Q1 2020 Earnings Call
And seamless through the end of the year.
We're also adding a range of limited time offers credits and rewards on stay at home services, such as wireless streaming grocery and food delivery for our consumer uncertain co brand card customers as well as business essentially like wireless office equipment and shipping for our small business customers.
For a co brand customers were also working with our partners to extend card member benefits such as airline companion certificates and hotel Free Night Awards. So our mutual customers will have more time to enjoy these benefits and for our travel customers were waiving fees for any flight changes or new bookings made through American Express travel now through May 30 Onest.
In addition to our card members with supporting small businesses as we have for many years to shop small initiatives like small business Saturday and many others around the world during the Cobot 19 crisis, we're continuing to promote the positive impact consumers can have on their local communities and small businesses through our stay home and shop small campaign.
Earlier this week, we launched stand for small in the U.S coalition of more than 40 companies across various industries that have come together to back small businesses by providing a wide range of offers complimentary services access to corporate assistance programs and other resources designed to help support them as a managed through the crisis, we look forward to many.
More companies joining this initiative over the coming weeks.
For our merchant partners. We're also temporarily extending the amount of time businesses must respond to disputes and have increased contact was transaction threshold thresholds to reduce physical contact at the point of sale in 28 countries.
Finally, our customer care professionals made a quick transition from a brick and mortar operation to a home based servicing one and we did so with minimal disruption in fact, our servicing levels quickly came back to be levels and our customer satisfaction results improved during the crisis and our at significantly higher levels now than in January.
Our next principle is structuring the company for future growth.
While we believe that to covert 19 pandemic will generate certain changes in our business in the near term and likely over the long term. It will also generate opportunities and we intend to being a position to take advantage of the opportunities as they present themselves. We're starting with the strong foundation the assets, we have our differentiated business model, particularly our brands our customers.
And our merchant network give us a great based to build upon.
In addition, the strategic imperatives, we've been focused on over the past few years remain just as relevant today and what will make some adjustments considering the current environment will continue to pursue our overall strategies in the following areas expanding our leadership in the premium consumer space building on our strong position in commercial payments strengthening our global integrated.
Network to provide unique value.
And making American express an essential part of our customers digital lives.
As the crisis unfolded, we knew that we had to reprioritize our investments in each of these areas to focus on those initiatives that are critical to retaining our premium customer base and strengthening our merchant network. While at the same time continuing to invest in those areas that are key to our long term growth strategy.
This led us to a thorough and thoughtful process to identify activities that we should stop.
Slow accelerate and continue.
What we're stopping for the time being includes items that are less critical in today's environment, including traditional advertising marketing sponsorships and customer acquisition activities were slowing down the development launches of some of the new products. We had in the pipeline for this year.
We're accelerating investments in mobile servicing and credit and collections capabilities that are not only important today, but will also important for a continued growth over the longer term.
And we're continuing our activities in a number of areas, including acquiring new merchants globally, our ongoing efforts to launch our new network in China, Our network Replatforming initiative, our premium product refresh strategy in both consumer and commercial can and continuing to integrate and develop new digital capabilities as well as making longer term enhancement.
In our servicing platform and other key areas that important for our future success.
Finally, we entered this crisis with particularly strong capital and liquidity positions that will enable us to remain financially strong.
While some of our expense categories, such as rewards costs than the cost of card member services will decline automatically spending declines and customer behaviors change, we're taking aggressive actions to reduce discretionary expenses across the enterprise by nearly $3 billion from from our original plan in the areas I mentioned before.
Sure and we're redirecting some of those funds into new product benefits and longer term investments I described a few moments ago.
Looking ahead in the near term our earnings will be driven by the answers to two questions that no. One can now no one yet can answer first when and how strongly the spending rebound as the global economy recovers second how long do the challenges of high unemployment levels and small business shutdowns last.
Perhaps softened by the record levels of government support and what does that mean for our credit losses.
Until we all get to the answers to these questions, we're reducing our spending in every area that doesn't make sense in the current environment consistent with our intention to not have any covered related layoffs in 2020, and consistent with our intention of protecting our customers and the brands.
So those are our principles, we've established for managing through this period in a way that will position us to return to growth when the economy rebounds without a doubt. These are times at our unlike any of that have encountered in my 35 years at American express, but while the magnitude and uncertainty of today's challenges are more intense the lessons we've learned through other crime.
Lessees will service well as we work through this one.
As always we'll remain focused on what we can control and short term, while keeping an eye in the long term and like before we intend to come back stronger. Our teams are working day and night all over the world to help our card members in our merchants just as we have done throughout our history.
And when this is over we intend to be in a position of strength ready to capitalize on the opportunities ahead, because we've managed to short term challenges while remaining focused on growth over the longer term.
Thank you for your time and now I'll turn it over to Jeff.
Thank you Stephen good morning, everyone.
Today I'll take you through our results with more real time granularity on recent trends than I normally do.
To help you understand how our business is performing in this rapidly evolving environment.
Starting with our summary financials I'd encourage you to look at slides four and five together.
As you can see on slide five while January and February was strong months March was a very different month and filled a full quarter results are not so helpful for understanding our performance in the current environment.
As you recall when we held our Investor update on March 17, We said, we expected first quarter earnings per share excluding credit reserves would be between $1.90 $2 in 10 cents and Thats, where we've landed.
We also said we expected FX adjusted revenue growth would be in the 2% to 4% range. We came in a bit below that due to spending trends at the end of March deteriorating even faster than we had expected as well as some of our ancillary revenue lines coming in a bit lower than expected.
