels of dollar write-offs, they are also impacted by the negative denominator impact of lower lending balances. This decline in loans reflects the flow through effect of lower levels of consumer spending in this difficult environment, in addition to the pro active credit actions that we have implemented. These actions and seasonal trends appear to have contributed to the recent improvement in the current to 30 roll rate, although it’s premature to call this a trend.

We believe that second quarter U.S. managed write-off rates will be higher than first quarter levels. Based on projected roll rates and an expected decline in loans, we estimate between a 200 and 250 basis point increase in second quarter U.S. managed write-off rates. In the third quarter we expect them to rise much more modestly, likely less than 50 basis points. We believe the fourth quarter managed write-off rate will be similar to the third quarter assuming that the U.S. unemployment rate reaches 9.7% by December.

These write-off rates assume that the actual dollar write-off rises in the second quarter but remains relatively flat in the third and fourth quarter. Our operating expense trends in the quarter clearly show the flexibility that we have been able to achieve through reengineering activities. During the quarter we continued to implement the $1.8 billion program announced last October and based on our progress to date we are on track to realize the target benefit this year.

We remain committed to our profitability goal, so in light of the economic uncertainty still in front of us we put additional expense related initiatives in place during the quarter and we are planning to implement another round of actions including staff reductions in the second quarter. We are also benefiting from the revenue enhancement put in place over the last two quarters, and we are realizing the benefits related to our sizable variable rewards expense base and the discretionary aspects of our marketing and promotion expenditures.

As we evaluate our investment decisions throughout this year, we will be working to prudently balance near term performance against long term profitability and growth. Despite the reduced amount of investments, we feel good about the long term opportunities within the areas that investments are focused on such as our expanded delta partnership and various B2B initiatives.

While the current economic weakness will continue to negatively impact our results, our goal remains to position the company to generate profits in excess of our dividend and we are working hard to achieve that income. At the same time we recognize that this is a difficult and [inaudible] operating environment.

Our tangible common equity to risk weighted asset ratio of 10.1% is relatively high versus most of the bank holding companies. Our Tier 1 risk based capital ratio of 14.8% as well as our other regulatory ratios are comfortably above the well capitalized threshold. This positions us well for the difficult period that still lies ahead and the potential consolidation of our off balance sheet receivables under the proposed FAS 140 revisions.

As Ken noted in the earnings release, if permitted by our supervisors and if supported by the results of the stress assessment, our intent is to repay the CPP capital provided by the Treasury. In closing, our business model comprises a diverse set of activities that span the payment industry. Our brand is an important asset that is recognized and respected around the globe. Our premium cardmember base remains a key advantage as it retains the capacity to grow spending substantially when the economy improves. Our balance sheet is positioned with capital funding and a liquidity profile that should provide us with the flexibility in these volatile times.

And across all our businesses we have instilled a strong focus on the customer, someone we need to stay close to regardless of the environment. Thanks for listening and we’re now ready to take your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Brian Foran - Goldman Sachs.

Brian Foran - Goldman Sachs

I think the expense flexibility was surprisingly good in the quarter I think for a lot of people. As we look out into the rest of the year is there more expense flexibility if revenues continue to decline or are we bumping up against a level where you reach as low as you can go?

Daniel T. Henry

So as I indicated I think that we recognize that the environment is going to continue to be difficult. We’re going to work very hard to execute against the reengineering that we put in place in the fourth quarter of last year so that we get the full benefit as we go through this year. But as I indicated we actually are going to have another round of reengineering, have additional actions including additional reductions in staff. So we do think there’s additional flexibility in our business model and we will utilize those levers. We look at some of the other line items like rewards, you know that’s going to be driven by where our spending levels are and it’s just another one of the aspects of the flexibility of our business model. So yes we have the ability to continue to utilize discretionary decisions and continue to demonstrate that our business model is flexible.

