American Express (AXP) Q4 2017 Results - Earnings Call Transcript

About: American Express Company (AXP)
by: SA Transcripts

American Express Company (NYSE:AXP) Q4 2017 Results Earnings Conference Call January 18, 2018 5:00 PM ET


Toby Willard - VP, IR

Jeff Campbell - EVP and CFO


Don Fandetti - Wells Fargo

Ken Bruce - Bank of America/Merrill Lynch

Betsy Graseck - Morgan Stanley

Craig Maurer - Autonomous Research

Bill Carcache - Nomura

Sanjay Sakhrani - KBW

Chris Donat - Sandler O’Neill

Moshe Orenbuch - Credit Suisse

Ryan Nash - Goldman Sachs

Ashish Sabadra - Deutsche Bank

Mark DeVries - Barclays


Ladies and gentlemen, thank you for standing by and welcome to the American Express Fourth Quarter 2017 Earnings Call. At this time, all lines are in a listen-only mode. And later, we will conduct a question-and-answer session. [Operator Instructions] And as a reminder, today’s call is being recorded.

I would now like to turn the conference over to our host, Vice President of Investor Relations Mr. Toby Willard. Please go ahead, sir.

Toby Willard

Thanks, Kerry. 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 presentation slides and in the Company’s reports 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 fourth quarter 2017 earnings release and presentation slides as well as the earnings materials for prior periods that may be discussed all of which are posted on our website at We encourage you to review that information in conjunction with today’s discussion.

Today’s discussion will begin with Jeff Campbell, Executive Vice President and Chief Financial Officer, who will review some key points related to the quarter’s results through the series of presentation slides. Once Jeff completes his remarks, we will move to a Q&A session.

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

Jeff Campbell

Well, thanks, Toby and good afternoon, everyone. I’m pleased to be here to recap the strong finish we had to our two-year game plan and to lay out our expectations for 2018. Let me start with 2017.

As you can see in this afternoon’s earnings release, like all U.S. companies, our fourth quarter and full year 2017 results reflect some onetime impacts stemming from the Tax Cuts and Jobs Act. Adjusted for the impact of the Tax Act, which I will come back to in a minute, we earned $1.58 in the fourth quarter and $5.87 for the full year, in line with the increased guidance we gave at the end of Q3 when we said we expected to earn between $5.80 and $5.90 for the year. Just as important as these EPS outcomes was the strong momentum we continued to see in the business, with success executing against each of the three priorities we set out in our game plan at the beginning of 2016, accelerating revenue growth; optimizing our investments; and resetting our cost base. In fact, billings and revenue growth reached multiyear highs in Q4 2017. And we are particularly pleased with the diversity of the drivers of our growth and the linkage between the many changes and investments we have made over the last couple of years and where we now see growth. So, we end 2017 with momentum and close out the two-year game plan period having surpassed the financial objectives that we laid out in early 2016.

We now start a new chapter in 2018, and of course, starting in February, we will have a new CEO. We are all fortunate to have worked with an incredible leader in Ken Chenault, who has done a remarkable job over his 37 years with the Company. As we now turn the page to Steve Squeri, I would echo what Ken said in his comments in our earnings release, the Company is in very strong hands going forward with our new CEO.

As we move ahead in 2018, we will be focused on the four key priorities that Steve laid out on last quarter’s call, strengthening our leadership in the premium consumer segment; extending our leadership in commercial payments and in particular with small and medium-sized enterprises; playing an even bigger role in the digital lives of our customers; and strengthening our global integrated network to provide unique value.

Now, of course, beyond these core focus areas of business growth, 2018 will also benefit from a lower corporate tax rate, which I will come back to in discussing our 2018 guidance as we wrap up the call.

With that, let me turn to the results, starting on slide two, where you see revenues in Q4 of $8.8 billion, growing at 9% adjusted for FX, reflecting accelerated growth in billings and continued strong growth in loans and fees. Net income and EPS for the quarter were both impacted by the passage of the Tax Act. And as I mentioned a moment ago, to provide a bit more detail, we recognized the Tax Act impact in the quarter of $2.6 billion, which is primarily composed of two pieces. First, given the global nature of our business, we recognized approximately $2 billion of taxes on deemed repatriations of certain overseas earnings; and second, we recognized a roughly $600 million charge related to the remeasurement of our U.S. net deferred tax assets to the lower rate of 21%. This $2.6 billion represents our current estimate, which is slightly higher than the estimate we previously disclosed.

We will continue to evaluate the implications of the Tax Act as guidance and interpretations evolve. The $2.6 billion and tax-related charges caused us to report a quarterly loss on a GAAP basis. Excluding this amount, adjusted net income for the quarter was $1.4 billion and earnings per share for Q4 was a $1.58, in line with our expectations.

Turning briefly to the full year results. Revenue of $33.5 billion for the year was up 4%. Adjusted revenue growth accelerated steadily through the year, starting at 7% in Q1 and ending at 9% in Q4. Our reported growth rate for the full year of course includes in the comparison two quarters of revenue related to the Costco relationship in the prior year. As you can see on the right side of slide two, full year earnings per share adjusted for the tax charges is $5.87.