Turning now to the details of our performance I'll start with Bill business.
Clearly it is remarkable how much the world has changed in just the last month and a half.
What's most important as you think about the near term future is understanding whats happening today.
And so we've included a different view of our build business than our typical quarterly disclosures, which you can still find in the appendix on slides 25 to 27.
Instead on slide six and seven we've shown you are weekly proprietary billed business growth trends through the latest date for which our data is complete which is April 19th.
Looking at all this data there are four key observations I'd make.
First the volume declines accelerated dramatically in March whereas January and February results were still in line with our performance over the last few years.
Correct.
TNT, which was roughly 30% of our proprietary volumes in 2019.
Is down almost 95%.
Third non see any spending has declined more modestly as you'd expect some areas such as grocery spending and some online commerce have held up quite well and even accelerated.
Whereas other categories such as other categories of more traditional retail have been much weaker.
And fourth you will see that our proprietary billings declined seem to have stabilized somewhat in April.
With overall proprietary volume growth down around 45%.
Turning next to loan performance on slide eight total loans declined by 3% year over year in the first quarter, driven primarily by lower spending.
In today's environment, where there are so many questions around credit we felt would be helpful to remind you about the composition of our loan book.
At the end of the first quarter, 70% of our outstanding loan balances were with us consumers, 10%, where with international consumers and the remaining 20% for with small businesses almost all of which are in us.
Moving on to slide nine we wanted to spend a minute focusing on our charge receivables.
Because in an environment, we're spending volumes move dramatically these balances move dramatically as well.
As you can see in the chart on the left with only one month of spend declines our charge receivables are down 21% versus the prior year and $13 billion below the prior quarter.
This dynamic is important as you think about liquidity and capital in this environment, which I will get to later in my remarks.
Of course, our charge receivables also have a different risk profile than our lending book.
And even within our within our charge receivables book there are different types of credit exposure and so we've included a breakout of where these charge receivables come from on the right hand side of the slide.
Around 35% of our charge receivables are from consumer charge card members and another 35% or from small business charge card members through.
The remaining 30% is from corporate cards, which have relatively lower risk exposure.
Slide 10, and then shows our traditional credit metrics for our lending in charge portfolios.
The trends in both write offs in delinquencies in the first quarter were solid and remains best in class in part due to all of our risk management efforts over the past few years to prepare for an eventual downturn.
You do see a modest increase in write off in delinquency rates year over year and sequentially, primarily due to lower loan in receivable balances as opposed to any significant change in credit performance.
Further we are you to look at our TDR disclosures in our Q1 10-Q. Those balances are also relatively in line with the prior quarter.
Now obviously, our traditional credit metrics, all look fine because not enough time has passed for things to show up in these traditional metrics.
What we are all trying to manage going forward is the collision of record levels of unemployment combined with record levels of government support.
So turning to slide 11, you will see the total balances that are enrolled in our customer pandemic relief program, which we established to support our customers that have encountered hardship due to cold and 19.
Since we created this program in March we have had nearly 845000 accounts and roll in the program globally through mid April just a few days ago.
I'd also note that over 88% of the us consumer and small business loan in receivable balances enrolled in this program our from Prime and Super Prime card members.
And many of those card members have it some payments sense enrollment.
In addition, we've seen the pace of new enrollments slow a bit from its peak a few weeks ago.
We are working hard alongside these customers to get to the best outcome for both our customers and our shareholders by providing payment deferrals waving interest in certain fees as well as protecting them from adverse Bureau reporting and collections actions.
We're also working as people roll off the short term programs to develop new longer term solutions as well as leveraging our preexisting hardship programs to help them retain their membership.
And to get to a good financial outcome.
So one of the many uncertainties around the economic future is the outcome of those efforts, which will be one of the factors that influences our credit performance through this crisis.
So let's move on to provision on slide 12.
The first point I would make is that just as our credit metrics were relatively unchanged in the first quarter. Our write off dollars were also in line with our original expectations and do not yet reflect the incremental stress from the current crisis.
The growth in provision expense is all about the $1.7 billion credit reserve build.
And the credit reserve build is all about the macroeconomic outlook as we close the books in early April which was suddenly and significantly much more pessimistic than when we started the year.
This outlook does attempt to incorporate all the uncertainties around the impacts of cobot 19, as well as any potential offsets from the unprecedented level of government stimulus.
So turning then to slide 13, you see that our reserves at the end of the first quarter are almost double the reserve levels, we had on our balance sheet at the end of last year.
The increase is from a combination.
Of the $1.2 billion of reserves, we built when we implemented the current expected credit loss accounting methodology Cecil on January Onest as well as the $1.7 billion of credit reserves. We added at the end of the first quarter as a result of the worsening macroeconomic outlook due to cold at night.
Team.
Today, our lending in charge credit reserves on the balance sheet represents 7% of our loan balances and 1% of our charge receivable balances respectively.
So the key underpinning of these reserves or the macroeconomic and assumptions that informed the $1.7 billion credit reserve build we took in the first quarter, which we show you on slide 14.
As you know we do not have an in house economist and so we use an external provider and look at a range of macroeconomic forecasts that we wait together in our credit reserve models.
When we closed the books on the first quarter those scenarios assumed that GDP would be down 18% to 25%.
And the unemployment rate would rise to 9% to 13% in the second quarter.
With a steady modest recovery after that.
