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Executives

Ron Stovall – Senior Vice President Investor Relations

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

Analysts

John McDonald – Sanford Bernstein

Craig Maurer – Calyon Securities (USA), Inc.

Betsy Graseck – Morgan Stanley

Brian Foran – Goldman Sachs

Robert Napoli – Piper Jaffray

Meredith Whitney – Meredith Whitney Advisors

Christopher Brendler – Stifel Nicolaus & Company, Inc.

Bill Carcache – Macquarie Research Equities

David Hochstim – Buckingham Research

Donald Fandetti – Citi

Brad Ball - Ladenburg, Thalmann & Co.

Sanjay Sakhrani – Keefe, Bruyette & Woods

Scott Valentin – FBR Capital Markets

John Stilmar – SunTrust Robinson Humphrey

American Express Company (AXP) Q1 2010 Earnings Call April 22, 2010 5:00 PM ET

Operator

Welcome to the American Express earnings conference call. (Operator Instructions) As a reminder, today’s call is being recorded. I would now like to turn the conference over to our host, Ron Stovall. Please go ahead, Sir.

Ron Stovall

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

As usual, it is 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 company’s financial and other goals are set forth within today’s press release which was filed in an 8K report and in the company’s 2009 10-K report already on file with the Securities and Exchange Commission, in the first quarter 2010 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. We encourage 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 has 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 Henry

Thanks Ron. Let’s look at slide 2, summary of financial performance. If you look half way down the slide you can see diluted EPS from continuing operations was $0.73 compared to $0.32 last year, up 128%. That was driven by strong billed business and improved credit performance.

A number of line items impacted by the adoption of accounting rule ASU 2009 16-17 formerly known as FAS 166 or 167. The rule requires that securitized loans be brought back onto the balance sheet and the related revenue and expense go back to their natural lines. We have not restated 2009. For better apples-to-apples comparisons I recommend you compare the 2010 to the 2009 managed results.

At the top of the slide you can see revenue on that basis was down 1%. If we adjusted for FX it is down 4% as better discount revenue from billed business is offset by lower net spread. The difference on the growth rate that you see on continuing operations which is up 100% compared to the EPS growth of 128% is driven by the fact we had preferred dividends in the first quarter of 2009 and as you know we repaid that preferred stock in June of last year.

If we move over to slide 3, here we are going to show the impact of the new accounting rule on our balance sheet. We recorded $29 billion of loans that were previously securities and off balance sheet. We have a related credit reserve on these loans of $2.5 billion and that was established through equity, not the P&L. At the bottom of the slide you can see the after-tax impact of that reserve, $1.8 billion. Now investment securities are the B, C and D trenches for certain securitizations. Historically we would sell all of the securitized receivables but starting in the third quarter of 2007 because of the wide spreads we held onto certain of the trenches. Those are now simply part of the loan balance.

Other receivables represents restricted cash. When S&P reduced our rating the trust agreements required that we hold assigned cash related to debt that would mature in the near future, that now is moving from other receivables to other assets. When we get to slide 12 I will talk about some of the impacts of the new rule on those line items. So while this is something of a nuisance comparing 2010 to 2009 in the long-term it is a good change because the new rules provide a clear depiction of our financial results.

So let’s move to slide 4 and look at billed business. You can see here it has increased 16%, 12% on an FX adjusted basis. Significantly better than our other major competitors. This clearly demonstrates we have a differentiated business model reflecting the makeup of our customer base and the design of our products which are focused on spending. You can see cards in force are down 4%. If we exclude the inactive cards we cancelled last year it is down 1%.

We can see average spend was a major driver of billed business growth. On an FX adjusted basis it is up 20% and as we also factor out those inactive cards it is about 14%. When we look at card loans I recommend you look at total portfolio. You can see it is down 11% on a reported basis and 13% on an FX adjusted basis. This is in part driven by the credit actions we have taken and in part by customers de-leveraging just as we have seen across the entire industry.

Travel sales are strong, both business travel and consumer travel. It reflects higher ticket prices and higher number of transactions. It also reflects customers moving from the back of the plane to the front of the plane and people taking longer flights.

If we move to slide 5 this is more detail on billed business. Each of the bars represent a dollar amount of billed business in each month. The yellow and blue lines reflect the year-over-year growth on a reported and FX adjusted basis. If you look at the top it is a summary of what the quarterly change in billings were over the last several quarters and you can see the first quarter of 2010 is [negatively] better than the first quarter of 2009 and they are both depicted as green bars in this chart.

The growth rate is significantly higher and the absolute dollars are higher. I recognize the growth rate in the first quarter of 2010 is higher in part because of the easy grow over. 2009’s first quarter was certainly our weakest billings quarter. As we look over the remaining quarters of 2010 the growth rates will be harder due to the fact we had higher billings later in 2009. That said March was the highest billings for any March in our history, slightly higher than March of 2008.

Let me move to slide 6. Here we are looking at worldwide network spend. You can see transaction size and the number of transactions are both contributing to the higher spend. Number of transactions increased by 7% and transaction size also increased by 7% for a combined billed business growth of 16%.

If we move to slide 7 we can see that billed business is growing across all of our businesses. The sharpest increase is in commercial services which is up 18% on an FX adjusted basis G&S continues to be very strong with growth of 25% on an FX adjusted basis. Global consumer businesses also are showing strong growth. If we look at this internationally, Asia and Latin America were somewhat stronger but we also had good growth in Canada and Europe.

If we move to slide 8, here we are showing you information for the U.S. consumer segment by product and we are showing it to you by quarter. You can see here we are getting the results based on the strategy we are deploying. We are focusing on driving charge card spend and premium lending which comes in the form of co-brand. This is where we are making our investments. You can see the U.S. consumer charge growth is up about 8%, co-brand is up 16% and proprietary lending is down 1%.