Moving now to our metrics, starting with billed business performance trends, which you see several views of, on slides three through five. Before we get into the details, I would quickly point out that reported billings growth was 11% in the quarter, our first double-digit billings growth quarter in some time. This is partly due to the dollar weakening year-over-year versus the major currencies we operate in overseas but also reflects strong underlying growth. What you see on slide three is billings accelerated to 9% in the fourth quarter on an FX adjusted basis.

Looking at the segment view on slide four, it is clear that we have strong momentum across our segments. And in the quarter, we saw acceleration in each segment from the Q3 growth rate which further illustrates the diversity of the drivers of our growth.

Digging into this a bit deeper, on slide five, you see a view of billings growth that brings together several ways we have talked about our broad ranging growth opportunities. Our global commercial and global consumer segments were roughly the same size, representing 40% and 43% of billings respectively. Global network services makes up the remaining 17% of billings.

Represented by the first three columns of the chart, our global commercial segment includes our small and midsized enterprise customers or SMEs as well as our large and global corporate customers. As a reminder, SMEs represent one of our highest growth areas, and you see that again this quarter with U.S. SME billings growing at 9% and international SME billings accelerating to 20% on an FX adjusted basis. The large and global customer segment grew 6% on an FX adjusted basis this quarter, up a bit sequentially from last quarter. And I would note that we also saw some sequential improvement in the overall T&E billings growth rate this quarter.

Moving to U.S. consumer which makes up 31% of the Company’s billings. We see 8% growth in the quarter and we are pleased by the acceleration and growth from Q3. International proprietary consumer continues to perform particularly strong with growth of 14% on an FX adjusted basis. Once again, we see robust proprietary growth in markets such as the UK, up 19%; Japan and Australia, up 16% each; and Mexico, up 13% on FX adjusted basis. And finally, our network business is up 6% on an FX adjusted basis.

As we said before, evolving regulations in Europe and Australia are driving declining network volumes in these geographies. And as a result, we expect our proprietary international billings growth to continue to outpace our network partner billings, which you see again in this quarter’s results. Overall, we are pleased with the billings growth we see across our business segments and geographies.

Turning next to loan performance on slide six. Our growth in total loans was 14% and adjusted for FX, total loans grew at 13% in Q4, as we continue to penetrate the lending opportunity with our existing customers and add new customers. On the right, you can see that net interest yield began to stabilize sequentially in the fourth quarter at 10.5% as we have been expecting for some time. Our results in the quarter however are still benefiting from the growth in yield over the prior year, which is a result of the ongoing mix shift of revolving loans towards higher rate buckets and pricing actions we have taken.

Turning next to credit metrics on slide seven where we see the write-off rates for our various portfolios. Starting with the lending portfolio on the left, the loss rate for the quarter was 1.8%, in line with the third quarter and up modestly from the prior year. As we’ve said in the past, we do expect lending write-off rates to continue to increase in large part due to growth in non-cobrand lending products, which have higher loss rates as well as seasoning of the portfolio. On the right side, you can see loss rates in our charge portfolio, as well as the global corporate payments loss ratio. With both, we see relatively stable performance, which we believe reflects the quality of our customer base and a stable economic environment.

Moving to slide eight. Provision expense for the quarter was $833 million, up 33%. The growth in provision this quarter is in line with what we saw year-to-date through the third quarter and our comment on last quarter’s earnings call. We continue to build reserves to account for loan growth seasoning and the mix shift over time away from cobrand products. As we’ve said before, we see attractive opportunities to continue to grow lending across multiple fronts. Our absolute growth in net interest income well exceeds the growth in provision, and net interest income remains just 20% of our total revenues.

Turning now to our revenue performance on slide nine. FX adjusted revenue accelerated to 9%. As you look at the adjusted revenue growth trend over the last several quarters, you can very clearly see our success in capturing the growth opportunities we’ve highlighted over the last couple of years. While not on this slide, I would also point out that if you look at our segment results, the highest revenue growth is in our U.S. consumer segment at 13% for the quarter. This demonstrates our ability to grow even in the competitive U.S. consumer segment.

Looking to the components of revenue on slide 10. We have healthy growth across all the lines. Discount revenue was up 8%, driven by the strong growth in billed business. Net card fees growth was 8%, driven by strong performance in the Platinum and Delta portfolios and growth in key international markets. Other fees and commissions grew 17% and 12% on an FX adjusted basis. The weaker dollar had a larger impact on this line. And other revenues declined 13% in the quarter though primarily driven by prior year revenue from a small business that we sold in Q4 last year. Net interest income was up 23%, driven by the higher net interest yield and loan growth that I spoke about a few minutes ago.

So, turning now to slide 11 we’ll look discount rate. The discount rate in the second half of 2017 was 2.41%, down 5 basis points from the prior year. So, ratio of discount revenue to billed business was 1.75%, down 4 basis points from last year. These changes within the range of our expectations, which we shared with you at our last Investor Day and which are shown on the right side of slide 11.

As we turn to 2018, you may recall that on our Investor Day in March of last year, we expected a decline in the discount rate in 2018 of 2 to 3 basis points. As we look ahead now, we expect a larger year-over-year decline in 2018. This stems from the stronger growth we are seeing in places around the world with lower discount rates and also from decisions we have made about how best to grow our overall economics with some of our larger partners. Both of these factors are actually part of what will continue to drive the Company’s overall revenue growth.