It's important to note that the latest macroeconomic outlook today reflects a and even more significant deterioration in us GDP and unemployment through when we closed the books on the first quarter.
If those forecasts were to hold or even worsened by the time, we closed the books on the second quarter, we would expect to have another large reserve build.
So this gives you a clear view of the assumptions behind our Q1 reserve build but only time will tell what the ultimate level of write offs will be given the completely unprecedented nature for global environment.
Turning next to revenue on slide 15.
Net card fees remained our fastest growing revenue line with 18% growth in the first quarter.
We expect this revenue line to decelerate less in the short term relative to other revenue lines based on our historical experience with strong card fee performance in a downturn as well as the fact that we have roughly $2 billion of deferred card fee revenue already sitting on the balance sheet today.
However, it's also important to note that the majority of the card fee growth we've seen over the past few years has been driven by growth in our fee based portfolios with around 70% of our new card acquisitions in 2019 on fee based products.
As the pace of new account growth slows in this environment, we would expect to see a modest slowdown in net card fee growth overtime.
Net interest income growth of 13% was faster than the 3% average loan growth. We saw in the first quarter driven by a modest tailwind from interest rate reductions year over year as well as continued yield benefits from mix and pricing for risk.
The details around average air in yield trends can be found in the appendix on slide 28.
In addition, as I mentioned earlier in my remarks, we saw softness in some ancillary revenue lines, particularly from travel related revenue streams that are relatively immaterial and typically don't change much quarter to quarter, but were down significantly year over year in the first quarter.
Turning then to the largest component of our revenue discount revenue I'd move you ahead to slide 16.
As you can see underwrite discount revenue declined 5% for the full quarter and 27% in the month of March.
The contraction in discount revenue was larger than the decline billed business.
On average we earn higher discount revenues from our T., an emergence than we do from our non teeny merchants.
So given the much larger declines we are seeing in TV spend the divergence in t. any and non t. any billing trends drove a three basis point decline in the average discount rate in the first quarter.
And a 10 basis point decline in the average discount rate in March relative to the prior year.
Looking forward if the spending trends we see in early April persist with TNT spending down about 95% for the entirety of the second quarter.
Our discount rate erosion in the second quarter could be as much as 14 to 18 basis points.
Now, let's talk about our expenses.
When you think about our cost structure, you've got the cost the come down naturally expand declines and certain behaviors change and when you look at the three customer engagement expense line shown on slide 17, you see this dynamic in the sequential change in growth between 2019 in the first quarter of 2021 way you might think about this time.
NAMIC in the current environment is that our as our revenue goes down in the near term.
You could see about a 50% offset to the revenue movement in these lines.
Other expenses, such as marketing and Opex move based on management decisions as Steve discussed in light of the current environment, we're aggressively reducing cost across the enterprise in fact, we're cutting discretionary expenses through the end of the year by $3 billion relative to our original plans. We're also choosing to selectively reinvests.
Some of these savings in initiatives that are key to our long term growth strategy.
Looking at Slide 18, you see that the environment in March change too quickly for us to see a significant impact from these decisions in our first quarter marketing and operating expenses.
So let me explain how we expect to those cost reductions to impact these lines from a year over year standpoint going forward.
In the balance of the year, we expect to dramatically reduce our proactive marketing efforts and reinvest in the additional product benefits that Steve spoke about in his opening remarks are reducing many other costs.
As a result, I would expect our operating expenses to be down about $1 billion year over year cumulatively over the next three quarters.
On the marketing line, we are funding the additional product benefit adjustments that Steve discussed with our other marketing cuts. The net of the two should result in a modest reduction in marketing investment levels relative to last year.
Moving lasted capital on slide 19.
As Steve mentioned earlier, we are entering the current crisis with a strong capital position.
Our cetone ratio was 11.7% at the end of the first quarter above our 10% to 11% CPT one target range.
The sequential growth in our Cetone ratio was driven by the counter cyclical nature of our balance sheet.
As our balance sheet shrinks with declining aer and loan balances in the current environment, our risk weighted assets dropped accordingly.
I'd also note that our first quarter see one ratio includes a roughly 80 basis point impact from the five year transition option made available under the fed ruled delay any capital effects of Cecil until 2022.
We repurchased.
$9 billion worth $900 million worth of shares in the first quarter, but have suspended our share repurchase program as of mid March and we do not expect to resume share repurchases for the time being given the current environment.
However, with our strong capital position, we have the capacity and intend to continue to pay our dividend in the second quarter.
Turning to slide 20, the counter cyclical nature of our business is also reflected in our particularly strong liquidity position during the first quarter, our cash and investments balance increased from 32 billion to $41 billion in Q1, driven mainly by the decline in a our and loans.
We also saw strong demand for personal savings deposits during the first quarter, even as we adjusted pricing given the current rate environment.
Our personal savings deposit base is up 6% versus the prior quarter and up 16% year over year.
Putting it all together our capital funding and liquidity positions are strong and we have significant flexibility to maintain a strong balance sheet in periods of uncertainty our stress.
In summary, we are certainly an unprecedented times and looking ahead, it's impossible to forecast our financial results for the rest of the year without knowing the answer to the two questions Steve posed earlier.
When and how quickly the economy improves and what happens to unemployment in the pace of small business recovery.
Until then we're focused on supporting our colleagues and customers prudently managing our risk exposure and expense base and ensuring that our capital and liquidity levels stay strong. So that we can take advantage of the inevitable rebound for our customers colleagues and shareholders with that I'll turn.
On the call back over to Vivian.
