American Express (AXP) Fixed Income Conference Call - Transcript

| About: American Express (AXP)

American Express Company (NYSE:AXP)

Fixed Income Conference Call

August 7, 2014 3:00 p.m. ET

Executives

Kerri Bernstein - VP, IR

Dave Yowan - EVP & Corporate Treasurer

Ken Paukowits - IR Group

Analysts

Ryan Butkus - Citigroup

Robert Smalley - UBS

James Strecker - Wells Fargo

Operator

Welcome to the American Express Fixed Income Conference Call. (Operator Instructions) And as a reminder, today's conference call is being recorded.

I'd now like to turn the conference call over to your first speaker, Vice President, Global Funding and Debt Investor Relations, Kerri Bernstein. Please go ahead.

Kerri Bernstein

Thank you, Alan. Welcome, we appreciate all of you joining us for today's call. The discussion contains certain forward-looking statements about the company's future financial performance and business prospects, which are based on management's current expectations and are subject to risks and uncertainties.

Factors that could cause actual results to differ materially from these forward-looking statements 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 other reports already on file with the Securities and Exchange Commission.

The discussion today also contains certain non-GAAP financial measures. Information relating to comparable GAAP financial measures may be found in the second quarter 2014 earnings release, earnings supplement and presentation slides, as well as the earnings materials for prior periods that may be discussed. All of which are posted on our Web site at ir.americanexpress.com. We encourage you to review that information in conjunction with today's discussion.

Today's discussion will begin with David Yowan, Executive Vice President and Corporate Treasurer, who will provide the capital and funding update including some key points really into the company's financial performance and provide some brief summary comment. Once Dave completes his remarks, we'll move to a Q&A session.

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

Dave Yowan

Thank you, Kerri, and thank you all of you for joining this afternoon. We're pleased to host the fixed income investor call this quarter. We hope you find both informative and helpful, a separate discussion that focuses on elements for our business of particular interest to fixed income investors. As always, we appreciate any feedback you might have on how we can best provide you with the information you need in order to make investment decisions.

This afternoon, we're going to provide you with a capital and funding and liquidity management update. Some of you may have joined us on our earnings call last week, and there are some key points from that call that I'd like to re-emphasize. Then, I'll take you through some specifics on our capital position and liquidity profile.

Turning to Slide three, many of you I know are familiar with our franchise, a global service company, principal products, our charge in credit cards and it's measured by spending volume, purchase volume, we're the world's largest issuer of cards. Our business model is distinguished by our spend-centric business model as well as the closed loop network; I'll talk a little bit about both of those in a second.

Key to our company and our franchise is our brand. The brand is recognized for service, quality and trust, and we're particularly proud of the exceptional service and the recognition to that service that we've received over time.

The average spending on our card is three or four times higher than our network competitors, and our footprint is truly global with over 109 million cards in force, over 140 card issuing or merchant acquiring arrangements, and over 1200 American Express branded products.

Slide four gives you some historical financial performance information as well as reminds you that we're segmented into five different business operating segments. U.S. Card Services includes our U.S. consumer and small business activities. International Card Services includes international consumer and small business activities those conducted outside the United States. Global Commercial Services includes our corporate card business. Global Network and Merchant Services segment includes both the activities where we partner with other financial institutions that issue cards and acquire merchants for transactions that are authorized on our network. While Global Merchant Services works with providers and goods and service, including retailers and seek to have them accept the American Express Card as a form of payment. Our Corporate and Others segment includes our travelers check business and our enterprise growth activities as well.

Slide five reminds you of the payments landscape and the different parts of a payment transaction, American Express's business model is distinct and that we participate at all parts of a payment transaction. This provides us with two advantages; one is we capture the full economics of a payment's transactions, secondly, it provides us with an information advantage which we can use to manage risk such as credit risk as well as work with merchants to help them promote their businesses.

Slide six views our spend-centric model, those of you who have covered us for some time know that this has been a feature of our business model for some time, and one that we can think continues to provide us with a competitive advantage. The average spending on American Express Cards is as I mentioned is three to four times the spending on other network providers that allows us to enjoy premium economics, which we use to invest in world-class service as well as other value propositions to our card members such as our Membership Rewards program. Those compelling value propositions in turn allow us to attract people that are characterized by high average spending.

Turning to Slide eight; I'll just review briefly our second quarter operating performance. Revenues both on an FX adjusted and reported basis rose 5%. As a consequence of some strong expense management discipline, net income grew by a greater amount at 9%. And then as a result of our share repurchase activities, you'll see that average shares outstanding were down 4% that help to drive EPS growth in excess of net income growth, and so EPS grew to $1.43 per share from a $1.27 per share in the same period last year.

