Q2 2020 American Express Co Earnings Call
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One moment please.
Gentlemen, thank you for standing by welcome to the American Express Q2 2020 earnings call.
At this time all participants are to listen only mode. Later, we will conduct a question and answer session. If you wish to ask a question. Please press one than zero on your Touchtone phone.
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If you're using a speakerphone please pick up your handset before pressing the numbers should you require assistance during the call. Please press Star then zero as a reminder, today's conference call is being recorded I would now like to during the conference over to our host head of Investor Relations Ms. Vivien Joel. Please go ahead.
Thank you Alan Thank you all for joining today's call as a reminder, before we begin today's discussion contain forward looking statements about the company's future business and financial performance. These are based on management's current expectations and are subject to risks and uncertainties factors that could cause actual results to differ much.
Nearly from these statements are included in today's presentation slides in our reports on file with the FCC. The discussion today also contains non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials as well at the earnings materials for the prior periods, we get Scott.
All of these are posted on our website I like the Americans.
Thanks, Brett Dot Com will begin today with the squaring chairman and CEO, our with some remarks about the company's progress and results and then Jeff Campbell Chief Financial Officer will provide a more detailed review of our second quarter financial performance.
After that we will move to acuity session on the results with both Steve and Jeff.
With that let me turn it over to Steve. Thanks, Vivien Hello, everybody and thanks for joining us on the call. This morning, I hope everyone is safe and well in your families or are the same.
Let me just jump in while overall results for the quarter clearly show the effects of Cobot 19 pandemic on our business.
Jeff and I will dive into our performance on a more granular level to give you a clear picture of what's going on.
I will ask together on April 24th the global economy was basically in a freefall and we had no way of knowing if the declines were seeing in our billings would continue.
We now realize it mid April was when we hit the trough in terms of second quarter spending declines.
As we sit here today, there's still much uncertainty about the economic environment as reopenings installed in a number of geographies in the status of government support programs remains unclear.
Nevertheless, I can give you better sense of where we are and how the Kogan 19 crisis has been affecting us today.
Spending volumes overall has been improving gradually since April when they were down about 40% year over year to a decline of about 20% in mid July.
Non see any spending has been recovering at a faster paced in genie categories, and our small business customers have been the most resilient through the period.
We've not seen an increase in our total customer attrition levels from prior years with regards to credit we feel good about our risk management capabilities and the progress we've made with the financial relief programs, we rolled out to support our customers as they navigate unexpected financial challenges journeys unprecedented times, we remain confident in our ability to effectively.
Managed credit risks to achieve the best outcomes for both our customers and our shareholders.
All in all I feel good about how we're managing through this period. Despite the significant impacts of the cobot 19 pandemic had in our business will profitable in the quarter and we have very strong capital and liquidity position and we paid our dividends to our shareholders.
Importantly, our customers continue to be engage with our products and services and I'm confident that our strategy of focusing on what we can control. The short term well continue invest in areas that are key to our growth over the long term will put us in a position of strength when this crisis ends.
Similar to the first quarter, Jeff will discuss help the current climate is affecting various elements of our financial results and I'll give a little more color on what we're doing to manage the company through the present crisis, while positioning ourselves to take advantage of the growth opportunities ahead.
As a reminder, in Q1, we introduced four key priorities for 2020 supporting our colleagues in winning as a team protecting our customers in our brand structuring the company for growth in the future and staying financially strong we've made good progress against this framework and we'll continue to use it as a guide to the rest of year I'll go through.
Each of these priorities and give you some highlights of our progress.
In terms of our first priority supporting our colleagues in winning as a team we've been operating on a fully remote basis globally. Since mid March our frontline colleagues have continued to deliver outstanding customer service and our historically strong customer satisfaction levels have improved globally on a year over year basis more recently like many.
Other global companies were taking a slow and cautious approach to returning to our offices and we're implementing comprehensive safety protocols as our buildings reopened.
