American Express' Management Discusses Q1 2013 Results - Earnings Call Transcript

Apr.17.13 | About: American Express (AXP)

American Express Company (NYSE:AXP)

Q1 2013 Earnings Call

April 17, 2013 5:00 pm ET

Executives

Richard Petrino – Senior Vice President, Investor Relations

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

Analysts

Ryan M. Nash – Goldman Sachs & Co.

Sanjay Sakhrani – Keefe, Bruyette, & Woods, Inc.

Bill Carcache – Nomura Securities International, Inc.

Mark C. DeVries – Barclays Capital, Inc.

Donald Fandettin – Citigroup Global Markets Inc.

Kenneth Bruce – Bank of America Merrill Lynch

Chris Brendler – Stifel, Nicolaus & Co., Inc.

Betsy L. Graseck – Morgan Stanley & Co. LLC

Bradley G. Ball – Evercore Partners Inc.

Moshe Orenbuch – Credit Suisse Securities

Operator

Ladies and gentlemen, good afternoon. Thank you for standing by and welcome to the American Express First Quarter 2013 Earnings Conference Call. At this time, all lines are in listen-only mode. Later there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like to turn the conference over to our host, Mr. Rick Petrino. Please go ahead.

Richard Petrino

Thank you, Tom. Welcome and we appreciate everyone joining for today’s discussion. 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, estimate, 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 and earnings supplement, which were filed in an 8-K report and in the Company’s 2011 10-K already on file with the SEC.

The discussion today also contains certain non-GAAP financial measures. Information relating to comparable GAAP financial measures may be found in the first quarter 2013 earnings release, earnings supplement and presentation slides, as well as the earnings materials for prior period that may be discussed, all of which are posted on our website at ir.americanexpress.com. We encourage you to review that information in conjunction with today’s discussion.

Today’s discussion will begin with Dan Henry, Executive Vice President and CFO, who will review some key points related to the quarter’s earnings through the series of slides included with the earnings documents distributed and provide some brief summary comments. Once Dan completes his remarks, we will move to Q&A.

With that, let me turn the discussion over to Dan.

Daniel T. Henry

Okay. Thanks, Rick. So I will start on Slide 2. So the first quarter of 2013, summary of financial performance, so total revenues came in at $7.9 billion for the first quarter of 2013. That’s 4% higher on a reported basis and 5% growth year-over-year on an FX adjusted basis. That’s the same FX adjusted revenue growth that we’ve had for the past two quarters.

Pre-tax income came in at $1.9 billion, up 8%. Net income came in at $1.3 billion, up 2%. So net income grew at a slower rate than pre-tax income in the first quarter, because in the first quarter of 2012 it included a tax benefit realized on certain foreign tax credits and we had no such item in the first quarter of 2013.

Diluted EPS was $1.15, up 7%. EPS grew at a faster pace than net income due to share buybacks. As you can see, shares outstanding on the bottom of this chart are 5% lower year-over-year. ROE is 23% for the quarter compared to 27% in the first quarter 2012, and this is due to the three charges that we took in the fourth quarter of 2012, which was about $600 million. So the ROE is calculated using net income for the 12 months ended March 31, 2013. Therefore, it includes the fourth quarter of 2012, and that’s divided by average shareholder equity. Excluding those three charges, in the fourth quarter adjusted ROE would have been 26% and you can actually see that calculation in Annex 6 through the slides.

Moving to Slide 3, which is a metric performance. You can see that billed business came in at $224 billion. It grew at 6% on a reported basis, 7% on an FX adjusted basis. So the same FX adjusted growth rate that we had in the fourth quarter of 2012, despite the negative impact of having an extra billing day in the first quarter of 2012, because it was a Leap Year.

Cards in force grew at 5%, the same as the fourth quarter. Proprietary cards grew at 2%, which is comparable to the growth rate we’ve seen over the last several quarters. Growth in average basic cardmember spending reflects continued strong cardmember engagement and cardmember loans continued modest growth, growing at 4%.

Moving to Slide 4, so this is billed business growth by segment and as you can see on the chart, total FX adjusted growth, the redline, in the first quarter of 2013 was 7% consistent with the fourth quarter of last year. Each of the business segments is consistent with the fourth quarter of 2012 except for GCS, which is Global Corporate Services, that’s the green line, and you can see here that the growth rate for that segment has moved down slightly as T&E spending grew at a slower rate than total billings growth rate in the quarter. Now, 2012 was a Leap Year, so we lost one day of billing year-over-year, which negatively impacts billed business growth rate in the first quarter of this year by about 100 basis points.

Going to Slide 5, this is billed business growth by region. So, you can see that the U.S., which is the dark blue line with the diamonds, grew at 7% consistent with the fourth quarter of 2012. And while each of the other regions had their growth rate slow a bit in the first quarter compared to the fourth quarter, in aggregate total FX adjusted growth rate of 7% is consistent with last quarter.

Then we have Slide 6, so this is the U.S. consumer managed cardmember loans. The bars are the dollar amount of loans, the light blue line is the U.S. consumer loan growth rate and the new line is the green line, and that’s the U.S. industry revolve growth in each of the quarters. So the 4% growth in loans is driven by growth in billed business. Loans are growing at about half the rate of the growth in billings or lending products.

Our loan growth continues to outpace the industry, as you can see by looking at the green line. So, for example, in the fourth quarter of this year we grew at 4% and the industry growth rate was 1%. The last point they make is that while loans grew 4% year-over-year, loans decreased sequentially on a seasonal basis from the fourth quarter. As you’ll see in a minute, credit performance continues to be excellent.