Brian Foran - Goldman Sachs

And then as a follow up, there’s a lot obviously going on in Washington. There was just recently a meeting obviously. Is there any update you can give us in terms of legislative and regulatory risks where those might be increasing or decreasing?

Daniel T. Henry

So I don’t have an update of the events that took place today. We had a representative at the meeting at the White House. We certainly take very seriously the concerns that are expressed about the industry and we look to work constructively with the administration and Congress toward a productive solution. And while we’re mindful of the calls for reform, we think it’s important that we look at all things and strike the right balance between consumer protection and the availability of credit to the general population.

Operator

Your next question comes from Robert Napoli - Piper Jaffray.

Robert Napoli - Piper Jaffray

On the expense savings just would like maybe a little bit more color as we move to the other side of this recession eventually. Of the cuts that you’ve been able to make and the reengineering, how much of that is sticky? So are we going to see significant operating leverage on the other side of this, beyond what we have seen historically? And what do you lose? I mean, these are substantial expense cuts that you had laid out pretty clearly going into this year, but what are you cutting into the muscle at all? And how are you – maybe give me some color on that.

Daniel T. Henry

Okay. So as we look at the reengineering that we do, a large portion of it is very sticky. So if you look at the reductions we’ve made in our staffing levels, we are not doing that solely for the short term. Surely there’s a benefit in the short term but as we look into the future, when things do turn around – eventually they’ll turn, we think in all likelihood the saving rate of individuals will be higher. We think people have less value in their homes. So when it turns and gets better, we may not return to the levels that we saw in ’06 and ’07 and so we want to construct a cost base that will enable us to be competitive and to invest and enable us to gain share just the way we did over the last several years. There are some aspects to it which are cuts that are just for the short term that will come back, but I would say a large portion has stickiness and are really designed for the future and the future growth over the long term.

Now we are always very careful not to cut into the muscle. We would not take actions that would hurt our ability to perform well when things start to turn. So we’re very conscious of that. So we think that the cuts that we have made as I say will put us in good stead in the future. They’re very helpful in the short term and they won’t negatively impact our ability to compete in the marketplace.

Robert Napoli - Piper Jaffray

And just a follow up on credit, if I could. American Express has more exposure as we all know in California and Florida and some of the housing states where you have higher income as well. And I think maybe credit started to go bad in the fourth quarter of ’07 maybe a little bit ahead of the competition because of your exposure in some of those states. And as you’re looking closely and I think you tightened sooner than others did because of that, when you’re looking at your roll rates improving and understanding your seasonality and it’s too early to get too constructive on that, but are you seeing signs of improvement, more so in states that went bad earlier because of the tightening? Where are you seeing that improvement?

Daniel T. Henry

Yes, I would say that early in the cycle I think that housing was a significant driver of higher delinquencies and write-off rates, and certainly did see that in the states that had larger drops in housing. However, at this juncture I really think that unemployment has taken over as the primary driver of delinquency and write-off rates. So I think that’s what we’ll need to see for a real turn. I think stabilization in the housing market will be important. I think consumer confidence will be critically important. People will have to start comfortable that they’re going to retain their job. And when those things start to happen I think is when we’ll really start to see some notable improvements.

Operator

Your next question comes from Craig Maurer - Calyon Securities (USA) Inc.

Craig Maurer - Calyon Securities (USA) Inc.

Regarding your billed business I was wondering if you could quantify if at all the effect in the comparison that Easter had on your comparison with the prior year and if that would provide an easier comparison in the second quarter than you had in the first with Easter falling in April this year?

Daniel T. Henry

Yes, so internally we have huge discussions about the impact of Easter and there’s a camp that would view it as having a positive impact, others will view it the other way. People have different views depending on geography. At the end of the day I don’t think it had a huge impact on the drop in spending that we saw in the first quarter, nor do I think it will have a large impact in April. You know, as I said I think the decrease in billings was pretty consistent over the quarter and continued into April to date.