Also want to spend a minute talking about the recent incidence of deadly violets against the black community and the subsequent demands for actions to combat systematic racism.
Like many others were taking a hard look at our own practices across our business and developing a comprehensive plan to strengthen diversity and inclusion within the company.
While also increasing our support to black on businesses in the Black community outside of American Express.
As a first step we made through that we made $3 million in grants in 2020 to several non profits that support the black community and as part of our recently launched shop small initiative, we pledged $10 million over the next for years to fund the coalition with US Chamber of Commerce Foundation rains together to use black chambers to provide grants to black on small businesses.
Yeah.
We view this is just the beginning of a multifaceted multiyear commitment to do our part to address issues of in quality and to promote social justice.
Our next priority is protecting our customers in our brands.
To ensure our future success, it's critical that we continue providing reliable world class experience to help our customers manage through these extraordinary times in recognition of our customers evolving needs in this environment, we've enhanced our value propositions on many of our consumer and small business products, including adjusting our rewalk.
It's programs and added limited time offers and statement credits in categories that are relevant for today, such as wireless groceries streaming services businesses Centrals.
And food delivery.
Early results from these enhancements are encouraging.
As I mentioned, we havent seen an increase in total customer attrition levels over prior years. In addition, we're seeing increased card member engagement in several of the new categories, where we've added value including streaming in wireless services. We're also building on our commitment to help small businesses around the world as they struggled to recover from the covert 19 pandemic.
Last month, we announced our largest ever global shop small campaign, which includes a commitment.
Of over $200 million over the next three months to help jumpstart spending at small merchants in over a dozen countries globally.
Finally, we've had very good results in helping our customers who have required financial assistance during the pandemic nearly three quarters of those in our short term pandemic relief programs have successfully exited the program and are now current and paying their bills. Many of those needing more time have chosen to enter one of our enhanced longer term relief program.
Okay, which provide additional flexibility and paying balances over time these longer term programs in our operating in 20 countries around the world.
Our third priorities destruction of the company for growth in the future covered 19 has had a major impact in the way, we live and work and some of the changes may last for some time, if not permanently as we begin to see what shape. The new normal we'll take our focus remains on our customers as we look to deepen our relationships and take advantage of the opportunities that will help us grow our CFO.
Customer base going forward.
Our consumer business will continue to enhance our value proposition to offer features benefits and experiences that are that are particularly relevant to our customers changing needs im not going to go into specifics now, but you'll see us continue to refresh our current products and launch new ones focusing on categories to build upon and add to our traditional TV.
Offerings on the commercial side, we're seeing a significant increase in demand for our automated VTB payment solutions as more customers look for efficient secure ways to pay suppliers and manage their businesses remotely in this environment.
We continue to introduce a range of newbies payment solutions for businesses of all sizes, such such as last week's launch of American Express one APC for middle market companies. Our first proprietary accounts payable automation offering which is built on a technology of last year's a com pay acquisition.
Going forward, we expect to see the trend toward digitizing the BTB payments process to continue and we will continue to invest in these capabilities.
For our merchant partners, we're hoping to meet their growing desire along with consumers for clean payments by raising our contact with transaction threshold thresholds in 60 countries around the world throughout this period, we're continuing to look for more ways to embed American express into our customers digital lives to facilitate the increasing number of online transactions.
Earlier this month, we announced along with other major payment networks that will begin technical preparations for the international expansion of click to pay a simple unsecured digital checkout solution.
We also continue to look for opportunities to extend our mutually beneficial strategic partnerships such as the renewal of our longstanding relationship with British Airways that was announced this morning as well as the extension of our agreement with Marriott during the second quarter.
Turning to internal changes, we expect to see an increasing number of colleagues working from home going forward, which will influence how much real estate, we need over the longer term in the second quarter, we made decisions to accelerate the exit of surplus office space in several countries and we're assessing our long term real estate strategy for postcode world.