Turning now to expenses on slide 12. I’ll review marketing and promotion, rewards and card member services expenses as part of our card member engagement discussion on the next page. But first, let me cover operating expenses. Total operating expenses were down 2% from the prior year, as we continue to see the benefit of our cost reduction efforts.

Let me pause here and make some final comments on our $1 billion cost reduction exercise. When we started this program in early 2016, we laid out specific plans to drive cost savings. And I am pleased to report that we have successfully executed on these plans. We have driven savings through headcount reductions, vendor negotiations, process changes, expense policy changes and many other initiatives. Throughout the year, as our business performance started to outpace our own plans, we took the opportunity to use some of these savings to selectively reinvest in the business, including in particular some incremental spending on sales force and technology which are part of our operating expenses. I would also point that in fourth quarter, we made an incremental contribution to our employee profit-sharing program of a little bit more than a $100 million related in part to our overall tax position in light of the new tax law and also the strong performance of the Company.

In general, we feel good about our operating expense control efforts and we believe we are well-positioned to manage operating expense growth going forward.

Moving to slide 13 and Card Member engagement spending. In the fourth quarter, total expense was $3.3 billion, flat versus the prior year. However, it’s clear that we have made tradeoffs between the components of the spending.

M&P was down 28% versus the prior year, partially due to significant investments we made in the second half of 2016 as well as a continued focus on creating more marketing efficiencies. Despite significantly lower spending, we added 2.5 million new proprietary cards globally in the fourth quarter, 1,000 more new cards than a year ago.

Rewards expense growth in the quarter was 12%, just slightly above the 11% growth in proprietary billings as we lapped changes to the U.S. Platinum value propositions at the end of 2016. We continue to be pleased with our Platinum product performance in the U.S. and around the globe. In the U.S., we finished 2017 with our highest ever number of Platinum members and record levels of spend.

Cost of Card Member services increased 39%, reflecting higher engagement levels across our premium travel services including airport lounge access and cobrand benefits such as first bag free on Delta as well as usage of the new Uber benefit on Platinum. This remains an area where we offer differentiated benefits and where we plan to continue to invest.

Let me turn now to capital on slide 14. Over the last few years, we’ve steadily returned capital to shareholders through our dividend and share buyback programs which continued through the fourth quarter as we returned $1.6 billion of capital. For the year, while we returned a 190% of the capital we generated, adjusted for the Tax Act impact, our payout ratio would have been about 100%.

Due to the Tax Act impact, of course, we ended the quarter with a net loss. The net loss combined with growth in the balance sheet and continued capital returns in Q4, resulted in a decline in our common equity Tier 1 ratio of 9.0%. For perspective, adjusted for the Tax Act impact, our common equity Tier 1 ratio would have been approximately 200 basis points higher.

So, our capital ratios are now below the level we had projected in the 2017 CCAR process. And as a result, we do not plan to use our remaining 2017 CCAR buyback authorization for the first half 2018. So, there will be no change to our dividends. The suspension of share buybacks will substantially rebuild our capital levels and ratios and better position us for the 2018 CCAR process.

Over the next few months, as we develop our 2018 CCAR submission, our goal will be to get back on our trajectory towards capital ratios consistent with our plans prior to tax reform while supporting balance sheet growth in the business. Of course, most importantly, for the long-term, the new tax law does significantly lower our tax rate going forward, which increases the capital generating power of the business. Given the lower tax rate, we expect that over time, we will more than make up for any reductions in the buyback in 2018 and generate more earnings and return more capital than we would have without tax reform.

And so, in summary, 2017 was a very strong year for the Company. We have come a long ways since early 2016, when we set the objective of delivering at least $5.60 of EPS for 2017. We exceeded that EPS goal on an adjusted basis, invested back into the business, and we believe we are set up well to grow as we go forward. Our strong 2017 performance sets the foundation for our 2018 expectations as we introduce a 2018 EPS guidance range of $6.90 to $7.30. The outlook is based on the current economic and regulatory climate.

Let me provide a little perspective on the drivers behind our expectations, which are summarized in slide 15. Starting with revenue growth. We expect continued strong momentum in our billings and loans metrics as we capture the diverse growth opportunities we see across our customer segment. As I mentioned earlier, we do expect the discount rates to decline, but to also see continued momentum in other areas like card fee growth. As we look at all the moving pieces, we expect to deliver revenue growth in the 7% to 8%.

Another important driver to consider for 2018 is our expanded agreements with two important cobrand partners Hilton and Marriott. We are excited about these partnerships and the platform for growth they give us over the next several years. Looking specifically at 2018, the purchase of the existing Citi/Hilton loan portfolio in the first quarter is expected to drive a little less than 100 basis points of revenue growth for the year. Incremental revenue from other new products we will be introducing, however, will phase in more gradually in future years.

As you would expect, in today’s competitive cobrand environment, the margins are lower on these partnerships, starting in January. And as a result, we expect to the overall impact of these renewals to reduce 2018 pretax earnings by more than $200 million versus 2017. To be very clear, these agreements generate attractive economics under the new terms, even though the margins are lower than before. And over the long run, we are excited about the opportunity to grow the portfolios and drive ongoing benefits for our customers, our partners and our shareholders.