Slide 7, so this is our revenue performance. Total revenues grew 4%. That’s 5% on an FX adjusted basis. Discount revenue came in at 4%, and this reflects 6% growth in billed business, partially offset by 1 basis point decline in the discount rate and higher cash back rewards.

Net card fees increased 7%, and this is reflective of higher average fees per card, primarily due to fee increases and a greater mix of premium products. Travel, commission and fees decreased 3%, as worldwide sales decreased 3%. Business travel declined 4%, while consumer travel sales increased 2%. Other commissions and fees decreased 2%, and this is the impact of some modest cost of cardmember reimbursement, partially offset by higher Loyalty Partner revenues.

Other revenues is lower by 3%, and this is primarily due to a favorable revision of our liability for uncashed TCs in international markets in the first quarter of 2012, and is partially offset by higher gains on our sale of ICBC shares in the first quarter of 2013.

Net interest income increased 10%, and this is a combination of 3% increase in average cardmember loans, an increase in the worldwide net interest yield to 5.9% from 9.2% a year ago. Now, a portion of this increase is due to the reversal of reserve for cardmember reimbursements that we set up in prior periods and without it, the increase would have been slightly lower. It’s also influenced by a decline in funding cost for our charge card portfolio.

Moving to Slide 8, so this is provision for losses. You can see the total provision for losses increased 21%. Charge card provision increased 10%, primarily driven by higher receivables, which are 5% higher than a year ago.

Cardmember loan provision increased 30% or $63 million, and this reflects a 4% increase in cardmember loans compared to last year. Our reserve release of about $100 million in the first quarter of 2013 compared to a reserve release of $200 million in the first quarter of 2012, and this has the effect of increasing provision by $100 million, partially offset by approximately $50 million less in write-offs in the first quarter of 2013 compared to the first quarter of 2012, due to improved credit performance. This will net to a $63 million increase in the lending provision. So provision is increasing, while credit metrics are stable and you’ll see that over the next several slides.

So Slide 9 is charge card credit performance and if you look at the left charge, this is the U.S. charge write-off rate and this has ticked up and down slightly over the past few quarters, but I view this as stable over the period. On the right side, you see the international consumer and Global Corporate Services net loss ratio and this also has remained stable. Both of these metrics are at historically low levels.

Moving to Slide 10, so this is the lending credit performance. The left side is the net write-off rate and this metric continues to be stable. The right side is the 30 days past due and the same is true here. This metric continues to be very stable. So, these metrics are at historically low levels and represent the best credit metrics in the industry. As I say each quarter, our objective is not to have the lowest possible write-off rate, but to achieve the best economic gain when we invest.

Next is Slide 11; so these are the lending reserve coverage ratios. So each of the metrics, whether it’s reserves as a percentage of loans, reserves as a percentage of past dues, or the principal months coverage, are lower in the first quarter of 2013 compared to last year based on the improved credit metrics, and are trending slightly lower than the fourth quarter of 2012 as we continue to sustain historically low credit metrics. Our reserves in these metrics are appropriate for the risks that are inherent in our portfolio.

Slide 12; so this is expense performance. You can see on the bottom right that total expenses grew 1% year-over-year. Marketing and promotion expense decreased 2%, reflecting lower brand advertising, partially offset by higher card acquisition spending. I’ll cover this in more detail in the slide.

Next is cardmember rewards expense and this increased 4%, reflecting higher spending on rewards products, partially offset by slower growth in membership rewards ultimate redemption rate in the first quarter of 2013 compared to the first quarter of 2012. I’ll cover this in more detail on the following slide.

Cardmember services decreased slightly. Total operating expense grew 1%, lower than our target of growing total operating expense less than 3% for the next two years and I have a slide on this later as well. The effective tax rate was 32.9% in the first quarter of 2013. This compares with 29.2% in the first quarter of 2012. So lower tax rate in the prior year includes a tax benefit related to the realization of certain tax credits.

Moving to Slide 13; so this is marketing and promotion expense. So marketing expense in the first quarter of this year was $621 million. That compares to $631 million in the first quarter of 2012. So, down slightly. As you can see from the chart, it’s also down slightly for marketing as a percentage of revenue. So all the way on the right you can see the percentage for the first quarter of this year was 7.9%, and for last year in the first quarter it was 9.3%. But we remain committed to our objective of having marketing and promotion expense to approximate 9% of revenues on an annual basis. While in the first quarter of 2012 this percentage was 8.3%, if you look at the chart on the right, you can see that we increased spending in the second through fourth quarter to achieve our annual objective, and you can see on the left hand chart that 2012 for the full year came in at 9.2%. We continue to invest in our business, despite the slow growth economy.

Slide 14, we’ve cardmember rewards expense. So rewards expense in the first quarter of this year was $1.520 billion. That compares to $1.467 billion in the first quarter of 2012, a 4% increase. So, cardmember rewards expense is a combination of rewards on co-brand products and membership rewards expense. Within membership rewards, it is a combination of expense of points earned in the current period and this is included in the chart along with co-brand expense in the dark blue section of the chart. This section of the bar basically grows with the growth in billed business.

Membership rewards expense also includes expense related to changes in the membership rewards liability for points previously earned. This is the green section of the bar. As you can see this portion of expense in the first quarter of 2013 is lower than the first quarter of 2012, as the increase in the ultimate redemption rate in the first quarter of 2013 was less than the increase in the ultimate redemption rate in the first quarter of 2012. The ultimate redemption rate in the first quarter of 2013 is 94%, the same as it was in the fourth quarter of 2012.