Finally, as I'm sure you also we recently announced that American Express became the first foreign payments network to be license to clear local currency transactions in mainland China. This historic milestone as many years into making and represents an important step forward in our long term growth strategy as well as in the overall development of the payments industry in China.
Our fourth priorities remain financially strong during the second quarter, we substantially increased our liquidity to record levels and we further strengthened our capital position with capital ratios that are well above our targets and regulatory requirements.
These robust capital and liquidity levels will enable us to continue operating through this uncertain period from position of strength.
Looking ahead no one can tell how the cobot 19 pandemic will evolve or whats impacts will be on the global economy.
So we will continue to focus on what we can control backing our customers colleagues and communities maintaining a tight rein on expenses, while seizing opportunities to invest in initiatives that will enable our long term growth and remain and and remaining very transparent with all of our key constituents about the trends, we're seeing and how they are affecting our business.
That's a quick round up of the progress we made on the four priorities I laid out last quarter.
These last few months had been extremely difficult for everyone and I anticipate we'll continue to face great challenges and uncertainty in the days ahead, while we can't predict the future I feel good about how we're managing through the crisis and I remain confident that we're positioning the company to emerge from this period even stronger.
This is how we weathered crisis time and time again over 170 year history.
Focusing on what we can control the short term while positioning our company for the long term and always believing in our customers in the power of our brand and in the resiliency and strength of our people.
Ill now turn it over to Jeff.
Well, thank you, Steve and good morning, everyone.
Just like it did last quarter I'm going to talk you through a very different set of slides from what weve used historically in order to help you understand how our business is performing in this unprecedented environment, which is obviously, unlike any environment any of us have faced historically.
The biggest drivers of our financial performance in today's environment, our volume and credit trends I will spend most of my time in these two areas.
Let's get right into our summary financials on slide three.
As you can see our results this quarter were significantly impacted by the global pandemic and the resulting containment measures second quarter revenues of $7.7 billion were down 28% on an FX adjusted basis, driven by declines in spanning the lend another travel related revenues as a result of cobot 19.
Net income was $257 million in the quarter.
You will notice an unusual effective tax rate this quarter of 58.7%. This is due to the combination of our lower overall pre tax income and some sizable discreet items, primarily related to certain foreign deferred tax assets that were impacted by the current environment.
Earnings per share was 29 cents in the second quarter down 86% from a year ago.
Turning to the details of our performance I will note that as was the case on our last earnings call quarterly data just isn't that helpful. Given the rapidly involving in environment. So we'll continue to show you are billed business performance and certain other metrics with a bit more granularity.
On monthly and recent trends.
Let's begin with billed business, which you see several different views of on slides four through nine.
Slide four shows you that worldwide billed business declines with the most significant down around 40% year over year in the month of April.
When the us and most of our largest international markets were effectively shut down due to covert 19.
Since then we've seen steady improvement in essentially all spending trends, while certain components or spend are now showing growth.
Our overall billed business volumes remained down year over year, given the significant role the t. any spending has historically played in our business.
In fact, you see on slide five that while TNT spending remains down 75% in the first part of July.
Our non Cheney billings are actually up about 5% so far in July.
This difference between the TNT and non Teeny billings performance, particularly shows when you look at our commercial business, where you have the tale of two very different customer types.
On slide six you see that spending from our small and midsized enterprises are SMB customers has held up much better through this period than the spending from our large and global corporate card clients.
The majority of the spend from our SMB customers is BTB spending.
While the spend from our large and global corporate card clients is predominantly TNF historically.
Also remind you year this spending from our SSD SMB customers represents the majority of our commercial billed business.
You also see the impact of different mixes of TV spend when you look at our international regions, which have a higher mix of TNT spend and thus are showing larger overall decline just volume as you see on slide seven.
Now as you would expect we have seen an increasing shift to online in card not sprint card not present spending in the current environment.