As a remainder, our results in the quarter include some one-time items specifically gain on the establishment and closing of a joint venture involving our global business travel business offset in part by a deal-related cost, restructuring reserves, a contribution to our charitable foundation as well as some incremental investment spending, business building investment spending as well.

Slide nine talks about some of the key drivers of revenue billed business spending on the cards as you can see up 9% in the quarter. There are really two ways for us to drive billed business. One is to put our products in the hands of more customers. You see the total cards in force grow at middle single-digit. The second way to grow the business is to increase our share of payments activity among existing customers, and you see that average basic card member spending also grew by middle single-digits both on a reported and adjusted basis.

We continue to see mid to low single-digit growth in card member loans as we have for some time now. The total card member loans at the end of the quarter at 66.3 billion, up 5% on both a reported and FX adjusted basis.

Turning to Slide 10, you can see some of going sequential patterns in some of these key metrics. In particular, I'd point out that billed business growth on an FX adjusted basis grew by 200 basis points, 2% quarter-over-quarter. And at the bottom of Slide 10, you'll see our world-wide lending write-off rate at 0.6%, while loss rates continue to be at or near all-time historic lows for the company.

Slide 11 gives you a good sense of the relative size of our business relative to other large U.S. card issuers. I think it gives you a good representation of the spend-centric business model. On the left hand side of the page you can see that we're by far the largest issuer in terms of billed business. On the right hand side of the page you'll see that our loans outstanding are closer to the smallest on that list.

Starting on Slide 12; we'll review some of our asset quality and credit statistics. Slide 12 includes the write-off rate on our charge card product, the pay in full product both within our U.S. business as well as our businesses outside the U.S. See that the sequential pattern in some of these write-off rates with some slight declines sequentially both in the U.S. and in the international businesses in part due to changes, senior note changes and balances sequentially.

Slide 13 gives you charge card credit performance both for ICS on a net loss ratio basis and at write-off rate on the prior page for ICS effectively has net write-off rate on are prior page for ICS effectively has net write-off dollars, a numerator and charge card receivables outstanding as the denominator in Slide 13, the net loss ratio, has net write-off dollars and numerators and spending on the cards in the denominator as well, so on a different basis. That's the same basis, the billings basis. The global commercial services net loss ratio is calculated as well on the right hand side of Slide 13.

Turning to Slide 14, we turn to credit performance in the credit card portfolios. You can see off to right, on the left hand side decreased sequentially by 10 basis points from 1.7% to 1.6% while delinquency rates as measured by 30 days past due declined sequentially from 1.2% down to 1%.

Slide 15 and 16 put our credit statistics in the context of some of the other major card issuers. As you can see on both of these are write-off rates and delinquency rates remain best in class against these other large card issuing competitors.

Slide 17 gives you yet another measure of asset quality. In this case this data are complied from securitization data. American Express sponsors two different securitization processes, one for our charge card product, one, for our credit card loans. You will see on this page that as a proportion of total assets outstanding and a proportion of our assets with FICO scores less than 616, the so-called subprime component is the lowest. While in the right hand side you will see that in proportion of assets where the FICO score exceeds 720, the so called super prime segment is among the highest of all the issuers.

Turning to page 19, I'll review the balance sheet management including capital management and something on liquidity for our company.

Slide 19 reminds you that we remain committed to a strong balance sheet. We generate a large amount of capital in excess of our needs in order to maintain capital strength. We use that capital that we generate both fund organic business growth as well as make acquisitions from time to time, and any excess amount, we distribute to shareholders in the form of dividends and for our share repurchase activity. The pay out ratio and/or retention strategy have allowed us to have a ROE target of 25, in excess of 25% over time.

Slide 20 shows our reported capital ratios on a sequential basis. You'll see that the common equity tier one ratio risk based capital ratio declined 20 basis points from the first quarter to the second from 13.6% to 13.4%. One of the key drivers of that is a seasonal increase in assets, charge card receivables and loans outstanding. To disclose that these ratios, I should say, are calculated on a so-called Basel III hybrid basis. The numerator is essentially a Basel III definition of capital including transition items. The denominator is a Basel I calculation of risk-weighted assets. To disclose that on a Basel III standardized basis the common equity tier one risk based capital ratio would decline by roughly 75 basis points compared to these reported ratios for the second quarter.

Turning to Slide 21, we begin our discussion of our funding and liquidity management activities. We remain committed to diversified set of funding sources and are attempting to maintain skill and relevance in each of our three long-term funding programs, unsecured term debt, asset back securitization and consumer deposits. Our liquidity objective is to maintain access to a diverse set of sources both on and off balance sheet and maintain liquidity sources and announced to meet our business requirements, and expected future financial obligations for at least 12 month period in which we did not have access to our regular sources of funding.