Next slide is Slide 15, operating expense performance. In the quarter, as you can see in the lower right, operating expense increased only 1% versus the prior year as we continue to focus on controlling expenses. Our expense performance is consistent with our aim to have operating expense grow at an annual rate of less than 3% over the next two years.

Salaries and employee benefits decreased 1%, reflecting a decrease in employee count of 1,100 people compared to the first quarter of 2012. Professional services increased 4%, reflecting increased investments in the business and higher legal fees. Occupancy and equipment increased 8%, driven by higher data processing, costs and software amortization.

Other net decreased 2% and this is resulting from a favorable impact related to hedging of fixed rate exposures versus an expense in the first quarter of 2012. So this is an accounting adjustment we need to record. These hedges are functioning exactly the way we intended, and over the life of the hedge it will move to zero.

Now we go to Slide 16; so this is expense as a percentage of revenue. Now adjusted expense means we’re excluding credit provision. On the left side you can see six years of history, and on the right side you can see the most recent five quarters. The 2010 and 2011 reflect elevated investment levels. In 2012, we committed to migrate this ratio over time back towards historical levels in two ways; first, through revenue growth, and second, our plans to control operating expense, while continuing to invest in the business.

In the bars for 2012 and the fourth quarter of 2012, the dotted line in the bar excludes the restructuring charge and cardmember reimbursements in the fourth quarter of 2012. As you can see on the chart on the right, we are making substantial progress in reducing adjusted expense as a percentage of managed revenues.

Moving to Slide 17; so these are capital ratios. In the first quarter of 2013, Tier 1, Tier 1 common and total capital ratios increased due to an increase in capital during the period, primarily driven by capital generation of $1.5 billion. This is a combination of $1.3 billion in net income and $200 million raised from employee plans. Offset by capital distributions of $1.1 billion, and this is $800 million in share repurchases and $300 million in dividends, as well as a decrease in risk-weighted assets mostly due to lower cardmember loans. Tier 1 common capital ratio of 12.6%, provides the company with a strong capital position.

Next is Slide 18; this is the total payout ratio. So, this is the percentage of capital generated through net income returned to shareholders through dividends or share repurchases. On the left hand side, we see the past five years. On the right side, we see the most recent five quarters.

In 2012, we returned $4 billion or 98% to shareholders. Now, the share repurchase in the first quarter of 2013 was governed by our CCAR submission in January of 2012, and so for the quarter we returned 70% of net income. We plan to increase our dividend to $0.23 per share from $0.20 per share next quarter, a 15% increase for shareholders. We are also moving ahead with plans to repurchase common shares that will total up to $3.2 billion to shareholders during remainder of this year to total of $4 billion in 2013 and up to an additional $1 billion in the first quarter of 2014.

Next slide is Slide 19, our liquidity snapshot. Our objective is to hold excess cash and marketable securities to meet our next 12 months of funding maturities. As you can see, we have $20.9 billion in excess cash compared to funding maturities of $17 billion for next year, thereby meeting our objective.

Next is Slide 20. So this is our U.S. retail deposit program and it shows you the deposits by type. As you can see on the right, the deposits increased by $1.1 billion in the quarter, with direct deposits increasing by $2.5 billion and you can see that on the left side of the chart. We remain committed to increasing direct deposits over time.

So with that, let me conclude with a few final comments. We continue to feel positive about our performance, especially given the slow growth economic environment. In the quarter, spend growth continue to be healthy and was relatively consistent with the past several quarters, despite the negative impact of having an extra billing day in the first quarter 2012 because of Leap Year. We also saw our average loans continue to grow modestly year-over-year and outpace the industry.

Moderate loan growth and slightly higher net yields led to a 10% increase in net interest income. At the same time, lending loss rates remained near all-time lows. Revenue growth was 5% on an FX adjusted basis, consistent with last quarter. This reflects the sluggish economic environment and the negative impact of having one less day in the quarter versus the prior year.

In the quarter, operating expense increased only 1% versus the prior year, as we continue to focus on controlling expenses. Our expense performance is consistent with our aim to have operating expense growth at an annual rate of less than 3% over the next two years. We’re also continuing to invest in the business, and expect full year marketing and promotion expense to be approximately 9% of total revenues, in line with our historical average. EPS growth of 7% outpaced revenue growth, reflecting the progress we have made on controlling operating expense and our strong capital position. We continue to return significant capital to shareholders in the quarter through dividends and buybacks while maintaining strong capital ratios.

The results of the recent Fed stress test underscore our capital strength and our ability to remain profitable even under severe stress assumptions. Risk flow in capital position provides flexibility, we are planning to afford 15% increase in our dividend during the second quarter and allow us to balance the capital needs of our business with the potential for significant share buybacks.

We recognized that our business is not immune to the economic environment, but we continue to believe that the flexibility of our business model enables us to deliver significant value to shareholders even in an extended slow growth environment.

Thanks for listening and I’m now ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question today comes from the line of Ryan Nash representing Goldman Sachs. Please go ahead.

Ryan M. Nash – Goldman Sachs & Co.

Hi, thanks, hi Dan. When you think about your outlook for revenue growth that came in about 5% on FX-adjusted basis quarter below when you’re factoring the FX. So if you’d assume that the revenue trends remain consistent over the next few quarters, how should we think about OpEx growth for the remainder of the year? I know you’re staying less than 3%, but assuming revenues were to stay at the 5% level, do you think we should end up on the low end of that range?