Next, let me talk a little about lending, building on the comments I made earlier. We expect the dynamic in 2018 to remain pretty consistent with 2017. Our loan growth is expected to exceed the industry as we continue to focus on increasing our share of lending, particularly with existing customers. Net interest yield has started to stabilize but is expected to still contribute to growth versus prior year. Lending write-off rates and delinquencies are expected to continue to increase, but we believe we will remain below the industry average. These dynamics together should again drive strong growth in net interest income as well as growth in provision for loss similar to the growth rate in 2017. And as a result, we again expect significant growth in the economics of the loan portfolio.

Finally, as we thought about our overall tax position and the implications of the new Tax Act, we certainly broadly believe the new tax law is positive for the U.S. economy and in turn for American Express. We have reached a series of conclusions and decisions around this. First, while we are still evaluating recently released interpretations of the new tax law, we expect an effective tax rate for 2018 of approximately 22% before discrete items. Second, as I mentioned, we decided to suspend our share repurchase program for the first two quarters in 2018, but we will continue dividend payments. Third, as we thought about our overall tax position and how to manage the impact from a Tax Act, we focused on three key constituents.

First, employees. So, considering our tax situation as well as strong Company performance as I previously stated, we chose to support the long-term wellbeing of our employees by making it incremental contribution to our employee profit sharing programs, which in most cases go directly to employees’ retirement accounts. Second, customers. So, consistent with our long history of balancing short, medium and long-term objectives, we now plan to invest up to $200 million more in customer-facing growth initiatives in 2018 than we had originally planned prior to the passage of tax. And finally, shareholders. As the remaining tax benefits, we’ll build capital and support earnings growth in 2018. All of these lead us to an earnings per share range of $6.90 to $7.30. Of course, there remains a lot of work to do in 2018 to deliver in this range, but our focus is to deliver against the plans we have set.

Stepping back, before we move on to your questions, we are starting 2018 from a position of strength with the tremendous set of customers, strong momentum across our integrated payments model and opportunities to capture growth in many different parts of our business. At our Investor Day in early March, we look forward to providing more insight into our growth opportunities.

And with that, let me turn it back over to Toby.

Toby Willard

Thanks, Jeff. Before we open up the lines for Q&A, I’ll ask those in the queue to please limit yourself to one question. Thanks for your cooperation. And with that, the operator will now open the line for questions. Kerry?

Question-and-Answer Session


Thank you. [Operator Instructions] And first, we go to line of Don Fandetti from Wells Fargo. Please go ahead, sir.

Don Fandetti

Hi, Jeff. On the discount rate, as you look sort of further out, has the kind of base case of down 2 or 3 bps changed to where it’s structurally higher or is 2018 just kind of based on some moves you’ve made?

Jeff Campbell

Well, good question, Don. I guess, I’d make a couple of comments. First, I think it’s important to remember, the end objective here is to drive revenue growth. And we feel really good about the acceleration in revenue growth that we have achieved over the last two years and the fourth quarter results of 9%, the highest we’ve shown in many years. And we did that with some significant declines in the discount rate above that historical 2% to 3% range.

Now, why did that happen? Well, because we are very consciously making some decisions that we think drive more revenue growth but also have the impact of bringing that discount rate down. So, the decisions we’re making around expanding coverage in the U.S. through the OptBlue program and some similar programs around the globe, some decisions we have made about how to best gain overall economics with some of our larger partners that had a positive impact on revenue and a more challenging impact on the discount rate, and of course regulation in certain places around the globe such as Australia, are doing some things to drive the discount rates down but also creating some opportunities for the kind of growth in our proprietary business that I talked about in my prepared remarks, in Australia and the UK for example which are both in the high teens.

So, some of those things will clearly pay over time. The OptBlue program in the U.S. will begin to wind down as we get into 2019, and that pressure we’ll receive. The impact of regulation in Australia and Europe which we’ve been going through for -- in the case of Europe, a couple of years now; in the case of Australia, really just began again in July last year, those will fade a little bit over time. But, our objective is going to remain what can we do to drive the most revenue growth and that will have varied implications over time I think to the discount rates.

So, we have line of sight into what we think is going to happen in 2018, both on revenue and we feel about the guidance of 7% to 8%, and on discount rate. Beyond that we will have to see what decisions make sense to drive the best overall economics for the Company.

So, thank you for the question.


Thank you. And now to line of Ken Bruce from Bank of America/Merrill Lynch. Please go ahead.

Ken Bruce

Hi. Thank you and good evening. My question relates to the guidance. I am hoping you might be willing to unpack the provision growth commentary a little bit, just in terms of what you are expecting in terms of the absolute rise in losses relative to the reserve building. It’s a pretty substantial growth that you are kind of pointing to on the provisions. So, I just want to make sure I understand that.

Jeff Campbell

Yes. I guess, I’ll make a few comments. So, we’ve now been at growing our lending a little bit faster than the industry for quite a number of years. And of course, we have a platform for doing that because we have historically so underpenetrated our own customers’ borrowing behaviors. And so, I think we now have a multiyear track record of achieving above industry growth rates while still getting really good economics. Now, we’ve pointed out for a while that particularly with the shift that began in the third quarter of 2016 to less lending on cobrand products, more lending on proprietary products, those products come with little higher write-off rates and pricing that also is reflective of that risk as well, thereby producing really good economics. Given that’s when we started, we just as you got into the latter part of 2017 are beginning to hit sort of the key seasoning time period in a lot of the new lending that we have taken on and that’s why we have said for almost two years now, we do expect this steady trend upwards in write-off rates and provision. It’s been part of the plan all along. As we look at the great diversity in our lending portfolio, we draw a lot of comfort from the fact that other parts of our portfolio, the cobrand portfolio, some of the lending we do on our charge products or our lending on charge products, you see very little change in the write-off rates. So, what you see when you’re looking at the average is that mix shift to more proprietary lending and the seasoning effect of the fact that we began an earnest to make that mix shift as you got into 2016.