Slide 22, just describes some of our primary funding and liquidity sources. We are an issuer of retail deposits. As I mentioned we have two separate asset-backed securitization programs, one for charge card, one for credit card. We are an issuer, a frequent issuer of unsecured term debt. We also finance our business activities through term bank facilities, and to a lesser extent, commercial paper are continued sources of funding in for difficult environments in the capital include a significant amount of cash and readily marketable securities. Our two U.S. banks have access and are eligible to borrow at the Fed's discount window. We also maintain committed bank facilities, and both the charge cards and the lending trust are used as collateral for some secured financing facilities. Those facilities are ones that we use from time to time principally to finance seasonal changes, seasonal balanced changes in our business as well as they are available to us as a continued source of liquidity, should other sources be unavailable or uneconomic.

Slide 23, gives you a history of our issuance volume in the capital markets both for last year and for this year. To-date we have done two unsecured deals and two ABS deals totaling 4.7 billion and 2.3 billion respectively.

Slide 24 reminds you of our range of potential issuance both on an ABS and unsecured basis with the range for card ABS between $3 billion and $9 billion for calendar year 2014, and an unsecured funding range, issuance range of between $6 billion and $12 billion.

Slide 25 shows the historic growth and evolution of our retail deposit program. We ended the second quarter with a total of $41.3 billion of retail deposits, U.S. retail deposits. By far the largest source of those is our direct deposit program branded under personal savings for the American Express. We also have distribution through two other channels maintained by various third-parties that allow us to issue certificate to deposit and money market sweep accounts.

Slide 26 gives you a sequential view looking back over the last four years of our outstanding funding composition. And proportion of that is taken up by each one of our major funding programs. But those of you who have covered us for some time you will know that this picture is very different than it would have been before the financial crisis. We now feel that the mix that we have today between deposits, ABS and unsecured term is relatively stable on it. We would not anticipate significant changes in this mix going forward.

With that I'll end my prepared remarks and I'll be prepared to take questions. I'm joined in the Q&A session by Ken Paukowits of our Investor Relations Group at American Express.

Question-and-Answer Session

Operator

(Operator Instructions) We will first go to the line of Ryan Butkus with Citigroup. Please go ahead.

Ryan Butkus – Citigroup

Good afternoon. Thank you again for hosting the call. Just a question on the unsecured debt issuance estimated range for 2014; it is $6 billion to $12 billion. I was curious to see how much has been completed this year of that estimated range?

Dave Yowan

So Ryan, that's on slide 24.

Ryan Butkus – Citigroup

Yes.

Dave Yowan

Yes, it is the range. And then it's the slide before that which is slide 23, we'd completed 4.7 billion of unsecured debt through the end of the second quarter.

Ryan Butkus – Citigroup

Okay. And that includes all global issuance.

Dave Yowan

It does. Yes.

Ryan Butkus – Citigroup

Okay. And another question I have was, do you provide an estimated supplementary leverage ratio?

Dave Yowan

We are checking. I would say that what it -- whether it'd be good to say is that we have calculated and we do not anticipate that it would do well in excess of the minimum requirements on that.

Ryan Butkus – Citigroup

Yes.

Dave Yowan

As a matter of fact I am just reminding, we did disclosed that in our supplement. And our estimated supplementary leverage ratio is 9.4%.

Ryan Butkus – Citigroup

Okay. Thank you very much.

Dave Yowan

Thank you. Thanks for your question.

Operator

We will next go to the line of Robert Smalley with UBS. Go ahead please.

Robert Smalley – UBS

Hi. Thanks for doing the call. A couple quick questions on credit quality; first, in terms of the experience between 30 day past dues and write-downs, are you still seeing the same kind of rates going from 30 days past dues to write-downs or is it -- are you hearing more instead of going to write-downs? What has the experience been there in terms of how -- what the treatment is versus maybe in prior periods?

Ken Paukowits

Yes. So this is Ken Paukowits. There really hasn't been that dramatic a shift between -- you are getting at kind of the migration rates from the early delinquency buckets to the write-off rate bucket. If you look at the trend in those metrics year-over-year, you can see that both of the metrics are down a little bit from where they were in the prior yea, and I think at consistent levels. So we continue to see, albeit at a slower pace we are paid gradual improvements in delinquency rates. And those gradual improvements have translated to slightly better write-off rates as well. So I wouldn't say there has been any noticeable change in those migration rights.