Operator

Your next question comes from Donald Fandetti – Citigroup.

Donald Fandetti – Citigroup

I just wanted to follow up on the improvement in the delinquency numbers. I think a lot of investors and folks in the business seem to think that most of that’s due to seasonality, but it sounds like maybe there’s a little bit more afoot at AXP. I was wondering if you could dig into that a little bit? Thank you.

Daniel T. Henry

So it’s hard to tease apart what’s seasonality and what are the actions we’re taking. You know, we believe that the improvement we see is both somewhat seasonal and also somewhat related to the actions we’ve taken. We’ve noted that in the month of March, particularly in the roll rate from current to 30 days past billing, there was an improvement and really we’re at historic lows there. But I want to be very careful not to take that and overstate it, because I don’t think a month or even two months is a trend and I think we’d have to see how this plays out over the next several months before we want to declare a victory here. So to one data point I think we need to keep in mind that our write-off rates are up dramatically this quarter from last quarter. As I described they’re going to be up again next quarter and so I think we need to take all those things into consideration as you kind of evaluate where we are.

Operator

Your next question comes from Sanjay Sakhrani - Keefe, Bruyette & Woods.

Sanjay Sakhrani - Keefe, Bruyette & Woods

Drilling down on that credit quality question again, I want to make sure I understand what specifically makes you comfortable with the charge-off guidance? Is it that you expect the rate of delinquencies increasing to continue at a slower pace than you’ve seen in the past? Or is it that you expect lower roll rates? And maybe you could just touch on international as well and your expectations there? Thanks.

Daniel T. Henry

Okay. So when we look at the second quarter our view is heavily driven by what we see in the roll rates. So we have a pretty good view of watching the leader buckets and we can look at historical performance as well as where that may go in light of the economy. So that is really driven heavily by looking at roll rates. When you get to the third quarter, again we can look at our roll rates, we can see what’s moved into the 30 day past due, 60 day past due, 90 day past due. So we have a sense of what’s in those buckets and again we look at historical numbers as well as where we think the economy is going. So there it’s a mix of roll rates and kind of what the blue chip indicator is saying about unemployment that forms our view of what will take place in the third quarter.

And when we get to the fourth quarter it’s really based on looking at the blue chip, which is saying that consensus which is saying that unemployment will reach 9.5. You know we bumped that up a little to 9.7. But that fourth quarter estimate is really based on an unemployment assumption. I Dan Henry am not forecasting that that’s going to be the number, we simply utilized the blue chip to make that type of a judgment. So that’s the basis for the information we’re providing.

As we look at international as I said that seems to be a little bit behind the U.S. and so we see delinquencies climbing there. We see write-off rates higher. We’ve increased our provision accordingly and it’s really a cross over geographies and we’re watching it very closely, taking credit and collection actions just like we are in the United States. And so we’ll have to see how that plays out over the next several quarters.

Sanjay Sakhrani - Keefe, Bruyette & Woods

Could you expand on your statement in the release on wanting to pay back TARP? What drives that thought process and how does that tie into your views on utilizing some of the other programs? Thanks.

Daniel T. Henry

Okay. So we’ve always viewed TARP as a temporary program. It was established at a time of extraordinary stress in the financial system and was designed to insure that participating banks were in a position to provide access to credit facilities that were needed to get the economy back on its feet. We have been doing that and believe we can continue to expand those activities responsibly, even after repaying TARP. We believe it’s in the best interest of American Express and good public policy to return TARP after the stress test process has been completed.

Operator

Your next question comes from Christopher Brendler - Stifel Nicolaus & Company, Inc.

Christopher Brendler - Stifel Nicolaus & Company, Inc.