So all of that will lead you in 2018 to continued really good strong growth in net interest income. Now, we’ll come with the same kind of growth in provisions that you saw in 2018 and the combination of those two should continue to produce really good economics for us. So, I guess, I’d like to leave it at that Ken as opposed to also trying to provide a write-off metric. But, we feel good about where we are and we feel good about the continued growth opportunities ahead of us in this area for many years.


And now to line of Betsy Graseck from Morgan Stanley. Please go ahead.

Betsy Graseck

Jeff, I wonder if we could talk a little bit about some of the customer-facing initiatives that you’re planning on using some of the tax windfall for the 200 million that you referenced in the press release and talked a little bit about. Be interested in understanding corporate customer-facing initiatives versus consumer and perhaps, you could give us a sense as to whether this is pulling forward what you already have been planning or is there something plus something new here that you’re considering with this 200 million?

Jeff Campbell

Yes. All good questions, Betsy. Let me make a few comments. First, one of the luxuries, I suppose, of the diversity of the growth opportunities we have is that our constraint as a company on the levels of customer-facing growth investing we do each year is really not that we run out of opportunities with very attractive long-term economics, but more that we do manage the Company for a mixture of short, medium and long-term objectives. We believe, it’s really important as a company and for our shareholders to show steady earnings growth every year. And so, when you look at the opportunities we have to invest for growth, generally in any given year, there are a variety of unfunded initiatives with good economics that we choose not to pursue, because doing so in the short run would not allow us to meet our financial objectives.

That’s why, if you think about the history of our Company over many years, that’s why when we have from time-to-time have some kind of sudden financial windfall, upside, better than expected performance. We often put a little bit of that into our shareholders’ pocket and we put a little bit to work funding some of these initiatives that we can’t necessarily get to in the normal course of business. So that’s really the context in which you should think about our decision once the Tax Act passed, to go ahead and increase in 2018 our customer facing growth investing by up to $200 million.

And if you think about where those next best previously unfunded opportunities are, they are probably where you would expect it. So, if you look at our consumer business, I did point out in my remarks that the highest revenue growth segment in 2017 was the U.S. consumer segment. And so, even in the face of how competitive the U.S. consumer segment is, there are some really good results we’re generating and some good opportunities we still have. When you look at the kind of growth we have with small and medium-sized enterprises, particularly outside the U.S. where we had 20% growth in billings in Q4 and you’ve been in the teens for a number of years now, there are tremendous opportunities to continue to accelerate our growth. So, those are the kinds of things that you will see us with the last incremental dollar of investment likely pursue. But I think the broader and important point here is, we always tend to have a pool of rally good opportunities left unfunded. And what we felt was the right balance here was the majority of the Tax Act benefits fall through to the bottom line in 2018, but to take a portion and put it for work for the longer term.


All right, thank you. And now to the line of Craig Maurer from Autonomous Research. Please go ahead.

Craig Maurer

Yes. Hi, Jeff. Thank you. So, I just want to confirm one that you are guiding toward 36% year-on-year growth in the provision for 2018. And secondly, Platinum, the changes you’ve made to Platinum obviously spurred some very aggressive growth and that’s good to see. Are you seeing any tail-offs in that momentum going into 2018, or should we expect another very strong year for Platinum growth? And have you seen any reactions from competitors to the more experiential benefits you put on that card?

Jeff Campbell

Taking notes, Craig, to make sure I get all your questions.

Craig Maurer

Sorry. I’ve taken advantage.

Jeff Campbell

On provision, look, I’m not trying to be quite as precise maybe as you were in the way you’ve phrased the question. But, our point is we expect continued really strong growth in loans and continued -- you’ll still have some benefits from net interest yields, so that’s going to drive really good net interest income growth. And yes that will come with provision growth on a percentage basis that is somewhere in the vicinity of what you saw for calendar 2017. You look through all that map and it will produce really nice overall economics for us.

Platinum, we are pretty pleased by. So, if you think about the Q4 results, with the highest revenue growth we’ve seen in quite some time, well, fourth quarter was actually when we already began to lap the Platinum changes. That’s actually why if you do the math of the rewards to billings ratio, while for the last four quarters you’ve seen rewards going faster than billings, that’s because of the Platinum changes. This quarter, it came back down to a much more normalized level where rewards were more consistent with billings. So, the fact that you continue to see strong performance in Platinum, the fact that you did not see any drop off in revenue growth, we feel really good about. And to end 2017 despite all the competition that you absolutely do see in the U.S. with a record level of Platinum members in the U.S., with record levels of spending and with our fee increase fully hitting customers now for some time, I think it is a tremendously strong confirmation of the differentiated value proposition we offer of the value of some of the experiential benefits and the fact that we have the courage because we believe in them to price for those benefits and that value proposition. And we think we as a result are going into 2018 with great moment around this product.


Thank you. And now to line of Bill Carcache from Nomura. Please go ahead.