Thank you Jeff before we open up the line for Q1, eight I will ask built into Q2. Please limit yourself to just one question. Thank you for your cooperation and with that the operator, we'll now open up the line for question operator.
Ladies and gentlemen, if you wish to ask a question. Please press one than zero on your Touchtone phone.
We'll hear message, indicating that you've been placed in Q you may remove yourself from the Q at anytime by pressing one than zero again.
If you're using a speakerphone please pick up the handset before pressing the numbers.
One moment please for the first question.
Our first question will come from the line of Sanjay Sakhrani with KBW go.
Go ahead please.
Thank you good morning, and I Hope you guys are well I want to follow up on the cost reduction commentary and I'm curious Steven Jeff.
You mentioned is are these are unprecedented times and a lot of the situation is fluid I mean, if things continue to remain depressed as they are or even get worse, how much more can you caught on cost because it seems like a selectively still making some investments here.
Is there room to take down costs further than you've outlined at the just on a related note as we think about your card product orientation being travel and entertainment driven I mean, do you see people sort of shifting away to other cars as a result and are there any proactive strategy than you can employ as a result, thanks okay.
So let me.
It's a very slick way of asking two questions, but let me.
Let me answer the second one first I think what's important to understand with our with our card base is that.
No Sir.
70, 73% of our spending is on is on non TNT and while you look at the benefits that we do have on our card base. What our card members really appreciate his experiences of all type of great service and our brand and what you'll see coming out in early.
We may is actual product refreshes to a number of our products.
Which will infuse additional value. In addition to the value that acquired May have so if you look at our platinum card, where you have fine hotels and resorts and you have over credits.
And you have other travel benefits and lounges, and so forth you will see other other enhancements there from from wireless to streaming to maybe some other types of travel credits, which can be used in the future.
You know over over a time period, but I think what you'll also see.
In the short term is card members using that and using using the points in the longer term I think here's where our product refresh strategy really does help us because we will continue to modify products as the environment continues to change in more and so we think some of those benefits will come back over to say.
I'm of the benefits at card members use will come back over time so.
Well I don't think that we will see people switch products and just to comment on the co brand promise the percent of our co brand spend is off the co brand partner. So if you think about Delta you think about Marianne you think about Hilton its own it's less than 10% of that spending is actually at those properties for those for those particular things and so.
I would say is we will continue to evaluate will continue to monitor what you will see value injection going back into these products and historically and these are not historical times, but historically, there's a tremendous resiliency.
In our fee based portfolios and so you'll see a lot of fee, but you'll see a lot of value injection into those fee base cards as I had mentioned before the one thing I will say, then I'll, let Jeff talked sort of technically to the costs.
What I think is critically important for us is that we support our customers I started out during this crisis, we moved rapidly to get our colleagues out of our facilities within a two week time period, we're basically 100% virtual around the world. The only people you'll find that are.
Buildings today, our security people in maintenance people and not a lot of them in so we rapidly move that once we did that our next focus really turn to our customers and what was really important through this crisis and through any crisis and I've talked about this over over the last.
Yes, you know sort of 10 quarters or so.
Is that it was important for us to protect our brand it was important for us to be there for our customers.
And it was important for us to stick with those initiatives that inevitably would be important when this crisis ended merchant coverage will be important our efforts in China will important our platform initiatives will be important in so while we are very focused on staying financially strong. We're also.
Focused on ensuring that when this crisis is over.
We have been therefore, our customers and are ready to continue to hit the ground running and so.
We talked a lot about what we stopped what weve, what we accelerated in what we've slowed down and I'll tell you to $3 billion of cost that we cut.
Out of our plan and I've been doing cost cutting for decades. At this company was probably one of the largest cost cuts that we've ever done and this is not a run rate number. This was 3 billion out of the plan in the next eight months in some of that money will be put back in for value injection. So the reality is is there more to go.
No. It is always more to go there will always be more to go we decided to do know layoffs and the reason we decided to do know layoffs is numerous reasons for that number one is humanitarian aspect of this number two is the disruption.
To try and layoff people in a virtual environment is nearly impossible and number three we don't know with the world's going to look like and so while we're not going to take layoffs off the table for the future. We certainly are taking layoffs off the table off the table for the rest of the year I'll, let Jeff comment on sort of the technical aspect of of where we have it where we have that that.
Opportunity, but you saw our a large reduction year over year and operating costs in most of your models assumed growth in operating cost. So that came right out as well, but Jeff Let me turn to you well the only thing I'd add Steve is to your point you can always react further sanjay the environment and we asked ourselves to questions on cost we took out everything we didnt need to some.
Port customers as Steve said.
And we do left things in or we cut everything that couldn't be put back quickly.
Or that we made sure we weren't cutting things that couldn't be put back quickly in the inevitable rebound. The other point I'd make is we're not hiring people today. So the reality is when you have 64000 people and you stop external hiring.
With each passing quarter.
Our costs will be going down and also with each passing quarters. Since you phrased. The question is what if the world really radically.
Changes in stays down for a long time with each passing quarter, our view of what we might need to put back is going to change. So we will continue to react. So we should go to the next question operator.
We will come from Don Vendetti with Wells Fargo.
Yes, Steve and certainly to the C are billed business growth stabilizing.
In.
April I was wondering if you could talk a little bit about coming out of the crisis. Anodyne you guys took share a lot of the banks were sort of in capital.
We're struggling with capital issues do you think how do you think the competitive dynamic looks on the other sidedness and do you sense that you can be opportunistic and take share.