Daniel T. Henry

So, as we talked about staying, having growth of less than 3%, we really haven’t factored in exactly where revenue growth is going to come in. So I don’t think that’s the factor in terms of our commitment to keep OpEx growth at less than 3%.

Ryan M. Nash – Goldman Sachs & Co.

Got it, and…

Daniel T. Henry

So at the FCA we’re trying to give a variety of scenarios in there in terms of what the potential outcomes could be when you vary both revenue growth and operating expense growth, and share repurchases to give you a sense of how each of those items could affect EPS in the several different scenarios.

Ryan M. Nash – Goldman Sachs & Co.

Okay, and in terms of the spend volumes can you give us a sense of how they progressed during the quarter end? At this point, have you seen anything that points a pull back on the part of consumers from higher tax rates?

Daniel T. Henry

So our spending levels, our FX-adjusted basis have been pretty consistent over two quarters, and we didn’t see any historic trends within the quarter. So whether the change in the tax rate is having a impact that was something that we could concern within our numbers.

Ryan M. Nash – Goldman Sachs & Co.

Great, thanks.

Operator

Question today comes from the line of Sanjay Sakhrani with KBW. Please go ahead.

Sanjay Sakhrani – Keefe, Bruyette, & Woods, Inc.

Yeah thank you. I was hoping if I can get like some specifics around the gain that you guys had from the sale of the ICB shares, as well as kind of those benefitted from the reversal of the reserve for cardmember reimbursements? And then secondly, I was just wondering how far we were into the restructuring that you guys have undertaken, and at what point during the year will we hit a level of operating expense, ex-marketing without that overhead? Thank you.

Daniel T. Henry

Okay. So as we relates to the ICBC shares, we put a hedge on that in the past and have effectively locked in the gain. As you have seen over the last several quarters, we are taking that over time and the reason we’re doing that is to enable higher levels of investment spending to help generate business momentum. So it’s a locked in gain we have in sort of time, our plan to take it over time.

With respect to your second question about the reversal of our reserve we put up previously related to cardmember reimbursements. We have come up with an estimate in the fourth quarter, upon further refinements we realize that the announcement we’re going to reimburse is actually lower in our estimate. It’s a relatively small amount, but it did have an effect on the increase in spreads. So I didn’t want people to think that that was a permanent increase that’s really the only reason I spiked it out, but it’s not really a large number at all as it relates to our income.

In terms of restructuring, we announced restructuring in January; the impact of employees leaving American Express is actually going to take place over all of 2013. Some have left in March, but others will not leave until later in the year. So we’re only get a portion of the benefit from that actions in 2013 and we’ll get an additional benefit in 2014 as some people would have been here for a portion of 2013. So it’s going to come to us very gradually over 2013 and 2014. And I would say, most employees, the first employees to leave were probably in the March timeframe. So there is a limited amount of benefit from that in the first quarter. So we really see it come to us over the next seven quarters, I would say.

The very good control of operating expense is just our continued focus on operating expense which we really started last year, which is rolling over into this year as we see the proper control of expense as a way of creating resources so that we can invest in the business, some of which takes place on marketing portion line, other portions of that actually take place on the operating expense line. So I don’t even know it was only one question. I hope I got each of the four parts correct.

Richard Petrino

You there?

Operator

Question? The next question comes from the line of Bill Carcache with Nomura. Please go ahead.

Bill Carcache – Nomura Securities International, Inc.

Thanks. Good evening. Dan, I had a follow-up question on slide 16 and the detail that you gave on the expenses. So you’re clearly making progress on reducing expenses, but I wanted to kind of make sure that I was thinking about the commentary that you guys have made correctly. You referred to how in the past that you intended to get debt expense ratio down to historical levels and I thought that you had said in the past that 2007 was kind of a good benchmark so that kind of 67% level and you’re at 69% now in first quarter 2013 and we see the progress you’ve made there. But should we be thinking, is that in fact a fair way to be thinking about it that that 69% over time is going to move towards 67%? And I know you guys don’t want to get locked into a timeframe, but let’s call it the next 12 months to 18 months or so kind of a reasonable timeframe to be thinking about.

Daniel T. Henry

Yeah. So I think what we said is we want to move back towards historical levels and 2008 and 2009 are low because it was during the crisis, and 2010 to 2011 are higher because we had all the levels of investment. Soon we’ll lock in exactly on the 67% and certainly want to head back in that direction. How much we actually think this ratio down to will depend on lot of things including where our revenue growth is, what’s in place of provision and what we’re aiming for in terms of what we want to free up for investment capacity. So all those things work together in terms of the pace and the level that we take this ratio to.

Bill Carcache – Nomura Securities International, Inc.

Okay. Thanks. And finally as a follow-up, can you give a little bit more color on what drove some of the weakness in GCS billed business, and then, should we expect reserve bills for the rest of the year or should we be looking for more releases? And then, I guess the last part of that is, the travel commissions and fees were little bit lower than what we were expecting. So I wondered if there is any kind of, maybe you could, if there is anything behind that and any kind of impact from the restructuring that we should expect to impact this line item? Thanks.

Daniel T. Henry

Okay. So let me talk to GCS, so corporate services. So really across the broad we’ve seen lower spending in T&E categories, right and we are seeing better strength outside of the T&E categories.

Corporate services is primarily T&E type of spending and so that’s where you see it come down and that’s relatively broad geographically. So it’s just lower T&E type of spending as it’s causing them to be lower, and that actually ties into travel commissions and fee, right. So if T&E spending is lower, then that way it is going to be impacted. Worldwide sales were down 3%, that’s the main driver. Now business travel was down 4%, consumer was actually up 2%, but business travel is much larger than consumer travel and so that’s yielding the lower sales, so it’s the activity in this particular category.