Bill Carcache

Hi. Thanks for taking my question. Since the starting point for the stress test is the December 31st balance sheet date, some investors are asking whether your relatively low CET1 starting point of 9% could also hurt your ask in the next -- in the 2018 CCAR cycle. Could you speak to that?

Jeff Campbell

Yes. Good question, Bill. I think, the really important thing to think about here is we run the Company for the long-term. And in the long-term, the lower tax rate is going to produce much higher earnings, much higher capital generation and therefore much higher capital returns than otherwise. In the long run, we need to get back to whatever the, as fed regulatory environment involves, whatever the appropriate steady state capital ratio is at any given point in time. So, the only question given the $2.6 billion charge we took is how quickly or in what pattern you get back to that steady state capital level. And so, we could have continued to repurchase shares in the first half of 2018 and then what you would have seen is a lower result as we go through the CCAR 2018 process. Our decision, which we feel very confident in, was no, look, let’s just very quickly rebuild the capital that of course will be built into the CCAR 2018 process. So, this will we think produce in fact a much stronger CCAR 2018 result than if we chose to spread out a reduction in our share repurchases. And look, we’ll have to see how the fed’s thinking evolves because we’re not the only CCAR participant in this situation. We will have to see how the rating agency thinking evolves. Although we’ve begun those conversations as you would expect today and we are going fine.

And I just want to end with the emphasis to people that we have a strong track record of being aggressive about returns of capital. We are going to produce more capital in the next couple of years than we otherwise would have that’s going to drive bigger capital returns. We think the best way to get at that is to take a small pause and to do it at a time when if you think about our guidance, it’s producing year-over-year EPS growth somewhere depending on how you want to do the math in the 20% plus range. So, we feel good about all those tradeoffs.


Thank you. And now to line of Sanjay Sakhrani from KBW.

Sanjay Sakhrani

So, maybe focusing on the revenue side of maybe where the benefits might reside from tax reform. I guess, when we look at your guidance range, are you expecting any benefit as it relates to the macro, given the tax reform benefits to consumers and corporations? And I guess, when you talk to your customers, at least on the corporate side, is there an expectation that they’d invest some more towards expenses? And then, I guess, when we think about the return that you’re generating and the fact that your competitors also get this benefit, are you making any assumption that some of the upside gets competed away?

Jeff Campbell

Okay. I’m also taking notes…

Sanjay Sakhrani

I’m sorry.

Jeff Campbell

That’s okay. So, a couple of comments. I think the reality of the way we do our planning process Sanjay is, as you know, we don’t try to be macro economic forecasters. But there is also a little bit of lag. So, we sort of built our plan over the last few months based on a view of the economy probably as it existed prior to the passage of the tax bill. So, mechanically, the reality is, we have not built into our plan any expectation that there is a stronger economy in the U.S. or anywhere else in the world for that matter than what people thought prior to the passage of tax reform.

So to the extent that tax reform does help the economy and we certainly believe along the long run. What that means for 2018 is probably a little secure, that will clearly be a good thing for us. And look, we ended Q4, I will say, with a little bit more momentum on the revenue side than we probably had originally anticipated. So, I think all of that bodes pretty well. I also think, it is interesting to look at -- and one quarter doesn’t make a trend, but it is interesting, if you look at our large, global corporate customers, that’s a segment that for some time -- now, we’ve pointed out is not a growth segment. Most corporations like us are trying to control T&E spending because this is more T&E oriented. But actually, it grew 6% this quarter, which is the highest growth rate we’ve had in a while. And if you dig through the tables, you see -- in our earnings release, you’ll see that for the company T&E spending sequentially strengthened a little bit. And that as I said a quarter doesn’t make a trend, but it’s an interesting data point, if you think about a little bit more confidence in the economy and a little bit more of plan to spend.

So, it’s upside to extent the economy strengthens, because of the Tax Act, and we’ll have to see what happens. In terms of the competitive environment, I guess, look, I can speak for our view, Sanjay, which is we have looked at the implications of the Tax Act and we said we should do something for employers, which we did. We have to reset our baseline by choosing to invest up to $200 million more in customer-facing growth initiatives this year and we’ve given you clear EPS guidance for 2018. We have to now show you off that 2018 performance that as we get into 2019 and beyond, we can produce the same kind of steady EPS growth that the Company has historically been known for and that’s what we’re very focused on. And that means we are not at all looking to do anything other than use the lower tax rate to produce 2018 performance, a steady growth thereafter.

I talked a little bit actually in response to other questions earlier about the reality for us that we always have a pool of unfunded things that are good opportunities for us to invest in but we don’t. So having a little bit lower tax rate in all those models doesn’t actually cause us Sanjay to think differently or to invest more, because we’re still focused on short versus long-term. We’re focused on producing steady earnings growth.

So, look, we’ll have to see where the environment goes. I will tell you today, we feel really good about the value propositions we have in the marketplace on the consumer side, on the corporate side, in the U.S., outside the U.S. As I think for that reason about the rewards to billing ratio with some of the folks on the phone who look at as a little bit of an indicator of the competitive environment, I will tell you that my expectation sitting here today for 2018 is that ratio is actually pretty flat to 2017 because I feel good about our value propositions, they’re performing really well, and we’re trying to do the best we can for shareholders. So that’s what we’re focused on and that’s how we think about it, Sanjay. Thank you for the question.