If we move to slide 9 this is charge card. It is showing you both billed business growth and the change in accounts receivable to charge card. You can see that billings and receivable growth continue to move in tandem. Total charge card growth for the total company is up 15% so that includes both consumer and corporate cards globally.

If we move to slide 10 we are looking at lending billed business and loan growth. Here, spending on lending products and loan growth are no longer correlated. Spending on lending products grew 11% while loans were down 11%. This is in part due to actions we have taken but also to consumers de-leveraging. Some of what is impacting this is we have reduced certain lines to certain customers. We have had lower lending card acquisition, there has been a significant reduction in balance transfers, the mix of the portfolio is changing to have a greater proportion of co-brand products.

If you look at our lending trench you can see payment rates are up. In March of 2009 the payment rate was 22.8% and in March of 2010 it is 26.9%. So a notable increase. We are seeing lower revolve levels and fewer cardmembers are making minimum payments. So we are seeing loan balances shrink as consumers de-lever and this is consistent with the industry trend but what differentiates us from the competition is they are seeing either low single digit growth or negative growth and we are seeing robust spending growth because we have a larger percent of transactors in our portfolio.

If we move to slide 11 this is our net interest yield. Here we have made some slight modifications to how we allocate interest among segments to make it simpler and more transparent for the business units and we have adjusted the yield calculation for each period on this slide. The change ranged from no change to about 30 basis points.

So you can see that in the first quarter of 2009 the yield was 10.9% and in the first quarter of 2010 it is 10%. The driver of this was reduction in interest rates with certain customers that are in our Care program as well as a change in customer behavior when you have lower revolve rates. We also had the impact of the Card Act but that was offset by pricing increases we put in place. As we have previously discussed over the balance of 2010 we expect the yield to return to historic levels of about 9%.

If we move to slide 12 this is our revenue performance. At the top you can see that discount revenue of 13% growth is a combination of growth in billed business up 16% and our discount rate dropping by one basis point to 2.55. So the discount rate continues to hold up well. Card fees are relatively consistent with last year. Net interest income I would look at on a managed basis and it is down 24%. That is both a combination of the drop in yield we just discussed and the fact that loans are down 11%. You can see we no longer have securitization income as these are all back on the natural line items.

Travel, commission and fees are being driven by the higher volumes I discussed before and if we look at other revenues on a reported basis we have increases related to the inclusion of loans and some of the fees related to those loans such as FX conversion fees. We also have higher G&S revenues and that is partially offset by lower assessment fees and the fact the GE portfolio which last year was on this line is now on the natural lines.

If you move to slide 13, the provision for losses, the improvement in charge card reflects lower write off rtes year-over-year, a notable improvement in the 30 day past due rates year-over-year and the fact we released approximately $50 million of reserves based on our credit performance. The improvement in cardmember lending provision is a result of lower write off rates and lower loans, therefore we have lower write off dollars.

We have lower reserve requirements based on the improved credit metrics and we released $500 million of reserves in this quarter. I would note the 2010 first quarter numbers includes write offs related to the loans that were securitized last year. Last year you don’t have the write offs related to those loans. This improvement in provision is providing significant resources a portion of which is flowing to net income and a portion of which is being used to increase investments to drive growth in the medium to long term. I will have a number of additional slides on provision a little later.

Let’s move to slide 14 and look at expense performance. You can see that marketing and promotion reflects the investments I just discussed before and are designed to drive future growth. I will talk a little bit more about that on the next slide. You can see cardmember rewards is up 43% and that is a combination of rewards related to our co-brand products as well as membership rewards. Co-brand volumes are up 16% and our cost per point is up slightly based on new co-brand agreements we have signed over the past year so the total increase in co-brand rewards is 24%.

Membership rewards’ growth rate is being impacted by the fact that last year we made some refinements to the calculation that actually had a benefit in 2009 and therefore we have a grow-over this year. In addition to that URR is somewhat higher. That is being impacted by the fact that we continue to improve the value proposition and [haven’t] made it easier for our cardmembers to redeem. It is also being impacted by the fact our cardmembers are more tenured as we have had lower levels of acquisition and more tenured cardmembers tend to have higher estimates for ultimate redemption.

In addition to that our cost per point is slightly higher. In 2009 customers utilized air as a redemption item to a lesser degree. Air is a higher cost redemption item and customers are moving back to normal levels of utilization of air as an option. The important thing here is long-term rewards are an important part of our value proposition and we believe we have the ability to properly manage these costs and have products that have very good economics.

Next let me look at salaries and employee benefits which are up 6%. This is being driven by higher incentive compensation, some impact from FX, severance costs in the quarter related to some re-engineering done within our global commercial services segment partially offset by lower employee level. Employee level is about 5,000 lower than last year and that is a result of the re-engineering that we did last year.

Other operating expenses reflect spending of certain costs that are driving growth such as technology spending but those expenses that are not driving growth in revenues are being very well controlled and I have a slide a little later on that.

So if we move to slide 15 and look at marketing and promotion expense, each of these bars is the dollar amount of marketing and promotion for each of the prospective quarters. The green bars reflect the first quarter of 2008, 2009 and 2010. You can see the 2010 spending is significantly higher than the amount we did in the first quarter of 2009. In that period we were pulling back on marketing so we could stay profitable. We can see that the first quarter of 2010 is back to the level we had in first quarter 2008 and represents healthy spending levels in U.S. consumer, International Consumer as well as G&S.

The increases are broad. They include spending on brand advertising. Last year we were basically dark in brand advertising so we brought back brand advertising. It also reflects spending on acquisitions. We note our acquisitions are focused on the affluent customer and therefore the number of accounts we are acquiring even though we are spending more on acquisition is similar to the number of accounts we acquired last year.

We are also spending on loyalty and you can see the benefit of that in our average spend numbers. We are also continuing to invest in merchant programs and with our G&S partners.