This shift is most evident in the consumer business and you can see on the right hand side of slide eight that for the non t. any categories.
Consumer online in card not present spend is actually up about 25% thus far in supply.
And finally as we all look for signs of where the most recent trends might take us.
See some impact from various markets in states going through shifts in the opening of their economies.
I would say, though that these impacts tend to be modest.
As you see one example of on slide nine which shows you the latest trends for our four largest stage in the us.
More generally it remains remarkable how much of the world is moving in a fairly similar pattern.
We are just clearly at a point, where there is still uncertainty about where that pattern will go next and at what pace.
Turning next to loans and receivables on slide 10, you see the total loans declined 15% and charge card member receivables declined 36% year over year in the second quarter, primarily driven by a little are lower spending volumes.
This dynamic of our balance sheet shrinking in weaker economic times is an important aspect of our business model as it fuels the extremely strong liquidity and capital metrics I will discuss later.
Looking forward into the third quarter. If you assume some continued modest improvement in spending levels I'd expect the sequential trend in our balances to be fairly stable.
Moving on to slide 11 loan and receivable write offs excluding GCP.
These things grew just 8% in the second quarter, and clearly do not yet reflect incremental stress since not enough time has passed for the impacts of the current environment to flow through our traditional write off credit metrics.
It is worth noting that our delinquency dollars are actually down year over year.
You do see an increase in write off and delinquency rates year over year, but this is primarily due to the significantly lower loan and receivable balances as opposed to there being any significant change yet in these traditional credit metrics.
In contrast, our provision expense on slide 12 reflects the likely impact on future write offs of the current stressed environment. As we took an additional credit reserve build of $628 million in the second quarter.
As you know macro economic forecasts are a key factor in determining the credit reserve build under Cecil.
Particularly in a volatile environment.
So turning then to slide 13, you will see the macroeconomic assumptions that were used in our seasonal reserving models for the first and second quarter.
This quarter, just like last quarter, you had a worsening macro environment.
However, this quarter there wasn't offsetting benefit mainly from volume declines as you can see on slide 14.
We ended the second quarter with $6.6 billion of credit reserves, roughly $2.2 billion higher than the reserve level, we had on our balance sheet. After we implemented Cecil at the beginning of Q1.
The increases from a combination of the $1.7 billion of credit reserves. We added at the end of the first quarter as a result of the worsening economic outlook due to covert 19 as well as the 628 million dollar reserve build we took in the second quarter.
Today, our lending in charge credit reserves on the balance sheet represent 8% of our loan balances and 1% of our card member receivable balances respectively.
So how do we feel about this level of reserves in today's environment.
Based on what we have learned in seen over the last few months, we do feel good about our risk management practices. The way, we are managing risk through the current environment and the resulting level of reserves we are holding.
And all starts with the changes we've made over the last few years in our risk management practices, which gave us a solid starting position when depend NAMIC hit we quickly rolled out a new short term customer pandemic relief program or CPR offering primarily one month payment deferrals, which we bid.
Steve gave us better visibility into our customer situations and then rolled out enhanced longer term programs for customers that need extended assistance as they exit our CPR program.
The nature of our charge card products also gives us very real time visibility into our customer situations and of course like others. We are also helped by external factors such as the impact of unprecedented levels of government stimulus in the broad availability of forbearance programs.
Internally one way we track what is actually happening in our portfolio is through looking at the balances that are in delinquent status or in one of our financial relief programs, including the temporary CPR program.
As you can see in the bar on the right hand side of Slide 15. The total of these balances was $5 billion at the end of Q2 around $2.2 billion higher than the Bu level, we had at the end of last year pre coated.
Around the time, we reported earnings last quarter. This metric was up to a peak of $11.5 billion as we saw balances enrolled in the customer pandemic relief for Ram peak in mid April.
Since then the majority of customers exiting the CPR program have become current and the remainder either enrolled in one of our longer term financial relief programs or are in the delinquent bucket.