In terms of reserve, what’s going to happen with reserves, so we have seen them come down for the last couple of years, actually in the fourth quarter we had a slight reserve billed, but a return this year to a release, but the release was much lower. The way our models work, they use the last 12 months worth of information to do the modeling to the extend we get to a point where the core of it is falling out, this is about the same level as the metrics we have in store.

Then you are going to have relatively stable provision, so it’s a relationship of what’s kind of pulling out of the model and what the new quarter going into the model is. So I think most people are anticipating that reserve releases are not going to be in 2013, what they were in prior periods.

Bill Carcache – Nomura Securities International, Inc.

Okay, thank you.

Operator

The next question comes from the line of Mark DeVries, Barclays. Please go ahead.

Mark C. DeVries – Barclays Capital, Inc.

Yeah, thanks. Dan, could you walk us through your thoughts behind your revised buyback request under the CCAR process. You only missed the FED’s Tier 1 common buffer by 3 basis points, but then when the subsequent request lowered the buyback request by $1.5 billion, was it communicated to you that would not be allowed to return in excess of 100% of earnings or alternatively did you just want to make sure that you had a really conservative request around 100% that you were confident that they would approve?

Daniel T. Henry

Right, so they never said to us you can’t be above a 100%, I think stage two, it’s in fact above 100%. And it turns out before our submission and subsequently. So that was not it. Our initial plan we asked for an increase of dividend to $0.23. We asked for a share repurchase of $4.7 billion, all the remainder of ’13 and $1 billion in the first quarter of next year.

Our revised submission, we were asking for the same $0.23 dividend. We dropped our request from $4.7 billion to $3.2 billion this year in cap. The request for the first quarter of next year is the same. So when we prepared our initial submission to the FED under the stress scenario, it was based on our own internal analysis and that internal analysis yielded a minimum Tier 1 common ratio of 9.2%, which was above the 5% minimum threshold that the FED reserve has set. However when the Federal Reserve did its own modeling, it generated a confusion that dropped us below that 5% minimum amount.

Now the good thing is both on our scenarios and their scenarios, even in the stress situation we have a hue of the process over the nine quarter period. However the FED’s projection of the loan loss provision was $3.1 billion higher than ours. And, was actually $4.6 billion higher than the analysis they had done the prior year, right? So, in 2012, their estimates and ours were relatively close.

Our net estimates for 2013 was similar assumptions were 2013 and 2012 were similar. Okay, what the FED has come out in the report that they published they said that some of the reserve models that the FED was using this year had changed substantially all were newly implemented. So, it was that change that caused us to fall below the 5% minimum. Now, as we thought about our revise submission. We didn’t want to putting a submission that just eked us barely over the 5%, and we said where we go back to the request that we have made in ’12, we thought that was substantial in terms of what we were returning to shareholders and that’s what really drove us at the end of the day.

And based on that, when you do that and reduce the share buyback request under the FEDs stress scenario our Tier 1 common ratio comes in at 6.42%, a healthy amount of 5%. So that was really our thinking in how we set our resubmitted request.

Mark C. DeVries – Barclays Capital, Inc.

Okay, I got it. On a separate fact, when I look at a year or so back, the delta between your billed business growth and loan growth was 10% plus, and I understand you are telling us then you would eventually expect lend to follow spend and those would converge, but now it’s relatively tied I guess there is only about a 240 basis point difference between your proprietary billed business growth and your loan growth which is actually a little bit tighter than I would expect it given your more spend based model, is that relationship in line what you would have expected or is it a sign that you are getting more growth from your revolvers than you are from your transactors here?

Daniel T. Henry

So given that pre-crisis our loans grew at about the same pace as the growth in billings on lending products okay, that’s separated while during the crisis as consumers started to de-leverage. What we have said, I think is that what the growth in loans will be in relation to the business is totally depended on our customers. Right, they are going to decide what amount of leverage that they want to have, although intuitively, at least in the near term didn’t seen that we moved back to where we were pre-crisis.

In the fourth quarter loan growth came closer to billings growth, but in the first quarter the growth in loans was about half the rate of the growth in billed business, it is kind of been about that level for several quarters. Now whether it goes up or down from there as I said depending on the customers, we give products to customers, we give them the opportunity to revolve if they choose, as you know probably the number of customers that we have that have lending products that are actually transactors they are very much in the high 20s, right. But if those customers choose to revolve the products design to allow, so it will be driven not by us, but by the choice of the customer and we will rely on the credit capabilities we have to properly monitor that, and you can see that while we are having loan growth even though really no one else in the industry is at the moment, our credit metrics were excellent. So, it’s really be driven by the behavior of the customer.

Mark C. DeVries – Barclays Capital, Inc.

Okay, thanks.

Operator

Next question comes from the line of Don Fandetti with the Citigroup. Please go ahead.

Donald Fandettin – Citigroup Global Markets Inc.

Dan, sort of looking at billed business in the U.S, I mean effectively your growth rates you could argue accelerated a bit and you’ve got the banks and JPMorgan sort of coming at the affluent side, I mean I guess my question is, do you still think you are gaining share, how is growth so stable and good. I mean is there anything specific in terms of sort of a income breakdown where they super affluent is maybe stronger, I mean are you just seeing across the board decent numbers?