Well done certainly that that's the intent I mean, that's the intent as Jeff just said about not shutting down. These channels. If you shut down completely your acquisition channels, whether that be digital whether that be direct mail. If you start cutting your sales organization.
And so forth, obviously, it's going to be hard to do that.
It's hard it's hard to say where.
You know where our competitors our overall in their overall business our businesses as you know very monolithic.
We are the only piece of our business that we have.
To focus on is is the is the credit card business whether that is corporate.
Small business and premium consumer how this whole pandemic plays out across all the other aspects of the financial services industry.
Is yet to be is yet to be seen what's convening impact on commercial lending commercial real estate commercial lending car loans mortgages, so forth and so on.
Traditionally what's happened is we have bounced back a lot quicker our card based tends to be a lot more resilient and there is pent up demand for our products and services. This is not a traditional a traditional environment that we're in but our intent is to come out of this.
Very very strong with our sales channels intact with our acquisition.
Engines pumping and actually to take share as we did.
In in Onein in as we did after the Internet after the Internet bubble that that's the intent which is why we're sticking with a number of the growth initiatives and more importantly, while it's easy to cut back on merchant acquisition. When all of this is said and done people are going to have a huge huge pent up desire to spend and we want to make sure.
Sure, we're able to continue to provide the access.
So all the alternatives that are available to spend at a merchant for merchant perspective.
Our next question will come from the line of Mark Devries with Barclays Go ahead.
Yes. Thank you.
And just want to thank you for the new sluggers in very good.
Yes.
So my question is on.
Impact.
The loan book is if we see bill business at these levels.
What's sort of run off should we expect and what are the implications of that.
We need to maybe resume share repurchases to avoid getting to capital efficient.
Well, it's a good question Mark I think when you think about our loan book there is of course, a fair amount of just transactors in there so I think.
You will probably if the world stays as it is today.
I see a more significant decline in the loan book in the second quarter.
Depending on how the world evolves I, frankly past that might expect a little bit more stabilization from a capital perspective.
The thing we are really focused on is making sure. We stay really strong financially. So we can be opportunistic about some of the things Steve was just talking about trying to gain some share in the inevitable rebound or other opportunities that might come up.
In the current environment. The last point I'd make is that does mean when growth resumes. The balance sheet. Then go sitting opposite direction at a grows so we need need to make sure that we have.
Enough capital to support very rapid growth.
When the inevitable rebound happens and so what does that mean for share repurchase boy I think like so many things mark we have to take that quarter by quarter and see where we are.
Okay. Thanks, Thanks Mark.
Our next question will come from the line of Rick Shane with JP Morgan go ahead. Please.
One moment.
He is well to Shane your line.
Can you hear me.
Yes.
Okay great.
Thanks for taking my question I hope everybody is well there.
When we look at the change in reserve.
Undersea sold charge was going to be treated has it was going to have a very favorable treatment and there was a pretty significant spike in the Cecil and the reserve this quarter I'm, assuming that thats associated with small business is that correct in the second part of that question is there an opportunity to move some of the charge product.
To pay overtime Q.
Give some relief.
So.
You're correct Rick that the charge.
Reserves under Cecil, we're actually to remind everyone a reduction from the reserves, we used to have under Fas five, whereas obviously the lending reserves went in the other direction. You're also correct that when you look at charge and when you look at our loan book today, I think it's fair to say that the sector that has shown.
On the most immediate stress is small business strategy shutdowns small businesses.
And a savvy business owner is going to say boy I need to go into cash conservation mode and in many ways what are.
Pandemic really programs are about just trying to help people through that transition and so the question really is how long do shutdowns last.
Can we help bridge, our small business customers.
Long enough to help them resume business and we're exploring every possible Avenue about how you help them with payment terms and fee deferrals et cetera to help them come back strong and healthy economy growth, Yes, I think the other thing from a small business perspective. These are people that are not used to being in this situation at all I mean, you think about every other.
The credit crisis, we've ever had no one ever shutdown, we never shut down the economy right I mean things got hard things got tough, but we never shut down the economy and when you. When you look at our small businesses and you look at sort of credit profile of our small businesses.
These are people that would have high high high FICO and their prime and Super Prime as well much like consumers and if you look at our programs that we have the programs are one to three months of relief than we have short term programs and we have.
Our longer are longer hard too low or excuse me our longer hardship.
Program so.
I think we're in I think we'll be in good shape, there because it's really getting people through.
This tumultuous period as far as the charge product the charge product has has a.
Has the pay overtime feature which co lending on charge.
And so people could use that but they could also use one of our one of our hardship programs and I think one of the things that we're really focused on is retaining membership at the end of this so what is the cat you know what is the carried at the end.
These are these are good customers.
Who are in a bad time through no fault of their own and we'd like to retain them as customers and so as you look at our programs and how were structuring them. We're also structuring them with a way to return to the franchise overtime. So.
That's an answer to your to your other question.
Our next question will be from Bill car cash with Nomura go ahead.
Thanks. Good morning, Steven just is there any indication will either is there any indication that the customers who are filing for initial claims are broadly representative of the amex customer base theres been some suggestion that a disproportionate.
Percentage of those filing our for example entry level restaurant employees, who may not be representative organics population and therefore some of the traditional relationships that we've seen between initial claims and reserve building.
Take down I would appreciate your thoughts on that.
I think bill I'd start by pointing back something I said in my remarks, which is.
I think as Chris noted that over 88%.