Today, we have stopped enrolling new customers and CPR and only a relatively small balance remains in the program.
You will find the details of our CPM program balances in mid April and at the end of Q2 in the appendix on slide 30.
The increase in the longer term financial relief programs balance over the past quarter reflects the effectiveness of the enhancements we rolled out in April as we continue to work hard alongside our card members to help them identify the right program for them. So that they can retain their membership and get to a good financial outcome.
For both our customers and our shareholders.
Historically, we've seen that the credit outcomes of card members that enroll in our financial release programs are better than those that do not.
With around 80%.
Have enrolled balances successfully completing these payment plan.
And when you look at the delinquent and F. RP balances on our books today, coupled with our historical experience with card member payment behavior. We believe that the reserves we have on our balance sheet are appropriate based on what's happened so far.
Now only time will tell where the ultimate level of write offs will be given the completely unprecedented nature of the global environment, but we feel good about our risk management capabilities and the work we've done so far to manage our exposure.
Moving on to revenues on slide 16 revenues declined 28% on an FX adjusted basis in the second quarter as you would expect given the spend centric nature of our business model revenue declines heated trough for Q2 in the month of April and showed steady improvement throughout the quarter.
Looking at the details of our revenue performance on Slide 17, you see the impact of the continued strong card member engagement that Steve discussed in the 15% growth in net card fees. Despite declines in all of the revenue lines due to the current environment.
We expect this solid growth to continue with some modest deceleration since we have slowed proactive new card acquisition.
Other fees and commissions and other revenues were down almost 50% year over year.
Due to declines in travel related revenue streams, such as FX conversion fees, our business travel JV income share in commissions and fees from our consumer travel business.
These revenue streams or a modest part of our total revenue and typically don't change much quarter to quarter on India, you environment, but continue to be down significantly year over year in the second quarter due to the go cobot impact on travel.
Turning to the details of net interest income and yield I would move you ahead to slide 18 on the left hand side, you see that net interest yield on our card member loans increased 70 basis points year over year in the second quarter, driven primarily by mix benefits due to a faster decline in transactor loans relative to revolving loans as well as.
Our ongoing efforts to effectively price for us.
Moving to the right net interest income declined 8% on an FX adjusted basis, which was less than the loan declines we saw in the second quarter due to the yield benefits I just spoke about.
Our largest component of revenue discount revenue declined 38% in the second quarter as you can see on slide 19 as expected the contraction and discount revenue was larger than the decline in billed business due to the much larger declines we saw in higher discount rate any spend versus lower discount rate non TNT spend.
In the second quarter.
The divergence in TNT and Ontelaunee billing trends drove a 14 basis point decline in the average discount rate in the second quarter relative to the prior year.
Looking forward if TNT spending remains depressed you would expect a similar level of discount rate erosion in the third quarter.
Moving onto expenses on slide 20, we are continuing to breakout our expenses between variable customer engagement expenses, which come down naturally as spend declines and benefits usage changes and marketing in opex, which are driven by management decisions.
Variable customer engagement expenses were down 47% for of year, driven by lower spend and lower usage of travel related benefits the year over year decline in variable customer engagement expenses provided roughly 60% offset to the revenue decline in the second quarter a bit more than I would expect to see going forward.
Moving on to marketing an opex as we mentioned in our Q1 earnings call. We made the decision back in March to aggressively reduced cost across the enterprise for the balance of the year, but also to reinvest a portion of those savings in our existing customer base.
As a result, we've dramatically reduced our proactive marketing efforts for new card acquisition and reinvested in value proposition enhancements, resulting in a 16% decline in marketing expenses in the second quarter.
This outcome as a good example of what we've long said about the flexibility we have around our marketing investment levels, which can be pulled back as well as redeployed quickly if market conditions on the universe of attractive opportunities change.
Operating expenses were down 7% year over year in the second quarter and we're on track.