If we move to slide 16 this is a chart on operating expense. As we have indicated, investments are not just in marketing and promotion but also some are in operating expense and this chart is intended to give you an idea of how it splits out. On the chart you can see growth is about 8%. It is actually 4% on an FX adjusted basis. So the circles that are above the line are growing faster than the average and the circles below the line are growing smaller than the average. So we are trying to use color codes to give you an indication whether it is a large item, medium in size or small. Certain of these circles as we go forward will be on the chart each quarter and others will be on the chart when they are relevant.

So the areas where we are spending above average are on partner investments such as marketing initiatives with Delta would be an example. We also continue to invest in global network services and that is marketing related to partners who issued cards that were on our network. We also are spending on technology to enable our growth initiatives. FDIC assessments while small is an indication of the type of item that is actually going above the average on this line.

On the other hand collections because write off rates are down is below the average and as you can see staff functions such as finance, HR and general counsel are growing slower than the average as is global services group which is led by Steve Squeri and as you know we pulled this group together which is focused on improving quality and also very focused one efficiency. I would note we continue to plan over the balance of this year to continue to invest at healthy levels in both marketing and promotion and in operating expenses that will drive growth.

So let me move to slide 17 which is the U.S. charge card net write off rate and 30 day past due chart. You can see that charge card continues to perform very well. Write off rates in the 30 day past due rate are now at historic lows. Actually in all likelihood over time these rates will actually probably move up more towards historic levels over time.

If we move to slide 18 this relates to international consumer and global commercial charge cards and the net loss rate and 90 day past due bills ratio. First let me mention for these two segments we have moved the write offs from 130 days to 180 days to comply with banking regulatory guidelines. You may remember we made this change in the U.S. in the fourth quarter of 2008. This has no impact on provision because the AR after 180 days is effectively fully reserves but the write offs do run through the net loss ratio calculation in this quarter and that piece is depicted by the dark blue section of this bar.

So write offs excluding the write offs between 180 and 360 was 13 basis points. Another change we made relates to fraud losses. Historically fraud losses have been included in this bar but starting in this quarter they are being excluded. That is probably about three basis points. So the apples-to-apples comparison to last quarter 22 basis points would be the 13 basis points plus the three basis points for fraud, or 16 basis points. On an apples-to-apples comparison you can see it is improving.

I would also note the 90 day past billings ratio is lower in part because of improved credit but also by the fact we made this change to write off those receivables that were between 180 and 360.

Moving to slide 19 this is charge card reserve coverage. While credit has improved we remain cautious in our reserving. The coverage of the 30 day past due for the U.S. consumer card is similar to what we had last year. International consumer and global commercial services the 90 day past billing coverage has increased as you can see on this chart and that is because we modified our reserving methodology to move to a methodology that is based on losses to billed business ratios. As those losses continue to improve this coverage ratio will move back to historic levels.

Let me move to slide 20. This is the lending net write off rate. So last quarter we forecasted the USCS write off rate would be flat with the fourth quarter of 5.7%. In fact it has come in slightly better at 7.2% and this is due to lower bankruptcy dollars. It is a combination of fewer filings and lower dollars per filing. We continue to significantly outperform the industry. Improved credit is a significant source of funding for higher earnings and higher investment levels.

If we move to slide 21 this is the lending 30 day past due chart and you can see we continue to improve in the U.S. and are stable in the international consumer markets.

If we move to slide 22 this is a chart we have used over the last several quarters. If the 30 day past due to write off rate remains stable, that is the bottom part of this chart, and bankruptcies and recoveries remain stable then improvements on the right hand side of this chart, improvements in the current to 30 day past due will flow to the bottom line with improved write offs.

In that upper left chart the yellow triangles are what wrote off in the first quarter. Those three triangles are pretty similar to the green triangles preceding that and that is why we forecasted the first quarter would be similar to the fourth quarter. As I said before the reason for better performance in the first quarter was really driven by the right side of this chart which is we had lower bankruptcy filings.

If we go back to the upper left hand chart and look at the green triangles we can see they are improving and therefore we would expect the second quarter write offs to be better or lower than the write off rate we saw in the first quarter of 2010. That is also consistent with what we said at the end of the first quarter.

So moving to slide 23, we wanted to provide you with some information regarding lending reserve levels. If we start at the left side of this chart, starting at the end of 2008 and during 2009 we had write offs of approximately $1 billion. We had a provision of $1.4 billion. So we built reserves during this period by $400 million and that reflects the deterioration in delinquencies and the higher write off rates we were seeing in 2009.

If you move to the right side of that chart we start at the end of 2009 and the first bar reflects the reserves we established related to the loans we brought back on balance sheet. I will remind you that ran through equity, not through the P&L. During this year we had write offs of $1.2 billion and a provision of $700 million so we effectively released $500 million in reserves and that reflects improving delinquencies, lower write off rates and lower loan balances.

With improved credit metrics you would expect the red bar or the write offs in this year to be lower than the write offs we had last year. But the difference as we are showing in the little box in the upper right of the chart is this year we have write offs related to both the on balance sheet loans as well as the loans that came back on the balance sheet which were off balance sheet last year and therefore there were no write offs related to that. The comparable is that the $700 million related to non-securitized loans compared to the $1 billion so we actually saw a decrease in write offs on an apples-to-apples basis which you would expect.

If we move to slide 24 this is our reserve coverage. Credit metrics, both write offs and past due, continue to improve. We reduced reserves by $500 million based on the inherent risk in the portfolio and the lower loan balances but we continue to be cautious due to the uncertain economic environment and you can see our reserve coverage, reserves as a percentage of past due and principle month’s coverage reflect our cautious outlook.

If we move to slide 25 these are our capital ratios. Capital ratios remain above well capitalized levels. Tier 1 common ratio relative to other financial institutions are strong and we need to wait to see where the regulators actually set the benchmark. Again, on a comparative basis our Tier 1 common compared to other financial institutions is strong.

If we move to slide 26 this is a liquidity snapshot. You can see we have excess cash and marketable securities of $27 billion. The next 12 months of maturities is $20 billion so we continue to hold cash and marketable securities equal to or greater the next 12 months of maturities.