Robert Smalley – UBS

And in terms of overall card growth, I know that leading into the crisis there had been growth in California and Florida cards. Now that we have come out of the crisis are you seeing similar kind of growth geographically? How has that changed at all?

Ken Paukowits

Yes. I think going into the crisis, you are right. One of the things that we pointed to that impacted our write-off rates going in there is some of the geographic mix and the fact that Amex does have a higher presence on the coast than in other market that we are impacted more by some of the real estate pricing impact. That had an impact on our credit performance. Obviously since that time we've enhanced our risk models quite a bit to take into account geography as one of those factors. And I would say, overall, the growth in cards that you are seeing, Dave referenced the 5% which is the global growth in cards. I don't think there is any noticeable pattern there from a geographic standpoint.

One thing actually that would be probably helpful in those geographies is that those are now the geographies where real estate prices have actually recovered to a greater extent which is anything gives people more equity that they can use to tap into some of their credit fees. So I think we have enhanced our models quite a bit to incorporate that. I wouldn't say there is any noticeable shift. It's been pretty even geographically in terms of where that card growth is coming from.

Robert Smalley – UBS

That's very helpful. Thanks very much.

Operator

(Operator Instructions) We'll go to the line of James Strecker with Wells Fargo. Your line is open.

James Strecker - Wells Fargo

Good afternoon, gentlemen. Thanks for hosting the call. Just a couple of quick questions; first, in terms of deposits there is a lot of concern among analysts and the media, etcetera these days about the performance or the stickiness of deposits in a rising rate environment. If I look at your breakdown, obviously there is a lot of direct to consumer deposits and Amex has huge cachet. But just thinking about like the third-party sweep programs and the third-party CDs, do we expect this to continue to decline over time? Have you thought at all about how your model outflows and deposit beta and just some general questions around that -- or general comments around that?

Dave Yowan

Yes. Thanks for your question. And indeed, you're right. When you think about the direct program personal savings from American Express, that's certainly one where we have direct relationship with customers, and we obviously have the ability to continue to price competitively to retain those balances. We started that program in 2009. And so, we've not been through a rate cycle with that program, but certainly the products that we offer have been in the marketplace for some period of time. You can imagine, we spend a lot of time studying the pricing patterns in that marketplace and spend a lot of time understanding the competitive marketplace that we're in today.

So it's certainly something that we're very focused on, and we feel comfortable obviously that we've got the levers in place, the knowledge and the relationship with the customers as well as the ability to price competitively there to continue to keep that persistency.

In the third-party arrangements, there is a little bit difference on the CD rates for example, we also control that rate that there. And so, like as with any financial products, you have to price competitively in order to continue to attract people to those products. The sweep account products are a little different. We don't have that direct pricing capacity, but we do have to some of the contractual arrangements we have with distributors, we have some, for lack for better words, some balanced protection there that we have and that gives us greater confidence that those balances will continue to persist to the different rate cycles.

James Strecker - Wells Fargo

Okay, great. Thanks for that, Dave. Maybe on a related note, since the growth in deposits has been so strong over the last few years and we have obviously got the securitization market back open; what about the willingness or the appetite to continue issuing debt out of the bank entities? There has only been a couple of examples over the last few years. Is that just circumstances and unrelated or is there a specific desire to kind of decrease issuance out of the bank entities?

Dave Yowan

It is a combination of factors. I'd say that the single biggest factor in the reduced amount of issuance that you've seen, debt issuance that you've seen out of the banks over the last several years is as we were growing the deposit base rapidly, the deposit base is exclusively in the two banks, in fact personal savings, the direct piece is in the federal savings banks. We were using that growth in liabilities largely to replace maturing liabilities. And in some cases, obviously those included unsecured debt.

We're as we said continue to be committed to having scale and relevance in all of our debt programs as I think you know, Credco and to a lesser extent the parent company have historically been the largest issuers of unsecured debt and for a variety of reasons I think you could expect that would continue to be the case going forward.

James Strecker - Wells Fargo

Okay. And then maybe one last one because I think it is going to be a quick no. But any other comments besides what Jeff said during the earnings call about the ongoing anti-steering case?

Dave Yowan

No additional comments.

James Strecker - Wells Fargo

Okay. I'll figure that out. Thanks a lot, guys

Dave Yowan

Any time.

Operator

And there are no further questions in queue at this time.

Dave Yowan

Great. Again, thank you all for participating in today's call. We hope you found it helpful. And of course, we remain available for any questions that you have as follow-up. Thank you, again.

Operator

That will conclude your conference call for today. Thank you for your participation and for using AT&T's executive teleconference service. You may now disconnect.

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