To achieve our target of a $1 billion opex reduction year over year cumulatively across Q2 through Q4.
Moving last to capital and liquidity on slide 21, our capital and liquidity positions remain tremendously strong and strengthened even further in the second quarter.
We also saw healthy deposit growth of 16% during the second quarter, even as we adjusted pricing given the current rate environment. As you can see on slide 31, the appendix.
Due to the counter cyclical nature of our balance sheet, our cetone ratio increased to 13.6% and our cash and investment balance grew to a record $61.4 billion in the second quarter.
We continue to have significant flexibility to maintain a solid balance sheet in periods of uncertainty or stress and with our strong capital position, we have the capacity and intend to continue to pay our dividend in the third quarter.
We continue to have significant flexibility to maintain a strong balance sheet in periods of uncertainty or stress.
And our strong capital position provides the capacity and we will pay our dividend in the third quarter.
Tend to pay it beyond subject to our board approval and so long as financial conditions support.
In summary.
No one can know how the future will play out but.
But we feel good about how we're managing the company for the long term.
This morning, we have been clear about how the current unprecedented times are impacting us financially.
Looking forward, we have tremendous capital and liquidity straight the continued engagement of our customers with our brand and we're confident that we are focused on the right things to position American express to grow as the current challenges inevitably recede with that I'll turn the call back over to Vivian.
Thank you gap before we open the line flicks Una I will ask fell into Q2. Please limit yourself to just one question. Thank you for your cooperation and with that the operator, we'll open up aligned for question operator.
Ladies and gentlemen, if you wish to ask a question. Please press one then zero on your Touchtone phone.
You'll hear a message, indicating that you've been placed in Q you may remove yourself from the Q at anytime by pressing one zero again.
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Our first question comes from the line of sight, Sanjay Sakhrani with KBW.
Go ahead please.
Thanks, Good morning, I'm glad you guys are doing all right and thank you for the added disclosures in the debt goes were great.
I guess, Steve you pointed out that conditions are little bit clear now versus last quarter. So I'm curious what your views are on t. any in the size of the markets and if your views have changed in terms of there being any structural impact to the market and then how can we think about American express responding to that long term.
His b to B.
Ill just take solution over the intermediate term thanks.
Good.
Shifting to Sanjay.
Let me provide a little context first and then so to answer the question.
So when you look at our overall spending 770% of our spending before this crisis was non teeny.
And growing faster than our TV business, and 30% was DNA to drill down a little bit our corporate card business was 9% of our overall business with about 55% to 60% of that being TNT, and then and not growing all add quickly.
And then you look at our SMB business, which has been the most resilient at this particular point in time.
And that business makes up 75% of our commercial business overall.
And is doing quite well and probably close to 80% of that spend is is is non DNA.
So we look at what's going on right now.
We made we gave you obviously disclosure up to almost mid you'll sort of mid July we see a growth we see growth in non TNT and but we see TNT as you know still being still being slow.
We're seeing restaurants come back obviously faster than you see airlines or or or hotels coming back, but I also think what youre seeing is there is a an unbelievable demand for people to travel it may not be the same types of travel, but you are seeing people driving to different locations.
And albeit when they come back quarantining, but they are driving to different locations.
And so we're seeing a little bit we're seeing a little bit obviously little bit an uptick in some of our lodging, which would include air bnb as well.
And other entities like that but I think as we think about this longer term and you only have to look at what the airline executive said over the last week or so I think my view has not changed on corporate travel I think corporate travel will take a while to come back.
But eventually.
We will get to we'll get back to 2019 levels. You just won't have all that growth that was happening in between.
I think the demand for consumer travel once consumers feel safe again, you will have this unbelievable pent up demand for people to want to get out and and travel in fact.
Our co brand cards in our consumer business are actually performing better than some of our proprietary cards now that may seem counterintuitive, but when you look at our partnership with Delta.