If we move to slide 27 this is retail deposits. We continue to build deposits. We now have $27.4 billion of deposits. If you look below the chart we have made some additional disclosures here. If you start at the very bottom you can see the average rate at issuance which is 2.3%. Also right above that you can see the weighted average maturity when the deposits were originally put on the books. That is 31 months. We think also a relevant disclosure is the weighted average remaining maturities so we have provided this additional information and we hope you find it useful.

With that let me conclude with a few final comments. Results for the quarter reflect the improved economic environment and our shift to a more offensive posture versus last year’s defensive stance. Spending has rebounded across all business sectors with monthly comparisons improving due to both easier comparisons versus last year and higher absolute spending levels. We also show a sharp divergence between customer spending and borrowing levels. Some of it is due to our strategic and risk related actions and some reflects changes in customer behavior.

While these offsetting influences, stronger billings growth and lower loan balances challenged overall revenue growth, credit trends continue to provide lower provision requirements and our underlying operating expense growth remains well controlled. This quarter is a clear demonstration of our differentiated business model reflecting the makeup of our customer base and the design of our products. Spending on our network increased well above industry average while loans decreased and credit performance was among the best in major card issuers.

Our decisive and effective credit actions achieved improved credit performance without stifling spend by credit worthy cardmembers. The net effect of all these factors is our ability to invest in the business at significant levels while also generating strong earnings. While some investments are designed to drive metrics over the next 12 months we are also allocating resources to initiatives focused on the medium to long-term success of the company.

Challenges to continued progress remain. Unemployment levels are still high and customer behavior as well as the legislative environment are uncertain. However, the global economy seems to be poised to continue to improve and our strong competitive position is yielding high quality comparisons versus the competition. This gives us confidence our investments and our differentiated business model are appropriately positioned to capitalize on the opportunities in front of us and continue to win in the marketplace.

Thanks for listening. We are now ready to take questions.

Question and Answer Session

Operator

(Operator Instructions) The first question comes from the line of John McDonald – Sanford Bernstein.

John McDonald – Sanford Bernstein

On the billed business did the strong March trend has that so far pulled through to April?

Daniel Henry

The results we are seeing in April are similar to what we saw in March.

John McDonald – Sanford Bernstein

On a simplistic level I think some people look at the numbers and when you talk about March being the highest ever they say how can that be? More people are unemployed. Companies seem to be spending less. Your numbers of cards are down. How is it that the billed business is at the highest March ever?

Daniel Henry

I think our cardmember base doesn’t reflect the general population. I think our products are designed to meet the needs of higher spending, more affluent customers. Last year when we saw the drop in billings in the first three quarters of last year when our billings were dropping at a rate similar to the competition we were actually relatively pleased by that because generally discretionary spending drops at a faster rate and our customers have more discretionary spending than the average population.

I think what we see here is when things improve that discretionary spending is coming back. I think it is really the impact of a more affluent customer base. I think that is one part of it. The next part has to do with corporate card. Corporate card generally is more of a V. It goes down sharper than the rest of spending and it comes back a lot steeper and I think we are seeing that make a strong contribution here. We have a very strong position in corporate card.

Thirdly we have a strong G&S business. As you can see from the charts spending on cards issued by our partners that run on our network is performing very well. I think it is all of those factors which are contributing to the billings growth which is significantly higher than we are seeing among other major competitors.

Operator

The next question comes from the line of Craig Maurer – Calyon Securities (USA), Inc.

Craig Maurer – Calyon Securities (USA), Inc.

Could you just quantify the severance you paid in the quarter?

Daniel Henry

It was the bulk of the re-engineering charge you can see in the supplement. It is about $16 million.

Craig Maurer – Calyon Securities (USA), Inc.

When you look at your reserve is a good way to think about that over time you will normalize to about 12 month’s coverage of charge offs? That seems to be what a lot of the industry is talking about.

Daniel Henry

We don’t set our reserves based on month’s coverage. We actually have models we utilize that look at historical performance which is really the basis for the bulk of our reserve. We also look at whether there is a need for specific reserves for certain areas. For instance, we have done re-aging recently. Those re-aged accounts have greater credit risk than the overall portfolio so we set up some specific reserves for those. Then we also take into consideration what is taking place in the economy. Is it uncertain? Is it stable? We use that process to actually establish our reserves. We then take a look a whole variety of metrics including loans coverage, including the percentage of reserves compared to the total loan balances, reserves as a percentage of delinquencies, what level of new cards we put onto the books. There is a myriad of other factors that come into play. That is the way we set reserves. We don’t do it off of any single metric. At the end of the day the reserves will be based on the inherent risk in the portfolio.

Craig Maurer – Calyon Securities (USA), Inc.

I know you commented on April versus March but have you seen any perceptible impact on your billings from the disruption in travel in Europe?

Daniel Henry

As it relates to the situation in Europe our main focus is really on meeting the needs of our customers and helping them to adjust their travel plans. Our call volume has increased eight fold during this period. That is where our focus is. There may be some minor impact to billings. Assuming there isn’t further impact from more activity from the volcano we would estimate the impact from this is not going to be significant but it is too early to tell. There could be some changes in status as we go forward and that could have an impact. Where we stand today our focus is on servicing our customers and we don’t think the impact as facts are today would be significant.

Operator

The next question comes from the line of Betsy Graseck – Morgan Stanley.

Betsy Graseck – Morgan Stanley

On the spending you indicated a couple of times that you have kind of three prongs to the investment spend approach. 12 month return, medium term and long term. Could you just give us a spend is going into each of those buckets and the kinds of returns you are expecting from them? I am assuming the page 16 you provided could also be identified that way as well.