Of the balances us consumer and small business enrolled in the program or from Prime and Super Prime card members and this goes back I think Steve to your point, but these are not people who are used to being a stress is just such an unprecedented.
Environment, and so look we'll have to see how this plays out but these are.
Could good card members on the consumer side and driving businesses until they suddenly we're forced by the government to shut down on the small business side and that's why we're really focused on working hard with them.
To help bridge the current environment and also hopefully let some of the government programs kick in and Hell.
Our next question will be from Bob Napoli with William Blair.
Yes.
Good morning, Steve Jeff.
Glad you guys are well wins.
Appreciate the color and all the additional detail.
In other words I mean, the post Colgate World is going to change I think at least some white I'm sure. We've all been on lot of zinc Paul's or Microsoft teams falls or whatever but.
Business travel has been an important part of your business.
I think consumer travel returning the business travel maybe.
Last materially less BB payments I think you're involved in b to b payments and through several partnerships with the bill Dot com.
Several other companies mental tree et cetera, but are you what do you what are your thoughts on how the world is going to change in how to next prepared for that on the B to B payment side are you seeing more demand.
For his stuff like HP automation as well we know it's a small part of your business.
So it's a great question and.
You know.
Obviously listen to add bastions earnings call yesterday, and you know what Ed said is probably going to take three years for travel to to come back to where it is and let's just put this in context I think because I think thats really important when you think about our commercial payments business. The majority of our commercial.
No payments business is is small business.
Both in the Us international and Middle market and a majority of that is 80% 90 any.
With a focus on exactly what you talked about.
When you look at our corporate card business, our corporate card businesses between eight and 9% of our overall billings 60% of that.
His TNS, you're looking at about 5% of our overall business, which.
You know drives a a lower proportionate share of not only revenue, but but net income as well I think that will that will slowdown, but remember in t. any you've got multiple components, you've got restaurants, you've got hotel, you've got car rental and you do have air.
And so I think we've all learned in this environment how to work of virtually.
It is amazing we don't use zoom, but we don't use webex, but it is amazing to see everybody on the webex screen and quite honestly I think there'll be more of that there will be less of less of those trips that are needed and so I think you will see in inevitable decline in probably air travel, you'll still see people making.
You know trips in cars, you'll still see people going to restaurants, albeit restaurants will probably be reconfigured in the short term, but in the long term I think it comes back pretty much to normal.
And so when you look at TNT I think the the travel piece of it in any of the appropriate stay in the meal that goes along we'll we'll probably go down and it'll be a little bit of a reset moment, but our focus really has been on large corporate.
And I said this before not a lot of people were sort of driving teeny high I mean, they were sort of looking to maintain teeny to reducing in Asia and our focus with large corporate has been on b to b payments. What we have seen in this short period of time is more automation to be to be payments. It is a small part of our business.
With one of virtual environment It has gone up.
Significantly I mean, not significantly enough to drive our overall volumes at this particular point in time, but it is amazing how much it's gone up from an automation perspective with our E com pay.
You know acquisition with our integrations into build dotcom and minimal train and Sage and.
And others like S&P, So I think you'll see more of a focus on that I think you'll see more spending there and I think you will see an inevitable decline in in some of the a beat if some of the business travel Entertainment I think the consumer travel will will come back overtime and I think the other thing is I am really happy with.
Sort of the co brand partners that we have and you know Ed talked about this on his call yesterday in that from an airline perspective safety will be defined in multiple ways now.
Safety was defined from a maintenance perspective, but it's also now going to be defined on how you treat your customers.
You know within within within the plane, it's going to be how you treat your customers within the hotel property and I think when I think about AD and Arnie and Chris Nassetta, we're of equal mines, there from a way to treat our customers and so I think you'll see a premium this return actually to air travel and I think that plays well for our.
Summer base as well and I think in this time I think our acquisition of resi is going to play really well in the short term as restaurants will probably reduce capacity and will be harder to get reservations and we'll be able to utilize as we talk about access and experiences our assets to be able to help our card members get.
Into an experience some of the great restaurants that are there that around this country.
Our next question will come from the line of Moshe Orenbuch with credit Suisse glad please.
Great. Thanks, and we wanted to follow up on that Steve because I think that you made some interesting points at the beginning about issues around your co branded programs in the spending being kind of our around.
Outside of the partner and the comments about that you just made about.
About kind of units being being special and at the top of the pile, but I guess the question that I have this you the fees that you just raised on a lot of those co brand. The high end cards with the actual benefits package provides whether its delta.
Hotel chains.
Our are going to be less valuable to people at this point, how do you think about what people do when we made game tier or actually ship spending to another card.
How does that process work, yeah, I think what you'll see in the coming weeks is you will see other benefits that will be added to those cards to sort of balance out the value I mean look we're very focused.
We're very focused on it obviously to go any blogger blogs is very focused on what is the value that you get for what you're paying and so you will see enhancements to those cards that are not specifically.
Either era hotel related.
And in particular, so those cards, where fees were raised and so you'll see extensions on benefits, but you'll also see other things that are non hotel non air related which will provide more utility to the to the card in general I mean people have those cards to accumulate points for hotel stays for.
For airline and for so forth, but I think as as I said and you just pointed out again, 90% of that have that spend is in in in other other areas and so what we will do is will enhance those products. So that the value propositions are more in an equilibrium. So what the environment is today.
And that's what we will continue to do which is why I think having built the DNA in the company now to constantly refresh products is very important.