Daniel T. Henry

Our customer basis is primarily affluent customer base and as I said before we don’t see any discernible impact of taxes on our base. As you said in the U.S, we had some pretty consistent performance over the last several quarters that we are pleased with, given where GDP is, and the fact that it’s a sluggish economy. Now we always have the fact that lots of our competitors want to be in our space and we mean to continue to innovate and provide to as a service to customers to maintain the kind of performance that we have, but and we haven’t done analysis to distinguish by income level within our customer base, but it’s pretty good performance over of what based of our products that’s giving us this stable growth.

Donald Fandettin – Citigroup Global Markets Inc.

Thank you. And then, in terms of the Chase, Visa deal, I guess, some have suggested that maybe that could be a competitor for us to AmEx because of the closed loop. I mean is there anything specific that they could do that’s incremental, is there any sort of incremental competitive threat from that you see today?

Daniel T. Henry

Well, they’re trying to replicate our closed loop. I think people realized that that has value. But the number of customers that actually operate within that space is limited. Right, it has to be a Chase customer and a merchant that uses their merchant-acquiring process. And we add that all up, I don’t think that’s a very large piece of the total universe. So is it something that will enable them to achieve growth. I think it likely is, but I don’t see it as a large threat as our closed loop covers all our merchants and all of our customers.

Donald Fandettin – Citigroup Global Markets Inc.

Thank you.

Operator

Now we’ll go to line of Ken Bruce representing Bank of America. Please go ahead.

Kenneth Bruce – Bank of America Merrill Lynch

Thank you. Good evening. Firstly, I appreciate the commentary in your prepared remarks as it relates to the marketing and promotion expense and expense levels in general. I do want to make sure I understand some of your comments there and my question will tie in with some of the others. But firstly, you’d mentioned that marketing and promotion expense, running at 7.9% in the quarter, likely going to go higher just in terms of where you expect to run it on a more stable state basis, and I want to make sure that that’s your outlook is for marketing promotion as a percentage of managed revenue to rise.

And then within the context of your marketing and promotion expenses, you had pointed out that brand advertising was down and acquisition costs or acquisition spending was up. And I want to understand, maybe you can dimensionalize if there has been any changes in terms of what is the discretionary side of the expense versus what is more cardmember behavior, if you have seen any change in the outlook for where you want to invest, whether that would be geographically or within products and get a sense as to how you are looking at the investment horizon, if you could provide some color on those areas, please?

Daniel T. Henry

So what we have said is, our objective is for marketing and promotion on an annual basis to be about 9%, it’s not a forecast that that’s our objective. I was just putting out that last year, we had got marketing as a percentage of revenue down in the first quarter. We’ve done that again. But again we aren’t changing our objective of being at that 9% level.

The commentary say we took brand down a little bit and acquisition up a little bit was going to say we had a strategy change in terms of the mix, which is say, during this quarter, when we had lower expenses coming more from the brand side and that our acquisition engine to bringing customers was actually at or little above what we have in the past. So it’s really just to give you a sense of how we allocate within the quarter.

Every year, we look at all of the opportunities we have in terms of where we spend our marketing dollars, whether it’s on brand, or charge in the U.S. or charge internationally, our lending products or co-branded products. And we have pretty refined models in terms of what the expected economic gain of those investments are and that’s what really drives where we put the dollars.

Obviously, it’s a lot easier to measure when you do an acquisition, because you can see the actual cards that come in and we have a pretty good idea how they’re going to perform, but I guess things like brand advertising, if you don’t have that nice mathematical calculation. We know this is certain amount that you want to do. And if you do, you will have good products and good brand advertising and that’s where you want to be. Because it’s really driven by which investments give us the greatest economic gain, it will drive what geography and what products we put the investments behind.

Kenneth Bruce – Bank of America Merrill Lynch

And as a follow-up are you, when you look at brand versus acquisition expenditures, it feels that the branding is very discretionary, but ultimately as a longer payback window versus you know the acquisition investments that you maybe making, which are harder to pullback and trying to get a sense as to how much of this maybe in reaction to, meeting some shorter term financial objectives versus any change in the overall outlook for investment in your business?

Daniel T. Henry

Well, I think we need, so for the marketing and promotion just about maybe not 100%, but very, very large, it's completely discretionary. Right, Then we can decide to either do or not do, so it’s not like a fixed cost of having employees within the company. So, it is just a matter of, I think we recognized that we can take marketing and promotion down in any quarter or for a couple of quarters in fact as we did back in ‘08 and ‘09. And there is really no negative impact to the franchise, you couldn’t do that longer-term. So this is just in recognizing in the first quarter. We’ve taken it down some. We’re committed to hit the objective that we set and we chose in this particular quarter to have brand come down and acquisition go up, but that can change from quarter-to-quarter depending on what we’re endeavoring to achieve.

Kenneth Bruce – Bank of America Merrill Lynch

Great. Thank you very much.

Operator

Yeah. Next we’ll go to line of Chris Brendler representing Stifel. Please go ahead.

Chris Brendler – Stifel, Nicolaus & Co., Inc.

Hi, thanks. Good evening. Dan, if you could gently touch on the lending business one more time. The margin seems to pop up a little bit in the first quarter. Anything going on there, is it sustainable. And also just sitting back a little bit, the lending business also seems to be going fairly well. As you mentioned you’re doing receivables better than almost anyone in the industry, the margins are healthy, credits at all-time lows. Any change in strategy around lending and given that this, the weakness in other parts of the business, is there any desire to increase your focus on lending and can you just comment at all on your use of teaser rates currently? Thanks.