Daniel Henry

I think page 16 we are trying to just give a little more information so we are a little bit clearer about the fact that investments don’t just mean marketing and promotion but really spills over to other areas. So we really haven’t broken out historically the dollar amounts in each of these categories but you do get some sense for what is in certainly marketing and promotion; a very clear look there. The actual percentage of total operating expense that OpEx is not the overwhelming majority. Let’s face it you need to have a fair amount of that operating expense supporting our core business but we are allocating more to that because we are emphasizing commercial card if we are going to grow commercial card it is generally related to sales force. That would be in operating expense.

We are also very focused on new fee generation and new products that would drive fee revenue growth. We have talked about loyalty as an example of that. We have talked about marketing data to merchants and all of those require OpEx to drive it. We haven’t split up that number exactly but it is not inconsequential but it is not the vast majority.

Betsy Graseck – Morgan Stanley

Can you give us a sense as to how the return on investment spend you have been doing over the last year has tracked relative to plan? The question that is related to your comment you did allow some of the credit losses to fall to the bottom line this quarter. I am just wondering if the investment spend is maxed out or if you are just waiting for some of those returns to fall through before reinvesting some of those credit loss improvement initiatives.

Daniel Henry

I think that the investments we are making in the tried and true things that we have historically done that are part of our core business as you can see over the years our returns on those are very good. We think the investments we are making this year in those core businesses will also be very good and very much along historic levels. Any time you venture into new areas some of which we are doing you have estimated returns and those estimated returns will give us actually very good economics. The certainty of those are obviously different because you don’t have history to know if you will be successful in achieving those.

In any event the assumptions we have made will give us very good returns. The way we think about what portion is flowing to the bottom line and what portion we are investing is driven by the fact we want to ensure we are investing enough to drive growth in the future that will enable us to hit our financial targets.

If you look back at the 2005 to 2008 timeframe and took marketing and promotion plus investments that drive growth within operating expense those two numbers would probably be about 13% of revenues. We have actually taken that up to about 14-15% in the current period. So we are investing at a slightly higher level than we did historically. Again we are trying to balance where our income level should be and investing to drive future growth in the years to come.

Operator

The next question comes from the line of Brian Foran – Goldman Sachs.

Brian Foran – Goldman Sachs

On the card margin at 10% this quarter I guess both you and Capital One had much better card margins at least than I had modeled off of the first quarter. What is the timing mechanism and why did it hold up better in the quarter that the Card Act went live but then ratchets down in your guidance to the 9-ish percent level over the next couple of quarters?

Daniel Henry

I think the Card Act was only in effect for a portion of the quarter and there is another piece of the Card Act that comes into effect in August. I don’t think we have seen the full impact of the Card Act yet. I don’t think we will see that until we get to the fourth quarter and that is why it kind of ramps down over the course of the year.

Brian Foran – Goldman Sachs

At your analyst day you gave some helpful slides on the composition of the spend recovery; things like jewelry and cruise sales that kind of pointed to the high end recovery we are now seeing in the quarter. Are there any other pockets of notable strength right now as you look at the March results by category? Both curiosity in where it is coming from but also is it still the high end, less indebted consumer that is driving the spending recovery or is some of the rest of the book contributing as well?

Daniel Henry

You are really seeing honestly all of our businesses contribute to the growth. You can look at that chart by segment and you can see that it is G&S, commercial card, it is in the U.S. and it is in international. It really is broad based across all of those. It is our view we think it does have a lot to do with these discretionary pieces where we are seeing the biggest bounce back. That was true based on the information we showed at the financial community meeting. I would think that continues to be a driving force.

Brian Foran – Goldman Sachs

But it is still more the discretionary high end bucket you are seeing the best strength in?

Daniel Henry

Again, I think there are many factors contributing but that is among them.

Operator

The next question comes from the line of Robert Napoli – Piper Jaffray.

Robert Napoli – Piper Jaffray

The cardmember rewards percentage of discount revenue and the growth rate is there some of your marketing strategies or promotions built into that which over time would pull back or are we looking at a level relative to the discount revenue that permanently is going to be at a higher level?

Daniel Henry

I think bonusing of rewards points is a part of that. That is decision we make every quarter. I think there were a number of unique things in this quarter which all contributed when you add it up. As I said in the first quarter of last year we had a refinement that actually was a benefit then. That creates a grow over. I think we have the impact of as I said less acquisition so therefore you have a more tenured base which is having an impact. Some of those will continue over time. The fact we have made the program have more options and increased the ease of redemption that would be a permanent increase.

Quite frankly to the extent customers actually redeem we view that as a very positive thing because if customers are engaged we see them spend more. If over time the URR were to drift up some we would view that as a positive, not as a negative.

Robert Napoli – Piper Jaffray

On page 22 you do a nice job of giving us some information on the direction of charge offs. That green line is a pretty steep decline from the yellow bars that drove charge offs in this quarter. Given it is that steep are you looking at charge offs to drop into the 5% range? Looking at that if you can give any guidance on levels of improvement you expect?

Daniel Henry

We designed this chart to try and be helpful without doing a forecast. I don’t want to do a forecast. We are trying to give you all of the pieces so you can think about where we are going directionally. I wouldn’t want to go beyond that.

Robert Napoli – Piper Jaffray

Can you give any outlook or update on Revolution Money and what you have done to date, how you feel about that business. It has been several months since you announced the deal and kind of where the key focus is for that business.

Daniel Henry

We closed that transaction in January so it is just about three months. I think as we talked about at the time we were basically buying a platform and so we are in the process of developing exactly what our strategy will be but we think it will help us in the area of alternative payments. I don’t have a lot more to add to that. Over time as it develops we will share that with you.

Operator

The next question comes from the line of Meredith Whitney – Meredith Whitney Advisors.

Meredith Whitney – Meredith Whitney Advisors

I am sorry, I have to beat a dead horse here. If you look at spending and I want to just drag down to U.S. spending for your comments you made about March being the best March ever, collectively though it was a quarter that wasn’t one of your strongest quarters in terms of spending if you look at 2007 and 2008. Worse than most quarters in 2009 and then sort of closer to 2006 levels. Did something happen in January and February that spending was very depressed and then all of a sudden it surged in March and is continuing [in August]? I just want a clarification.