One of the things that I think is remarkable about this quarter is the stabilization you’ve seen in the credit metrics. I know that you’ve been doing a lot of repricing, just pulling back on lines and the reduction in balances has been significant. Do you think that some of the stabilization you might be seeing in some of those roll rates might be related to you’ve sort of gotten through the worst of those actions? Or are you still aggressively pulling back on the portfolio? And then a follow up question would be, in the charge card business you’ve talked a lot about the outlook for the credit card portfolio. Charge card metrics look pretty good and I think you mentioned that. What is your outlook there? Do you think that this portfolio will continue to experience much less deterioration or does it have a little bit of a lag? I think you also talked about the delinquency rate being I think flat or down year-over-year, but doesn’t that have something to do with the fact that you’ve changed your charge-off policy at least in the U.S. charge card? Thanks.

Daniel T. Henry

So I’ll start at the beginning. You may have to help me if I don’t hit all these questions, but what we’re seeing in balances is largely being driven by spending. So we have a very different model than the competitors. They have really a lend-centric model. Ours is spend-centric. So spread revenue is much more a piece of our total business. So we have made available credit to creditworthy customers. They have decided that they are going to spend less and when they spend less we are seeing a reduction in our balances. So while it’s also being impacted by the credit actions we’re taking which we think are prudent and responsible given the environment, the largest impact on our loans and receivables is being driven by the fact the customers are spending less.

So we have over the course of the last year put in credit actions that we felt were appropriate. We continue to look at both credit as well as collection actions that we think make sense. And in this environment in some cases we’ve moved more towards industry standard practices, which we think will have a positive economic benefit over time. And that’s what’s really driving those decisions.

Christopher Brendler - Stifel Nicolaus & Company, Inc.

Are you talking about re-aging when you make that comment?

Daniel T. Henry

When I talk about that comment I talk about kind of our care program, how we interact with customers who are struggling, in some cases we are forgiving certain fees and the like. So there’s a number of different programs that we have in place. If as a result of our policies customers comply with those and they re-age, then that’s a result of their behaviors as it relates to our policy. Again we’ve moved to some policies that are closer to industry standard. I guess I’d emphasize that the amount of re-aging that’s taken place in the quarter has not had a significant impact on any of our metrics.

Christopher Brendler - Stifel Nicolaus & Company, Inc.

Okay then. Charge cards?

Daniel T. Henry

So in terms of just going to charge you talked about us changing our charge policies, I’m not really –

Christopher Brendler - Stifel Nicolaus & Company, Inc.

When you go from 360 to 180?

Daniel T. Henry

Yes, yes we did. So we did do that absolutely in the fourth quarter we did that. And now we’re a bank holding company that’s something we need to do. But that really doesn’t have any impact on either our provision, we’ve restated I think our metrics, so I do not think that’s having any significant impact.

Christopher Brendler - Stifel Nicolaus & Company, Inc.

Just finally the outlook for charge? I mean do you think it continues to materially outperform the credit portfolio and it’s obviously a very differently underwritten portfolio. You mentioned that you voted to control spending. Just give me a little color on how that ability limits your exposure there. I think if I’m not correct, correct me please, but I think the charge card portfolio was worse in the ’01, ’02 downturn relative to where you’re sitting today. Maybe I’m wrong.

Daniel T. Henry

I think charge card is a product that’s pay in full. You know we have the ability at any time to stop a customer at points of sale. We have a tremendous history of experience here and we have the ability to tightly control this. As you’ve seen our experience has been very good, the provision is only up modestly and we would anticipate the ability to continue to control charge card in a similar way to the way we have in the past.

Operator

Your next question comes from Andrew Wessel - J.P. Morgan.

Andrew Wessel - J.P. Morgan

I just had a quick follow up from I guess a comment that was made at the Investor Day. I believe it was said that in a 9.5 and that was back a couple of months ago so it was a 9.5, 10% unemployment environment that it would be difficult to remain profitable. Was that comment made just in the card business, the U.S. card business itself? Or was that a broader comment about that as a consolidated business and then what’s changed if that’s the case?