And not just constantly refresh them on a sort of we run a three to four year cycle, but the ability within a couple of months now to add other benefits end to end of the credits and other access and things like that we will serve us well as we go through this because we're going to watch it very carefully we're going to work with our partners very very carefully to put the.
Those benefits that will continue to maintain the value and maintain continued to maintain the price value that weve that we strive to.
To have with these with these cards. So I think it's a great question and that's what the teams are working on with our partners.
Question will be from two great. Thanks of Morgan Stanley go ahead.
Hi, Thank you good morning, Stephen Jeff.
We are investing money.
I know, we spoke a little bit earlier about small business. It is the single biggest question that I get on American express ranging from.
Credit quality questions too.
Persistency in the business as we go through this coven crisis. So I just wondered if you could refresh.
Your comments with some more details around.
[music].
How you see the credit quality different industries that are really dominating your small business portfolios and if you could help us understand.
How long you feel your partners are small business customers are set up to endure this.
Got down that they have to deal with.
Well, maybe I'll start.
Thank you very few comments and then Steve can chime in so.
I have to start by reciting for a third time. This statistic I pointed out earlier that when you look across both consumer and small business because many of our small business card members or they run their small business on the car they still have.
Credit scores and personal FICO scores, we can track so 88% of those people are prime and Super front and I, just think Thats an important first thing.
To think about second.
We have I think a lot more diversity in our small business card members than perhaps many people realize and so Steve you were just talking earlier about the importance of restaurants to our value propositions in our partnership with resi. If you look at our open Cardmembers, that's actually restaurants are fairly immaterial part of the.
Card member base and in fact, the card member bases in some places you might not think about intuitively Betsy like construction building materials professional services, our lawyers doctors and if you think about many of those kinds of small businesses. Those are the businesses that are going to come back and thrive.
But clearly when the government tells them and you got to shut the doors. They would be I think financially irresponsible as they didnt say boy for little while I could pay American express, but I just need to kind of hold onto my cash while I understand the environment and that's a lot of the anecdotal dialogue.
We're having with our customers. So we'll have to see as we said all along I get the question is how long does unemployment staff. The astronomical levels. It appears to be at now and how long to small businesses say shutdown as Steve you can add a little more no I think it's it's a great question and it's one that we look at all the time, but Jeff set a small.
Percentage, it's less than 5% of our small business customers are actually restaurants, and when you look at sort of almost 25% of our small business customers. It's things like contract is plumbing electrical work air conditioning. All those things are actually still continuing today, maybe at a more reduced level because people don't want to other people.
And a house, but they're not going there those people are not going to go anywhere and they usually have a lot of low overhead, but they may need that three months to to get through it and when you look at business services, it's legal its automotive repair its.
Our beauty salons, barbershops things like that and so a lot of those will will still will still be there and come back as they are a lot of them are single proprietor.
Institutions. The other thing that I'll point out about our small business is what we do have a very high.
Share of the market from a spend perspective, when you look at the overall sort of loan books, whether that be working capital whether that be mortgage loans auto loans is small businesses have just their own loan servicing we're probably less than 2% of the us market when it comes from an.
Exposure perspective, so I when I look at it from a credit perspective, I think you just can't look at the current you need to look at the entire small business sort of.
Echo ecosystem of what is out there and we're less than 2% of that.
And I would also leave you with the fact, we are very very diverse.
In terms of what our small business set is so we think we think it'll bounce back.
And we feel good about we feel good about our small business portfolio, but it will go through like everything else. It will go through a a tough period of time until the world's starts to open again, which is why our which was why we think our relief programs or are ideally suited for small businesses.
Okay.
Our next question will come from Eric Wasserstrom with UBI us.
Go ahead.
Okay. Thanks, so much can you hear me okay.
Yes.
Michael We think we can get it.
Good.
So so my question is about the claim experience just doing the quick.
Back as the envelope.
Sure.
Sure.
Ratio.
Yes, maybe an expectation around a four and a half ish kind of percent.
Peak loss experience and I'm wondering if you can maybe put that in context of of past downturns I think as I recall from from peak quarter of losses in 90, something like 9.7, something like that.
So I was wondering because maybe put that in context and maybe the broader question is does the circumstance perhaps suggests.
We're ahead because it can be caused you to reconsider whether expanding lending is most value maximizing floor for amex.
So let me maybe make that you comment antiquated rehab, Steve and then you might talk about risk management and the current environment.
So Eric Gosh, if you think about past experiences the great financial crisis, I think it takes six quarters.
For the economy to get up to.
Close to 10% unemployment rates and the current environment in six weeks, we appear to have gone way beyond that.
So that makes it very hard to predict.
Exactly how things are going to plough clearly of unemployment stays at the level. It is that now then you should expect lifetime losses across the entirety of the financial services sector that are greater than what you saw in the great financial crisis on the other hand, the government is throwing unprecedent amounts of money at things here, we'll have to see where that goes.
I'm also not sure peak write off rates really make are useful way to think about this right under Cecil we're trying to every quarter close the books and put on the books our reserve for the lifetime losses, we expect for what loans and receivables are on the books and that's what we did as we close the deal.
Now, we'll have to see where we are.
At the end of June, but I, but I am going to close before I turn it over to Steve by saying, but unemployment today is worse than it was in the great financial crisis in worse than it was in any seek R&D fast test.
And you've tacked onto that shutting down small businesses in the U.S. So we'll have to see how long that goes yes. So let me let me answer the last part of the question. You know do is there regret to be in lending and the answer is no I don't think you could be in a payments business without providing a wide range of services and so I think our strategy of.