Daniel Henry

I think the spending levels you see in January and February we are seasonally down as they always are after December. January and February were not record months but they did show strong growth; growth that wasn’t dissimilar to what we saw in December. But March picked up to a higher growth level than we saw in each of those. As a quarter it is not the highest quarter ever. I was trying to create some balance here. I was trying to point out that the grow overs as we go into the next three quarters are going to be more difficult because spending did improve last year. I didn’t want to be too downbeat so I wanted to point out March was notwithstanding that the best month.

Meredith Whitney – Meredith Whitney Advisors

We are not looking at spending in the go go days of 2007 and 2008? A return to that quickly?

Daniel Henry

March is higher than 2008 which previously had been the highest March ever. So March is slightly above March of 2008.

Meredith Whitney – Meredith Whitney Advisors

Now that TALF is officially over and you didn’t access TALF in the fourth quarter. Even since the third quarter. What is your outlook on the securitization market and overall funding?

Daniel Henry

Securitization market I think is going to be important to the whole industry over time. I think the fact that all of the major issuers really stood behind their trust in 2009 should bode well for its ability to come back as an important funding source. Right now we are really using deposits as the main area we are growing to fund our needs. I would point out this month we did sell one B trench we had previously held and the reason we did that was because spreads had come back in to a level we thought was appropriate to sell.

I think spreads have come in quite a bit both on that B trench as well as generally our spreads have come in very nicely. I think it may take some time but I don’t see any reason why securitizations in the future would be a good funding source not only for American Express but for the Industry. I am talking about credit card securitizations.

Meredith Whitney – Meredith Whitney Advisors

Is that a 2010 or 2011 phenomenon do you think?

Daniel Henry

I don’t know. Right now with folks’ balance sheets shrinking the need to move back into that market quickly is being diminished a little bit. You generally need to increase your funding to the extent your balance sheet is growing on the left hand side. So I guess it would be a moderate process.

Operator

The next question comes from the line of Christopher Brendler – Stifel Nicolaus & Company, Inc.

Christopher Brendler – Stifel Nicolaus & Company, Inc.

Can you give us an update on your view of the success of your charge card marketing campaign? [Inaudible] I was hoping you could give us some color.

Daniel Henry

I think we are seeing I think charge card in total in the company grew 15%. That is a combination of both consumer and corporate. So that is actually very strong growth I think when you are looking at the total. If we were to look at the slide which is just U.S. consumer charge card growth for U.S. consumer is up 8%. Both of those are pretty healthy growth rates and I think reflective of not only the marketing we are doing in this corner but quite frankly the strength of this franchise and the fact those are customers that have the capacity to spend. So I think that is all really very positive.

Christopher Brendler – Stifel Nicolaus & Company, Inc.

On how the response rate to…there seems to be a lot of TV advertising in that campaign. I am not sure how much mail is being sent out. They are a tough customer to crack in terms of high acquisition costs there. Are consumers entering responses to this campaign? Any metrics on the account growth you could give me?

Daniel Henry

I think as we all know response rates over many years have declined. I don’t think we are seeing response rate that are dramatically different than recent history. I would say we are focusing on charge card and premium lending. As you know to acquire those customers are more costly than to acquire customers that have lower spend. So while we have ratcheted up the dollars we are spending on acquisition the actual number of accounts we are acquiring this year are similar to the number of accounts we acquired in the first quarter of last year. That is a reflection more of who we are going after as opposed to a notable reduction in response rates. So to acquire the affluent is more costly but based on our modeling we believe we will have very good economics on those customers.

Christopher Brendler – Stifel Nicolaus & Company, Inc.

On the rewards expense, it was up a lot and you cited some factors. I would think you would have a little more pricing power just given where you are in the cycle to drive a lower cost per point rather than a higher cost per point. Can you give some additional color on what is going on there?

Daniel Henry

I think our rewards team has really over the last 5-6 years done an excellent job of both expanding the program to add many new options people can redeem for and at the same time create a mix that has really helped us to hold cost per point very constant over a 5-year period. We saw a little bit of a tick up and again that was because I was making a comparison year-over-year and last year you basically had probably a little bit of a benefit on cost per point because people weren’t redeeming for air and in the mix that is the most expensive piece. I think the team continues to do a good job and I think we are optimistic that cost per point can be managed well while also providing a good value proposition for our customers.

Operator

The next question comes from the line of Bill Carcache – Macquarie Research Equities.

Bill Carcache – Macquarie Research Equities

Can you talk a little bit about the performance of the CARE program and how actively you are having to manage that?

Daniel Henry

We are managing it very actively and very closely. Our intent going in here was to work with customers who had temporary liquidity issues. The actions we took were intended to help them but also were economic actions. They were actions where we thought by working with the customer American Express over the long-term would get a better return than if we didn’t have a plan with them. So we are tracking them very closely customer by customer. We are identifying which customers are not complying with the program and actually re-aging. Those customers that are performing well we are also moderating the reserve we have against them based on their performance. I also point out the program is not growing at this juncture as credit metrics actually are improving somewhat.

Bill Carcache – Macquarie Research Equities

Can you comment on your expectations for lending balances as we look throughout the rest of the year whether you expect them to continue to decrease or stabilize?

Daniel Henry

We haven’t really given a forecast for the balance of the year. What I would say is probably over an 18 month period I would expect the growth rate in spending and the growth rate in loan balances to come closer back together. Part of that will depend on customer behavior and how much further they are going to de-lever so that will be a big part of it as well.

Bill Carcache – Macquarie Research Equities

On capital levels, your business generates more capital than you need and you are building up those capital levels very quickly. Of course you have talked about how you are waiting for guidance from regulators before you give ROE guidance and start considering the potential for being able to repurchase shares. If you were able to build those capital levels up let’s say at some point would you consider even if you didn’t get guidance from regulators yet just coming out and feeling comfortable giving what you expect ROE guidance will be and also potentially even announcing that you are going to do some repurchases?