Daniel T. Henry

Okay. So honestly I don’t remember having said that, that it would be hard to profitable in a 9.5 or 10% unemployment range. So certainly if you look at the estimates that I discussed today, we’re assuming that unemployment gets up to 9.7% in December and with that environment it’s our goal to stay profitable and to have generate earnings in excess of our dividend.

Operator

Your next question comes from David Hochstim - Buckingham Research.

David Hochstim - Buckingham Research

I wonder, Dan, could you relate your comment about dollar charge-offs in the second and third quarters to the reserve build for worldwide lending in the quarter? Is that – I mean if you think about the $440 million increase in reserves that’s anticipating some higher dollar charge-offs over the next 12 months and yet you’re saying you’re not going up very much? So should there be no provision, no reserve build after the first quarter?

Daniel T. Henry

So we are expecting that as we’ve disclosed write-offs will go up. I would anticipate that as credit worsens, if we actually see credit worsening that we will continue to see appropriate provision levels and could well be that there are further builds in the reserves as we go forward.

David Hochstim - Buckingham Research

Should we assume that the dollar increase you’re talking about from Q1 to Q2 and charge-offs would lead into a big portion of that reserve build this quarter or?

Daniel T. Henry

I think we will have high write-offs but we also anticipate a build in reserves.

David Hochstim - Buckingham Research

And then could you give some color in terms of what you’re seeing from cardmembers and spending in the U.S. or outside the U.S. and charge card versus lending products, in terms of changes in behavior? I think you talked in the past about fewer big ticket purchases, but what are you seeing in terms of T&E or non-T&E spending? How do those things factor into the changes in billed business?

Daniel T. Henry

Yes, I think the largest impact that we’re seeing is in average spend. You know, you can see almost segment by segment that the decreases in billed business closely correlate to decreases in average spend. People – transactions were only down 3%, so that’s a positive. People are still taking the card out of the wallet. They’re still using it but they’re choosing to spend less per transaction. You know, I think that is really the story. Now in the U.S. we saw that non-T&E so retail and everyday spend was down about 12% and T&E spend was down 20%. And beyond that I think we continue to see this as broad based across all segments, all products. And that’s continuing.

David Hochstim - Buckingham Research

Are you seeing bigger declines from some [inaudible] and centurion cardholders in percentage terms or everybody’s at the average?

Daniel T. Henry

I don’t see that any one group is performing dramatically different than the others. I think it’s broad based.

David Hochstim - Buckingham Research

And to Chris’s question, no difference between regions?

Daniel T. Henry

You know, if you look internationally on an FX adjusted basis we were down 5% and quite frankly in consumer business it was pretty evenly spread, the decrease across all the regions. On an FX adjusted basis in commercial card it was across most regions. The only exception was Latin America where it was up a very small amount. So it is broad based across products, it’s broad based across segments and it’s broad based across geographies. Now again geography, 5% FX adjusted outside the U.S. compared to in the U.S. it’s about 15%. So greater in the U.S. but we are seeing impacts internationally and internationally it’s broad based.

Operator

Your next question comes from Bill Carcache - Fox-Pitt Kelton.

Bill Carcache - Fox-Pitt Kelton

Can you comment I believe it had been since 2001 since you had last sold charge-off debt and in I believe the 8-K from this past with the March credit data you’d indicated that you’d sold some charge-off debt. Can you say how much that benefited the charge-off rate and the extent to which you might have some additional inventory that you could use in the future to help offset losses there? And then I have a follow up as well.

Daniel T. Henry

So I think we said it’s been a number of years since we’ve done it. I don’t know that the last time we did it was ’01. It is a common industry practice and we’ve made a decision that we think there is the proper economics associated with doing it, so we did it this quarter and I would anticipate that we would continue to do it in the future as long as we think there are good economics around that decision. So it’s a practice that we may well continue.