Lending to our customers and and understanding who were lending through I think that will play out for us well.
During this.
During this pandemic.
I think the other thing is which important to note is that you go back a couple of years.
We really started to even invest even more heavily in our credit capabilities and.
So the difference between 2009 and today is is is a CASM I mean, it we're not even the same company as it relates to what it when I think about what we've done from an external monitoring perspective, how we do modeling and risk assessment, whether its machine learning and how we do more through the cycle evaluation just our overall.
Customer evaluation, our ability to to flex up and down spend in lending capacity the way we risk price.
And our credit collections capability are so much better, including our Harsha programs I mean, we had no hardship programs in the great through the great financial crisis, and now we roll out the CPR program in a matter of weeks.
We have other programs that are coming out in addition to our traditional hardship programs, which by the way we're not traditional in 2009 I think the key thing as we move forward through this cycle will be our constant evaluation of our customers are constant ability to to modify the spend in lending.
We have and our credit and collections capabilities and our ability.
To be able to talk to our customers understand their situations and really worked with them. So that those customers that are.
So have the potential will be good customers. When this is over we ensure that we would therefore them. So I think I don't regret.
Sort of expanding our lending at all.
And I think we're much better positions.
How much much better positioned than we were in 2009 and much better positioned than we were just two years ago.
Our next question will be from Ryan Nash with Goldman Sachs Go ahead. Please.
Hey, good morning, guys.
Hi, good morning.
Maybe just a follow up on on the last question. So.
You talked about 88% of customers being prime Super Prime, but Jeff you also mentioned that unemployment is higher than where we were on the financial crisis. I guess do you have any visibility on where job loss is across your customer base, how that plays into your loss forecasting and I guess broadly speaking just how do we think it.
About the relationship between job losses, and unemployment across your customer base. Thanks.
Well I think we've said for a while that certainly general levels of unemployment.
As long as just one of many many many factors that influences our ultimate credit losses is probably the single most important factor.
Thank you are question also goes to though when we look at our consumer customer base.
We would believe that the unemployment levels amongst our customers are well below the general levels of unemployment. When you think about who's got laid off when you look at small business.
Small businesses, we talked earlier about the range of actual card members, we have who are small businesses and there are lots of different industries, but you have a probably a more representative sample amongst our card member base, because we cut across all industries in a small business gets shut down that's that's a tough thing in a short run form so well have to.
See how this plays out, but I think I'm going to go back to where Steve kind of finishes last answer we've built tremendously stronger risk management capabilities over the last decade, we have taken many steps in the last couple of years to tighten up our risk management practices and we go into this I would draw.
Hi, Andrew with best in class credit metrics.
We think we are best in class capabilities, and we think we have a customer base, both consumer and small business that absolutely is more premium oriented.
That should help us depending on whatever the outcome is here economically.
Our next question will come from Craig Mauer with autonomous please.
Good morning, Stephen Jeff.
Craig.
So.
Two questions I was hoping you could update us on your us regional exposures and secondly in what I am sure have been.
Extensive conversations with Ed Bastian in others.
Can you provide a little bit of sought around how you expect to travel to reemerge in terms of cross border versus domestic the one of the biggest debates we currently have with.
Investors is the pace at which cross border travel can resume thanks.
So let me quickly hit the regional one Steve and then you can talk about travel because the regional answered Craig is pretty short, which is I think as you would expect.
Where our heavy concentrations of our premium oriented card member base as well places like California, the northeast, Texas.
All places that have been fairly significantly hit within the you asked when you go outside the us, particularly in the big urban areas. The London, the Paris, Tokyo's. So I'd say, we are right in the mainstream of the cold and 19 challenge when it comes regionally, we don't particularly see any differences, though when we look across all those regions and countries.
In terms of credit performance or volume performance, it's remarkably similar globally I would say, yes, so look I haven't I talked to Ed.
Maybe once a week.
Not only we could partners, but we'll get friends as well and.
I think he would he would tell you that you will see more emergence of domestic travel.
Before you see cross border and the reason you'll see that is I think.
Look I mean will how we'll countries open up their borders to two to inbound flights number one and how will the psychology work from a consumer perspective, I think there'll be a pent up demand.
To do something in the summertime.
In September, but I think a lot of us consumers will probably do that in the United States May do that may do that in the island. So I think I think travel will emerge more domestically.
First then it will internationally, having said that I talked to Willie Walsh, a couple of weeks ago and at the a and.
There there flights to China are are going back and forth and relatively relatively full as as those.
As those markets reopened as well so I think it's going to be it'll be interesting, but I think.
What about what's going to what is going to.
You don't make the difference here is how safe you make your airline and how safe you make the travel experience and certainly we will work.
With Ed and our other partners to do our part to help that whether it's from a boarding process and he'll take care of once you're on the playing into a fantastic job in and him and his team he and his team or thinking about those things and I'm sure. They will come up with a really high quality and premium premium product as they always do so.
But I do believe a domestic will emerge more than cross border and I think it will take more time to get back to a to cross to cross border travel would be my sense and I think Thats, obviously, a better question for Ed in the other airline executives, but.
We do have a.
Sort of a dog in this fight as well, so, but I think thats what'll happen Greg.
With that we will bring to call. It to an end. Thank you Steve. Thank you again. Thank you again for joining today's call and thank you for your continued interest in American Express the IR team will be available for any follow up questions operator back to you.
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