Daniel Henry

I think we are committed, I am committed by the middle of this year to give some guidance on ROE. We will probably give some guidance on what percentage of earnings we will be looking to return to shareholders through either dividends or share repurchases. So as I say I think we will do that in the middle of the summer. It also requires a conversation with the regulators. There is another large financial institution that actually did some share repurchases this quarter after a conversation with the regulators. I think that will be an assessment we make later in this year.

Operator

The next question comes from the line of David Hochstim – Buckingham Research.

David Hochstim – Buckingham Research

I wonder if you could revisit the expected decline in the net interest yield in USCS? How much of the Card Act affects the small business card? Are they exempt?

Daniel Henry

The Card Act does not apply to the small business cards. We think our card agreements with small businesses are clear and transparent so we are very comfortable with our terms and conditions with small businesses. The Card Act does not apply to those cards.

David Hochstim – Buckingham Research

Given the fact that you were less affected by the Card Act and have all the onerous elements going into effect last year, I guess I am still a little unclear on why you are going to have a 10% decline in the net interest yield because of the Card Act this year.

Daniel Henry

I think you have to go back a little further. If you go back to 2008 our yield was about 9%. In 2009 we put in pricing changes to increase the yield in anticipation of the Card Act coming into effect. The Card Act comes into effect in 2010 and we move back down to 9%. So it is really just getting back to historical levels. What we have said is we want to put pricing increases in place that would offset the impact of the Card Act and if we move back to 9% that is exactly what we would have achieved.

David Hochstim – Buckingham Research

So you lost any pricing flexibility you had on the consumer card so you are actually not worse off if you have the same yield and don’t have the same tools here [inaudible].

Daniel Henry

That I think would only be true if we fell below 9% as we go forward.

David Hochstim – Buckingham Research

Can you give any color on slide 8 where you talked and showed that the increase in spending on programs and charge and proprietary lending? I guess part of the differential in growth rates is a function of the size of those businesses but is there also a difference in the kinds of spending or the kinds of merchants those customers are spending at? Is it all T&E growth?

Daniel Henry

The size of the portfolio wouldn’t affect the growth rate. That is not….

David Hochstim – Buckingham Research

I meant the size of the card base and spending volumes.

Daniel Henry

I think the mix of our business between T&E and non-T&E I haven’t really seen anything to indicate that has shifted. What I would say is the co-brand increase in part is being affected by the fact that we signed a new agreement with Delta and it has opened up a whole new set of customers that we really didn’t have access to before that were part of the Northwest program. We have been investing heavily behind the Delta program as well as some other new co-brands as well as resigned co-brands. It is really that activity that is driving the co-brand spend up.

On charge card we are also investing there. That is very much in line with the strategy we articulated. I think we are getting good results from that spending. I think it is probably in areas that are more discretionary. I don’t think we have seen a big shift.

David Hochstim – Buckingham Research

The spending per card that has been outstanding for a year or two would there be these kinds of differences or they would have more similar changes?

Daniel Henry

I haven’t seen any data that would imply any major shift whether it is the more tenured customers who are doing it or newer customers. Again, everything I have seen shows that it is very broad based. It is not just one segment or one area that is carrying 16% growth in billed business. It is really all of the businesses, all of the products other than proprietary lending where we have not been investing behind. Other than that I think it is very broad based.

Operator

The next question comes from the line of Donald Fandetti – Citi.

Donald Fandetti – Citi

As you think about for the alternative payments and online spend do you think American Express is behind the curve a bit on that movement compared to PayPal and some of these other initiatives? I guess my question is are you going to have to spend a significant amount more via acquisition like we are seeing out of Visa and some of the other networks?

Daniel Henry

We are keenly aware over time alternative payments are likely to play a bigger role in payment. That is why we want to be very focused to this area. That is part of the reason why we made the Revolution Money acquisition. Online payments certainly receives a significant amount of attention by our senior management team. So we are balancing between what we are investing in the core business but it is also one of the reasons we want to allocate resources to investments that are really over the medium to long-term.

When I said before we are focused on investments that drive metrics over the next 12 months those are our core business investments. We are allocating more money to those things like online payments, alternative payments, some of the new fee businesses. Those in all likelihood won’t provide significant returns to us over the next 24-36 months but we think they are very important to maintain our growth trajectory as you look out beyond that. So we are very cognizant of that and looking to invest in at an appropriate level.

Donald Fandetti – Citi

Do you think…should we assume there could be other sort of bolt-on Revolution Money type acquisitions that sort of position you over the next year or two?

Daniel Henry

I think the reason we have over the last two years talked about bolt-on acquisitions is for exactly that reason. To actually achieve our strategies in some of these areas it may be appropriate to do bolt-on acquisitions to actually achieve those strategies.

Operator

The next question comes from the line of Brad Ball - Ladenburg, Thalmann & Co.

Brad Ball - Ladenburg, Thalmann & Co.

You have addressed to some extent the impact on the margin from the Card Act. Could you talk about whether or not you expect an impact on non-interest income and whether the Card Act provisions that are becoming effective in mid-August do they have an impact to the appropriate and reasonable fees on your charge card business? Can you give us some sense as to how to scale that?

Daniel Henry

Certainly that is something we will have to pay attention to. Certainly there is an indication people will look at the pricing increases people have put in place to see that they continue to be justified. They are also going to look at fees for people who don’t comply with terms and conditions. We believe those fees are reasonable we will only know the ultimate answer to that after someone comes in and takes a look. So we are not anticipating that will have a negative impact on charge card. Nor do we think those aspects will have a negative impact beyond what we see now on yield.

Brad Ball - Ladenburg, Thalmann & Co.

But charge cards are captured as part of the Reg provisions?

Daniel Henry

Yes they are.

Brad Ball - Ladenburg, Thalmann & Co.