Thank you. And now to line of Chris Donat from Sandler O’Neill. Please go ahead.

Chris Donat

Hi. Good afternoon, Jeff. Chris Donat here. One other question on the $200 million or upto $200 million of customer-facing spending. I’m just wondering what sort of timing you might expect for that, will you frontend load it or kind of have it evenly over the year? And are you factoring in what competitors may or may not do? Will that affect how much you spend if they’re aggressive on things like promotion and…

Jeff Campbell

So, good question. Couple of things to put this in perspective. So, our total marketing and promotional spending was over $3 billion last year. Our total spending on rewards was probably over $7 billion. And then, you’ve got bunch of money we spent on card member services. So, look, $200 million I’m choosing to call out, because as you think about the EPS guidance range we’ve given and certainly had an impact on that EPS guidance range because this was at the margins and decisions we made at the end. And we didn’t have to make it, and we could have given you a little higher EPS guidance range. On the other hand, in the context of all the customer-facing spending that we’re doing on an ongoing basis and plan to do in 2018, it’s a very small number and a very small increment. And that’s why we would anticipate that as this spreads throughout the year, it is based on our current understanding of the competitive environment and how our value propositions play. And I don’t see it as changing anything about our value propositions; I do want to come back to that, or changing anything about the level of incentives we need to put into the marketplace to attract any particular customer set. This is about there are incremental things we can do to garner more growth that we weren’t previously doing. And that’s really what you will see us targeted at.


Thank you. And now, to line of Moshe Orenbuch from Credit Suisse. Please go ahead.

Moshe Orenbuch

Hey, great, thanks. Jeff, with respect to the tax side of things, I mean, the actual DTA write-down was smaller I guess than we had thought. But in aggregate, obviously, still a pretty big number. It feels like that’s going to take bunch of years for that tax benefit to be recovered. So, kind of coming at the capital kind of question, a slightly different way, I mean, how should we think about what to expect post 2017 CCAR as you go into 2018, and I guess also recognizing that loan growth that you’ve put on in the last year probably has higher stressed losses as well? So, may be kind of walk through that.

Jeff Campbell

So, a couple of comments I think I’d make. So, when you think about our $2.6 billion charge, you’re correct, the smaller piece is the $600 million piece which is the revaluation of our net deferred tax asset. And as you think about that number going forward, for us, we’re a pretty simple monoline business financially. And so, our net deferred tax position doesn’t change that much from year-to-year, and it actually changes out pretty quickly, it’s mostly driven by things like provision timing and membership rewards. So, there’s not long, multiyear, complicated investments or business impacts on that. So, other than the revaluation, I wouldn’t expect it to have any different impact on our regulatory capital calculations going forward than others.

On the deemed repatriations, as everyone knows, one of the in some ways ironies there is you pay out that amount over eight years. And in fact, if you dig into the details, you’ll see that the actual payment of the cash is backend loaded. And yes, from a regulatory capital perspective, we have to book it all upfront and that’s why you have the big hit to regulatory capital upfront in those and actually no cash impact for a while.

So, I think that we will use the two-quarter stoppage of the share repurchase program to very quickly get our capital ratios back into a range that all of the rating agencies, the regulators and we are comfortable with. And I think we will very quickly get on to the positive side of the one-time charge that we in return for a much lower tax rate going forward.


Thank you. And now to line of Ryan Nash from Goldman Sachs. Please go ahead.

Ryan Nash

Hey. Good evening, Jeff. I just wanted to ask two quick questions. First, I wanted to bring to you some of the things that you talked about, Jeff. In terms of the EPS guidance, can you talk about what the two or three biggest swing factors would be that would get you from the top end of the range to the bottom end of the range, just given that the 7% does seem like the range that’s wider than you’ve historically given? And then, just on the renewals, the $200 million pretax impact, is that just a true-up from renewing the contracts and then that goes back down or is there another step-up beyond 2018? Thanks.

Jeff Campbell

Well, let me take those maybe in reverse order. So, on Marriott and Hilton, the way I would describe this is, as you commonly see in these larger cobrands where you have very long-term agreements, as they are renewed, there tends to be a step down in economics and we work over the course of the subsequent five, seven, eight years to really rebuild the economics. You’ve seen that pattern several times with Delta, you’ve seen it with some of the hotel partners before. And to be very clear, as I said in my remarks, you still have very attractive economics for us but not as attractive as they generally are in the very last year, what was the prior contract. There is no further step-up. So, over $200 million impact to PTI in 2018 is one of the hurdles that we have to overcome as we think about our EPS growth in 2018; it goes away in 2019. Just like our decision do a little bit of incremental investing, because of the Tax Act, it’s really a one-time resetting of the baseline, and I wouldn’t anticipate that same kind of increase in 2019 or beyond. That’s a little bit on Marriott and Hilton.

On the EPS guidance. In many ways, I think, I would go back a little bit to Sanjay’s question, which is, when you look at our performance in 2017, the plan we have articulated for you this evening is really one, which is just a continuation of the momentum that we have today with the lower tax rate put on it and the impact of Marriott and Hilton, and the decision to step-up investment a little bit. So, the plan doesn’t assume any particular greater strength in the economy. The plan does not necessarily assume a quicker take-up on some of the new and innovative things that we continue to do both in our proprietary product lines, as well as with cobrand partners like Delta or Marriott or Hilton.