Bill Carcache - Fox-Pitt Kelton

Can you tell us what the reserve rate was that you used in the 140 disclosure that you made about the capital ratios? And then separately the final question is related to the allowance. So is it right then since you’re using 9.7% unemployment, is it right that if unemployment does not exceed 9.7% then you’re adequately reserved as of right now and you don’t need to book additional reserves?

Daniel T. Henry

Those are two different questions. So the reserve rate to bring assets back on the balance sheet would be the rate we have in the owned portfolio. Okay? In terms of what we reserve going forward, we’ll be dependent on the risk we assess in the portfolio at the end of each quarter. So it’s a combination of what we see in write-offs, what we see in our model in terms of migration to loss. It’s what we see in terms of coverage ratios whether it be for total loans, for delinquencies, we look at full coverage of write-offs and how much coverage we have. We look at a wide variety of indicators and based on that we set the reserve balance at the end of each quarter so as we move forward the expense or provision in each quarter will reflect write-offs in the quarter and it will reflect the apparent risk in the portfolio and I would anticipate that there would be a reserve build as we go forward throughout the year.

Operator

Your next question comes from Richard Shane - Jefferies & Co.

Richard Shane - Jefferies & Co.

I didn’t catch the answer to the first part of Bill’s question about what were the impact of the portfolio sales on the first quarter loss rate?

Daniel T. Henry

You didn’t hear it because I didn’t answer it, which wasn’t my intent to not address the question. So the way I addressed the question is to say it had a minimal effect. It’s not an amount we’re disclosing but it did not have a significant impact on the metrics.

Richard Shane - Jefferies & Co.

Our attention is being drawn to the lag loss data because of the denominator fact and what’s going on in the portfolio in terms of shrinkage. When you give the outlook in terms of projected changes to the loss rates over the next couple of quarters, how much of that is explained by denominator effect and how much is explained by your expectations on credit?

Daniel T. Henry

So I think what we should expect is that write-off dollars in the second quarter will increase and then we think write-off dollars will stay relatively flat in the third and fourth quarter. And the write-off forecast also as a projection at bad asset levels. And if spending decreases than that is going to have an impact on the denominator effect. So it’s a combination of both higher write-off dollars and what we’re forecasting in terms of asset levels.

Operator

Your next question comes from Bruce Harting - Barclays Capital.

Bruce Harting - Barclays Capital

Your Slide – what number was that? The one concerning the FAS 140 was fascinating. Just the TCE to RWA, is the significance of that is that the calculation that’ll be used for the stress test, Dan or that just?

Daniel T. Henry

Okay, that’s Slide 23. So the stress test we provided a variety of information under the stress test, but it’s our understanding that they will focus on Tier 1 ratios and they will also focus on tangible common equity over risk weighted assets. That’s an assumption. We have not gotten back yet their findings.

Bruce Harting - Barclays Capital

You answered already that the reserve rate is based on the owned portfolio assumption but down in the footnote there where you say that the TCE change is $1.1 billion, that’s just the after tax impact of that number you specified, the owned portfolio reserve rate after tax? Is that what that is?

Daniel T. Henry

It’s primarily the reserve we put up tax [inaudible] but there may be some other small items in there, but it’s primarily that.

Bruce Harting - Barclays Capital

And then the RWA increase of $20 billion, of $20.5 that’s not really the difference right now between managed and owned. That’s a different number?

Daniel T. Henry

It is. I mean it’s basically – it reflects what is already in the calculation for off-balance sheet assets, which is the differential in essence between that number and the full amount of securitized loans today.

Bruce Harting - Barclays Capital

And then just switching gears a little, I just tried to run the math on the translation of GAAP to managed here but I just noticed it’s pretty remarkable that your yield is up about 200 basis points on a linked quarter and about 100 of that’s on a year-over-year. Can you just comment on do you expect that the average cost of funds – it looks like you’ve had about a 46% decline year-over-year in your cost of interest so should we expect any continuation or decline in you cost of funds? And it looks like you’ve had about a 15% decline excluding foreign exchange in balances, so interest income’s down about 17% so it looks like you’ve held the interest income pretty flat. Are those kind of trends which are very good sustainable through the balance of the year, i.e., lower funding costs and kind of flat interest income?