You noted the bankruptcy impact on first quarter credit statistics. I think your policy is to charge off bankruptcies on notification. Is that right? If that is the case there was a spike in bankruptcy filings in March. Was that those numbers or would that show up in the April numbers?

Daniel Henry

We do write off when we are notified. The industry may have had a spike up in March but we did not. We actually had filings drop in our customer base. In addition to that the dollar amount in the filings has been decreasing which is a benefit. So we actually saw a drop down, not a spike up in the month of March.

Brad Ball - Ladenburg, Thalmann & Co.

So maybe a disconnect where your higher quality customer base there are fewer bankruptcies in March than the end of Q1?

Daniel Henry

That is a metric that is hard to forecast. It could pop up next month to where we were in February. It is one of those things that is hard to forecast.

Operator

The next question comes from the line of Sanjay Sakhrani – Keefe, Bruyette & Woods.

Sanjay Sakhrani – Keefe, Bruyette & Woods

I thought the Macy’s deal was an interesting one this particular quarter in private label. I was wondering if that deal kind of foreshadowed a broader entry into private label or if there was just opportunity there?

Daniel Henry

So I think we are always looking to see where there are good economic deals to shift spending onto our network. I wouldn’t say this is a broad strategy in retail. On the other hand to the extent there is an opportunity that is beneficial to both the other party and ourselves and has the right value proposition for the customer we will pursue those.

Sanjay Sakhrani – Keefe, Bruyette & Woods

Do you consider taking credit risk in retail?

Daniel Henry

Private label? Is that the question?

Sanjay Sakhrani – Keefe, Bruyette & Woods

That is right.

Daniel Henry

I would say the answer to that is that it is not one of the strategies that we [like to do].

Sanjay Sakhrani – Keefe, Bruyette & Woods

If we look at reserve coverage on a worldwide basis I think you are at over 16 months. Then if we tie that to the delinquency trends you show on those charts over the next six months it seems like charge offs could come down quite a bit. How should we think about reserve coverage on a go-forward basis? Should we expect it to increase? Would you grow into it? Or should we assume that coverage and the reserve levels could come down?

Daniel Henry

As I said before describing how we set reserves which is not off of any one particular metric. So I think our reserves are going to be impacted by what the credit metrics are, where write offs are going, where delinquencies are going, what the loan balances are, what our outlook is as it relates to the economy. All of those things will come into play in terms of where we set our reserves each quarter.

Operator

The next question comes from the line of Scott Valentin – FBR Capital Markets.

Scott Valentin – FBR Capital Markets

On the membership rewards idea, ultimate redemption rate maybe that will improve slightly over time. It seems like it is reviewed annually or periodically and adjustments are made. Would you expect rewards expense to move up as the economy improves and you see more and more air type or travel type of redemptions taking place? Where are we relative to historic on those types of redemptions?

Daniel Henry

I would say as we look forward I would expect rewards costs to grow at a somewhat higher rate that volumes over the next several quarters because we signed some new co-brand deals and so when you get a full year under your belt you are going to see that in the results. Then we had some things that are short-term in nature that are affecting membership rewards. Those won’t repeat themselves. To the extent URR continues to drift up a little bit that would cause rewards costs to be somewhat higher than volumes.

As I said before, it is an important part of our value proposition and we actually view people redeeming as a very good thing. It is another reflection of engagement and our data shows that when people redeem they tend to spend at higher levels in the future.

Scott Valentin – FBR Capital Markets

On page 15 which I appreciate you showing a historical graphic of marketing and promotion expense. It looks like 1Q10 is back to a more normalized level if we look at 1Q08. Should we interpret that as saying maybe we should look at 3Q and 2Q of 2007 and 2008 as being indicative of where spend could go? Or do you plan to really increase the marketing beyond those levels?

Daniel Henry

I didn’t want to forecast the marketing and promotion lines. As I said before it is our intent as credit improves and it provides us with resources to balance dropping some of that to the bottom line but continuing to invest at healthy levels to drive the business. Some of that will come in marketing and promotions and some of that will be reflected in operating expense. We are very focused on investing for the proper growth trajectory as we go forward.

Operator

The next question comes from the line of John Stilmar – SunTrust Robinson Humphrey.

John Stilmar – SunTrust Robinson Humphrey

With regards to overall corporate expenses if we look at American Express excluding Visa and MasterCard the benefit you have garnered over the past couple of years and we trend your business back and we look at you like a payment processor where total expense is relative to revenues or non-credit expenses are related to revenues we get kind of an operating margin. This quarter itself was one of the lower operating margins we have had which is certainly okay if we are at the early part of a growth cycle. I guess the question is I am sure you probably have looked at your business in this way. How should we be thinking about that relative to sort of near-term expectations? We have comments of some lower revenues and continued investing at this part in the cycle is certainly understandable but at these kinds of operating expense levels are we to sort of expect them at these levels for the next couple of quarters and then potentially get operating leverage in years to come? How should we be putting that in context relative to where you have been historically? Because this quarter is one of the highest expense levels relative to revenues that we have had at least for the past couple of five years.

Daniel Henry

We are long-term very focused on the fact we have to have well controlled operating expense. That is why I tried to speak to this in terms of some operating expense we view as not driving revenues and we are really focused on controlling that very well. Quite frankly I think we have done a pretty good job of that historically. We are investing in some areas that fall to a greater degree in operating expense that may have not been the case in the past. We are just trying to make that distinction. We are not moving away from our historical financial targets to grow revenues at greater than 8% and achieve EPS growth of 12-15%. I think that is probably one way of answering your question.

So thanks everybody for joining the call. Have a good evening.

Operator

Ladies and gentlemen this conference will be available for replay after 7 p.m. today until April 29, 2010 at midnight. You may access the AT&T executive playback service at any time by dialing 800-475-6701 and entering the access code 150440. International participants may dial 320-365-3844. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

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Source: American Express Company Q1 2010 Earnings Call Transcript
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