Daniel T. Henry

All right. So I’ll start with teaser rates. So others are using balanced transfers with zero for a certain period of time. That is not a strategy that we are following. So we’re not growing loans by putting teaser rates out there. The growth in our loans is coming by as a result of cardmember spending, the business spending on our products which is what we want them to do.

Coming out of the crisis, we did have a shift in our lending strategy, right. So we weren’t coming out of the crisis to be focused on premium lending, right. So that was a change. So that’s really a change that we put in place back in 2009 and we’ve continued to execute against that. We’ve shared information about what percentage of lending customers actually are transactors, and that has increased quite a bit over the last several years, and as a result of the premium lending strategy, we’re focused on cards that have higher spending on them, so we have also shared the percentage of customers who have a tenure of less than 2.5 years with us so there is a lot less than it was again five years because we are bring fewer products right?

Chris Brendler – Stifel, Nicolaus & Co., Inc.

Right

Daniel T. Henry

That’s helpful from our credit perspective as well, so I think you’re putting a number of metrics out there show that we not only talking about a premium lending strategy, but actually executing against it. We can actually see that average cardmember spending is in the whole base is growing up. So that has been something of a change because changing some strategy changes that we made a couple of years ago.

Lending products for credit worthy customer, our products that have good economics associated with it, and so we were grow both charge card and premium lending and as I said before, which ones we are actually investing against is based on the return that we think we’ll get out of each investment.

Chris Brendler – Stifel, Nicolaus & Co., Inc.

Any comment on the manager’s margin and then also separately can you also comment on fraud? I heard more and more concerned about fraud but the lack of EMB in the U.S. and this year plan to start issuing EMB cards in the U.S. an update there. Thanks.

Daniel T. Henry

So net yield is at 9.5% in the quarter, up about 30 basis points from last year, I made a comment that a part of that increase had to do with adjusting of our reserves, I wouldn’t expect to stay at exactly 9.5%. Coming out of the crisis or actually coming out of the new regulations that we had. We had said, 9% was about our yield prior to those regulations and our intend was for our yield to be about 9% after those regulations with the changes we have made in our products, so we have achieved that and slightly more.

So on our lending products, we are getting good growth, low credit losses and good yields and that’s a pretty good combination to have, right. So we are very pleased with how our lending products are performing.

As it relates to fraud, our fraud losses are less than half of what we see across the industry and I think that’s the benefit of having very good gross proceeds to money growth, it’s probably one of the benefits of closed loop and we have not seen any notable tick-up in fraud in our core business.

As it relates to EMV, we have started to put EMV chips on some of our premium products or products for customers who travel expensively, so that they have the best utilization possible quite frankly outside the U.S., but I think gradually within the U.S. we put EMV on to our cards over a number of years.

Chris Brendler – Stifel, Nicolaus & Co., Inc.

No big roll out plan for this year, Dan?

Daniel T. Henry

It’s going to be a very gradual roll out over several years, I would say, so no big push to do it in 2013, but it’s a gradual undertaking for us.

Chris Brendler – Stifel, Nicolaus & Co., Inc.

Great. Thank you so much.

Operator

Next, we will go to the line of Betsy Graseck with Morgan Stanley. Please go ahead.

Betsy L. Graseck – Morgan Stanley & Co. LLC

Hi, good evening.

Daniel T. Henry

Hi.

Betsy L. Graseck – Morgan Stanley & Co. LLC

Couple of questions; one is just on the travel segment. Travel segment have been relatively weak thinking about just airline and airline seat capacity, and I’m wondering how much of that may have impacted your first quarter in terms of billed business.

Daniel T. Henry

Yeah. So I think I mentioned before, the reason that Corporate Services was down in terms of growth rate, the growth rate was lower, was that we were seeing weakness in T&E spend compared to our average. So we saw that in all of our products. It’s a bigger percentage of Corporate Services. So it had a bigger impact there. So it was impacting growth in the quarter.

Betsy L. Graseck – Morgan Stanley & Co. LLC

Okay, but no sense of degree of impact?

Daniel T. Henry

It’s hard to tease out exactly. I guess I would say that was little bit, overall we’re very pleased with our aggregate growth rate given the sluggish economy.

Betsy L. Graseck – Morgan Stanley & Co. LLC

Sure. And then on slide five, just looking at the different billed business growth rates per region, it’s kind of interesting that they’re somewhat coming together fairly tightly and I’m wondering how you guys are thinking about that, is this new normal where distribution of growth rate across the globe is likely to be running more similarly or do you have a different outlook than what you experienced this quarter?

Daniel T. Henry

Yeah. I think there have been times when it kind of moves together like it is now and I think to be a time where it performs again. Let’s say EMEA is slower than the other regions and so kind of figure out exactly all the issues and problems. It could well be in the EMEA space kind of in the lower part of the chart. We think JAPA is being impacted by China. So it’s good growth rates, but not the growth rates that they had in recent history that impacts countries like Australia. So it’s really very much going to be driven by the economies in those regions in large part.

Betsy L. Graseck – Morgan Stanley & Co. LLC

Sure. Okay. And then, just lastly couple of questions on Bluebird. I wanted to understand the impact of adding a checking feature and the FDIC insurance on Bluebird, and if there has been much in a way of any effort to expand the merchant acceptance to attract more Bluebird spend?

Daniel T. Henry

So, Bluebird products were all reloadable products, are accepted across our whole network, right. So you can use any of those products in any location where American Express product is accepted. The FDIC insurance we put on because it refer some customers that they matter, and also to load certain checks like government checks or your tax refund bond, it had to be FDIC insured. And in terms of the check writing, we just want to have a full suite of options for customers. So it’s the best possible product for them.