Daniel T. Henry

Well, it’s going to be driven by where interest rates go in the future so it’s very dependent on the market and where the benchmark rates are. And that’s what’ll drive interest as we go forward.

Bruce Harting - Barclays Capital

So it wasn’t just a function of longer dated – the rollover of longer dated liabilities that have run their course? I mean, looking at your rate schedule it looks like you still have a fairly substantial amount of longer dated funding rolling which should be beneficial through the balance of the year.

Daniel T. Henry

Well, it all depends on lots of things like what our funding needs are in terms of what we fund it with. So there’s numerous factors here. It’s like where the benchmark rates are. It depends on where asset levels are. It depends on what the mix is between deposits and other sources of funding that are available to us. So there’s a myriad of factors that are going to go into that. As I said before based on the current economic environment, we would think a majority of our funding is going to come from deposits although it’s likely that we will use a small portion of the capacity that’s available under TALF.

Bruce Harting - Barclays Capital

I mean kind of looking at the managed numbers stated simply year-over-year you’ve had about a $0.5 billion increase in provision, $0.5 billion decrease in discount revenue but you’ve had about $1 billion decline in expenses to offset that. And then a little bit of a benefit on the net interest margin line.

Daniel T. Henry

Well you know it’s very much about the business model we have and the flexibility that we think we have in that model. I took a fair amount of time at the financial community to talk about that and I think this quarter actually reflects us executing against that.

Operator

Your next question comes from John Stilmar - Suntrust Robinson Humphrey.

John Stilmar - Suntrust Robinson Humphrey

I wanted to talk a little bit about spending if you would and it’s certainly not a surprise to have double digit down year-over-year declines in spending given the contraction in both the wallets of consumers as well as in your portfolio. Can you talk to me about the pace of deterioration and is the pace of deterioration in spending continuing to – is it accelerating, staying about the same or have we at least seen in the pace of deterioration level off at least through April and then how has it occurred through the quarter? And if you could differentiate those comments between the credit card and charge card business I’d be appreciative. Thank you.

Daniel T. Henry

Okay, so we’ve seen spending down on an FX adjusted basis 12% or 16% on a reported basis. But on a FX adjusted basis if we look at the quarter it’s been very consistent over each month in the quarter that number. And that level of spending decline has continued into April.

John Stilmar - Suntrust Robinson Humphrey

How do you compare between charge card and credit card or are you not seeing any difference?

Daniel T. Henry

Well, you can look at Slide 22 and it gives you some idea of the difference in the decline in spending between lending and charge.

John Stilmar - Suntrust Robinson Humphrey

Finally, one of the things that you alluded to on analyst day was a lack of – there was more of a focus on internally with regards to the company and not really a focus externally. Have you thought any more about potential acquisitions of adjacent businesses or specifically in more the spending side of your business rather than the credit side as you move forward, or is it still very much executing on your business model internally and not necessarily looking at acquiring additional capacity or other businesses on the payment side?

Daniel T. Henry

Yes, I don’t think our view has changed here. I think we think there’s a lot of opportunity in our core businesses to fuel our growth. We think the businesses that we’re in have a lot of growth opportunity whether it’s on the issuing side or on the network side. And we’ve always been open to acquisitions which are kind of bolt ons that would help achieve our long term goals and the growth of the company. And I would think we would continue. In fact, we’ve done some of those over the last couple of years and I think we would continue to have the same philosophy as we go forward.

Operator

Your next question comes from Scott Valentin - FBR Capital Markets & Co.

Scott Valentin - FBR Capital Markets & Co.

Two questions. First, with regard to the pricing actions you took in January, raising rates on I think it was 55% of the card holders, have you seen any noticeable change in behavior in that cohort that you raised rates on?