So, those are the kinds of things that I think could cause you to do a little bit better. I think the main thing that I worry about in terms of anything that could put you more towards the lower end are really the standard external factors. So, if you see a blip in the economy or if you see some sudden regulatory change in some major market for us, which I particularly have any line of sight into today, but it’s those kinds of external factors that I would worry about, that would drive you more towards the lower end. I think other than that, as I said, the guidance we’ve given you is just a continuation of the performance. But, you should have confidence and based on what we’ve seen recently and if we get a little stronger economy and/or some of the new things we’re doing take off a little quicker, that will really help us to get to the upside.


And now to line of Ashish Sabadra from Deutsche Bank. Please go ahead.

Ashish Sabadra

Hi. This is Ashish Sabadra. Thanks, Jeff. And my question was about NIM, you talked about NIM stabilizing. I was just wondering, how do you think about the loan yields going forward with the rate hikes? And then, also, if you could comment on the deposit betas. Have you seen anything on the competitive environment there with the deposit rates?

Jeff Campbell

So, I think, as we think about net interest yield, we have had a pretty good run over the last five or six quarters as we have evolved a little bit, our mix of customers, as we have taken some thoughtful pricing actions where we could, and as interest rates have edged up a little bit while the portion of our funding stack that comes from our personal savings program was acting with the beta of about 0.3. So, all of those things have given us a really nice sequential run.

What I said in my remarks is as you think about 2018 I think our ability to sequentially keep growing the net interest yield is probably about at a plateau. Although, if you look at full year 2018 results, there will still be some year-over-year growth, because what I’m telling you is we’re plateauing kind of at Q4 levels. And in fact, the first part of 2017 was below that if you do a little bit of seasonal adjusting. So that’s how I think about net interest yield.

If you look at deposit betas, so fed’s now done five rate hikes; if you look at our personal savings program, our beta to date, if you will, is about 0.35. As we have for a while for forward planning purposes, we assume a beta of 0.7, based on a lot of history. Certainly, I hope that is a very conservative assumption. And in general, we are trying to make sure we provide good returns for our accountholders but just competitive returns. And we’re comfortable with the balances we have and with our ability to attract new balances. So, we’ll have to see where that goes. As you know, if that data flips all the way up to 1, then interest rates start to be, as they go up, a headwind for the Company because of our charge card portfolio. If we can keep the beta a little bit below the 0.7 level, then interest rates going up ceases to be much of a headwind, and of course, the betas that we’d had thus far is mostly a tailwind. So we’ll have to see where all that goes. So, thank you for the question, Ashish.

Toby Willard

Kerry, we have time for just one more question.


Thank you. And that comes from the line of Mark DeVries from Barclays.

Mark DeVries

Just had questions around clarifying the guidance little more. I think you exited the year with the revenue growth FX adjusted at 9%. I think you called out an additional 100 basis-point lift from the acquisition of the Hilton related receivables from Citi. But you’re guiding to 7% to 8% for next year. Is it just an inherent conservatism in that or are there some specific headwinds you have in mind? And then, just to clarify the comments around the contributions to profit share. I think you indicated, you made some contributions in December but then talked about it in the context of the 2018 guidance. Is there more coming in 2018 and did you quantify that at all? Thanks.

Jeff Campbell

So, two good questions, Mark. First, on revenue, look, we’ve put together a plan, as I said in response to an earlier question, based on the world as it existed over the last few months, not necessarily as it has existed since December 22nd when the tax act passed. So, the only two things that are at some point headwinds -- not headwinds, but start to fade a little bit from the revenue growth that you saw in Q4, two things I’ve talked about for a while, which is net interest yield has I think started to hit a little bit of the plateau. It’s still going to show nice year-over-year growth for the first half or so of 2018, but will probably show less year-over-year growth, as you get into the back half. So, that’s a little bit of a moderation of the revenue growth rate. The second thing you’ve heard me talk about for a while is at some point, the changes we made in the U.S. Platinum products way back in 2016 we’ll be done lapping them. Now, we actually started to lap those in Q4, although not the fee -- increased fee in the consumer Platinum and yet we were still at 9%. So, as you heard me say earlier, look, Q4 probably came in a little stronger than we had anticipated. So, we’ll have to see what all that means. I think our 7% to 8% range that we’re giving you guidance for on 2018 is one we’re very comfortable with that we can very confidently hit. And our job is to see if we can do any better.

On the profit-sharing, let me clarify that. So, if you think about the timing of all this, we -- the decision to top up our profit-sharing is one we made in the days after passage of the Tax Act as we thought about the overall economics of the Company going forward and over the long-term, as we thought about the strength of our 2017 results and as we thought about doing something very consistent with our view that we’re about the long-term, we’re about the long-term for our shareholders in terms of performance, were about long-term relationships with our customers and we want to be about the long-term wellbeing of our employees. And that’s why we think that doing something that we have not previously done a real top up around the world of retirement-oriented profit-sharing plans is a really good thing to do for the long-term wellbeing of our employees. That is a 2017 Q4 period expense and it would not be an expense in 2018, nor do we expect it to necessarily repeat.

Toby Willard

Great. Thanks, Jeff. And thanks everybody for joining tonight’s call. We appreciate your continued interest in American Express. And Kerry, that’s it for us.


All right. Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference service. You may now disconnect.