Betsy L. Graseck – Morgan Stanley & Co. LLC

So have you seen any uptick in growth rate beyond what you were experiencing before post the FDIC announcement?

Daniel T. Henry

Well, they just went on. So it’s hard to measure, but we are seeing healthy in renewable prepaid across that product set.

Betsy L. Graseck – Morgan Stanley & Co. LLC

And then, the question on the merchant acceptance. Again that BlueBird is accepted at any merchant who access AmEx. So I guess the question is, does a reloadable prepaid card user seek a potentially different kind of merchant addition to the merchants that AmEx has today?

Daniel T. Henry

So we say it’s possible, but we do have an initiative to, so we’ve always had initiative to expand merchant coverage. So I think a small merchants is a particular initiative within 2013 and we’re trying to expand it. So it’s very much in line, it will be good for customers who use reloadable prepaid, will be good for our customers who use our corporate card as well. So let’s do the next question if you could.

Richard Petrino

Thanks.

Daniel T. Henry

This will be the last question. Well, two more questions. Two more questions. Okay.

Operator

All right. Next we’ll go to line of Brad Ball with Evercore. Please go ahead.

Bradley G. Ball – Evercore Partners Inc.

Thanks Dan. A lot of my questions have been asked. Just you mentioned that you were experiencing higher cash back rewards. Is that a contra-revenue item and how many of your – what proportion of your customers are using cash back?

Daniel T. Henry

So cash back reward is a contra-revenue and cash back is a good product. I don’t think we actually break out the percentage, but it’s still a reasonably healthy product within our suite of products.

Bradley G. Ball – Evercore Partners Inc.

And is it a product that resembles the products that are in the market, 1% type cash back on all outstanding that kind of product?

Daniel T. Henry

Well, these products is a little different, but it’s basically a percentage of spend you get and sometimes there is higher rewards in particular categories either on a product feature basis or on a promotion basis.

Bradley G. Ball – Evercore Partners Inc.

Okay. And then one other. You had mentioned that other revenue were helped by higher loyalty partner revenues.

Daniel T. Henry

Yeah.

Bradley G. Ball – Evercore Partners Inc.

Can you give us a sense as to the magnitude of the contribution there and just broadly how are you tracking to the $3 billion target for fee revenues?

Daniel T. Henry

So we’ll be partnered as a substantial business. However it’s one business in a very large company, but they are performing nicely, very much in line with our expectations and it’s the one spot that we think is going to help us achieve our $3 billion target.

As we said, we are kind of halfway through the timeframe of achieving that target, which we still think is appropriate. It will be different fee businesses like certified, royalty edge, royalty partner, revolver prepaid, that we’re looking forward to get us there. And as of 2012 we stood at $1.5 billion that was up 15% from the prior year. We recognized $3 billion an ambitious target particularly in a sluggish economy, and we had a fair amount of work to do as we go forward. Our royalty partner, reloadable prepaid are two examples of how we’re diversifying our base and we expect those to ramp up as we hit towards the end of 2014, which is when we’re shooting to be at a run rate of $3 billion.

Bradley G. Ball – Evercore Partners Inc.

That’s great. Thanks.

Daniel T. Henry

Last question.

Operator

Our final question today will come from the line of Moshe Orenbuch with Credit Suisse. Please go ahead.

Moshe Orenbuch – Credit Suisse Securities

Great thanks. Just to comment about the bank stock gain, could you just tell us how much is left in that that you’re releasing kind of overtime when you said you needed the earnings for marketing purposes? And I’ve got a follow-up?

Daniel T. Henry

So we’ve taken gains, I think over the past six quarters or so seven quarters, the hedge still runs for into next year sometime, probably towards the middle of next year. So I would expect we’re going to take gains pretty evenly over the next six or seven quarters.

Moshe Orenbuch – Credit Suisse Securities

All right. And just on the reserving, I mean, if you kind of take the analysis that you described, and look at what kind of forward 12 months would have been at the end of this quarter versus at the beginning, you're kind of down 3% or 4% in terms of charge-offs. But I guess, given that…?

Daniel T. Henry

Could you start the sentence again because I didn’t catch up with you?

Moshe Orenbuch – Credit Suisse Securities

Yeah, sure. Basically, you had said that with respect to reserving, that you kind of look at the forward kind of 12 month losses and if a quarter drops out that had higher losses and, in that exact analysis I mean taken literally, your losses are down 3% or 4%. So, kind of with the reserve drop we saw seems reasonable. How do you factor in the idea of growth because you've gone from 14 months of coverage at the current rate to 13 which kind of implies that you're not leaving as much room for either growth or any kind of deterioration in the existing rate.

Daniel T. Henry

We actually use 12 months looking back. All right, so we use historical information to seat our models. That’s striving the reserve.

Moshe Orenbuch – Credit Suisse Securities

Okay. So the growth has nothing to do with it, expected loan growth?

Daniel T. Henry

No, we’re looking at the behavior of our portfolio right? And if you have loan growth, we’re assuming I guess apparently that loan growth will have a similar loss aspect to it as our existing book of business. And we’re not putting reserves on our books today for loans that we put on in the future. So, this is, what is the reserve you need for the loans that are already booked at this moment.

Moshe Orenbuch – Credit Suisse Securities

Got you. Okay. Thanks.

Daniel T. Henry

Okay, so thanks everybody for joining the call. Take care.

Operator

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and using the AT&T Executive Teleconference Service. You may now disconnect.

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