Daniel T. Henry

Yes, it’s – we certainly are very focused on that and we are monitoring it very closely. You know, quite frankly it’s probably a little too early if we’re going to see some impact but we really haven’t seen impact to date, but it’s something that we’re tracking very closely I can assure you.

Scott Valentin - FBR Capital Markets & Co.

You mentioned additional reengineering efforts in 2Q and I guess can you principally size it relative to the one you took in 4Q with regard to a charge or potential reengineering goal cost saves for the second initiative?

Daniel T. Henry

Yes. We were in the process of deciding what actions we’re going to take. We need to do that very thoughtfully. We need to plan it. And so that’s what’s taking place right now, so I really can’t size it for you. When we’ve done that work and decided on the actions, you know, we’ll make an announcement.

Operator

Your last question comes from Robert Napoli - Piper Jaffray.

Robert Napoli - Piper Jaffray

Just looking at the growth and decline in loans through the first quarter, I was wondering if you might be able to give a little bit of color on your intentions or thoughts and what you’re seeing and what you expect in the rate of decline of your managed loans in the U.S. and abroad and credit card – your charge card receivables as well?

Daniel T. Henry

So I think Bob that’s going to be heavily driven by the spending levels that we see in the future. Again if you look back on Slide 22, there’s a very tight correlation between loan balances and spending on lending products and a very tight correlation in terms of receivables linked to spending on the charge card. So I think where those balances go are going to be driven by spend and spend in all likelihood will be very driven by what’s taking place in the economy.

Robert Napoli - Piper Jaffray

But given that you said that spend that the trend has stabilized through April, does that mean that you would expect the rate of decline of your loans to start to slow significantly as I mean that also has a significant effect on I mean you’re talking about charge-off percentages, that percentage has to have a denominator associated with it?

Daniel T. Henry

Well certainly the write-off rate is a function of two things, right? It’s write-offs in the period which are in the numerator and it’s where loan balances go in the denominator. So certainly as we’ve seen in the material we’ve presented that when you have a declining balance sheet that has a negative impact on the write-off rate.

So really it depends – at the end of the day it really depends - I’ll go back to the beginning of my answer, it really depends very much on where spending goes. That’s what’s going to drive this to a large degree.

Robert Napoli - Piper Jaffray

But what are you seeing? I mean are you seeing a slowdown? I mean you have a forecast of loans. Are you still seeing the same rate of decline?

Daniel T. Henry

So in the month of April the decrease in spending was the same as what we saw in the first quarter.

Robert Napoli - Piper Jaffray

And does that mean loans have stabilized? I guess that’s what I’m trying to get to. You’re saying that the rate of decline in spending has stabilized. Does that mean that the rate of decline in loans should therefore slow down from what we have seen?

Daniel T. Henry

Yes, I think, you know, when spending is down you’re going to see balances decline. If spending were equal year-over-year based on history it would imply that loans at that point would stay at a similar level. But if spending increases the balance is going to go up. Spending declines, period over period they’re going to go down.

Robert Napoli - Piper Jaffray

Just for clarification on the TARP, requesting to repay the TARP. You intend to do that without raising additional equity, capital?

Daniel T. Henry

So I would say that’s kind of jumping ahead. We haven’t really received the results of the stress test. We haven’t completed our conversations with the regulators, so I wouldn’t want to speculate on that point. I just say my own view is that we have a very strong capital position.

Robert Napoli - Piper Jaffray

Thank you.

Daniel T. Henry

All right. Thanks everybody. Take care.

Operator

Thank you sir. Ladies and gentlemen this conference will be available for replay after 7:00 PM Eastern Time tonight through Thursday, April 30 at midnight. You may access the AT&T teleconference system at any time by dialing 1-800-475-6701 and entering the access code 995278. Again those numbers are 1-800-475-6701, access code 995278. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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Source: American Express Company Q 2009 Earnings Call Transcript
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