Hilton BA and so forth. These cards are performing better why they are performing better well, they're performing better because 90% of the spending is not on the co brand partner.
90% of the spending these are not store cards. These are these are all purpose cards and you know a lot of people. There psychology is they save points for the big trip. The other part of the psychology is I want I want status and I can get status through spending and I think when this is over status is going to be even more important.
As we move forward, so I don't think from a timing perspective.
My view is change I think that will be driven by.
Therapeutics, it will be driven by vaccine it will be driven by the distribution and production of vaccines, but I think that.
As we look at our spending we anticipate.
So slow climb back and we're seeing our consumers by definition consumers consume and.
And there is a pent up demand to consume and they will find other ways to consume as as we are seeing from a value proposition perspective, because I'm sure Thats, where people will go next.
From a value proposition perspective, part of our DNA has always been to constantly refresh our value propositions and as we've talked about we've been talking about refreshing those value propositions from a lifestyle perspective, and so while not cutting in specific details on on value propositions for competitive competitive reasons, what we've done in a short term.
Some stop GAAP measures in terms of various credits and extension of benefits and things like that which you know our support doing two things number one showing our customers we're thinking about them, but number two is actually getting more engagements in categories that we didnt have as much engagement and were increased our engagement.
The wireless and we increased our engagement in streaming, but you will see us continue to more fair value propositions into next year by adding on to our premium value propositions with more lifestyle 990 any.
Aspects and developing other value propositions for other products and services. So I hope I gave you sort of a general view of how we're how we're thinking about things.
We'll go next in line of Betsy Graseck with Morgan Stanley Go ahead. Please.
Hi, Good morning, My question is high.
Just wanted to understand a little bit on the credit side and the reserving that you did I know you indicated that you feel like you're in good place and so when I think about the reserving levels I'm looking at the 6.6 billion versus in a roughly the 5 billion in delinquency and financial relief programs that you've got so is that.
Good how I should be thinking about the forward look as these financial release programs either increase or decrease thing of the reserve will flex around that and maybe you can give us a sense as to how you are seeing those reserve buckets between consumer and small business 'cause there's been a lot of questions around the up to small business exposure and risk that you've got.
Thank you.
Yep two good question.
Betsy I guess the numbers I would actually encouraged people.
To think about our.
Since the beginning of the crisis between last quarter in this quarter. We've added 2.22 0.3.
Billion dollars of reserves.
And of course that is based upon.
Diesel accounting, which is really about a forecast of the future.
And that forecast of the future I would tell you, while we don't do our own economic forecasts.
External provider that we use does incorporate into their forecast such things as government aid.
Turning out such things as perhaps.
More small business failures and our lay off so that all goes into that $2.2 billion to $2.3 billion seized to reserve build as a forecast.
The reason we added slide 15.
Which is something we really closely monitor.
Internally Betsy is because it's back it's not a forecast. It shows you. The actual experience that we have had through the end of June and the number I would actually encourage you to look at on Slide 15 is the difference between the total dollars. We had that were delinquent or in a financial relief program.
Before cobot 19.
The demonstrating that number and the end of July was $2.2 billion.
And very importantly, I pointed out in my script, our historical experience is that with people we get into one of our longer financially programs. We generally over time are able to manage to get about 80% of those balances. So.
So we look at these numbers in say boy, our we feel good about our credit reserves, we think there certainly appropriate I would point out depending on what your future view is of the economy. Betsy. If you think there's going to be several more shocks government aid running out and we will need all those reserves on the.
Other hand, I think what slide 15 would save those shocks don't occur we may not need all those reserves will have to see the last thing I'd say is.
If you go back 90 days this year second part of your question Betsy.
Initially there were a higher percentage of the dollars that were in the small business receivable and loan receivable balances that signed up for CPR than there were consumer.
90 days on now we actually feel really good about the small business portfolio and in fact, those numbers have come way down and I think it's important to remember and Steve you might want to talk for a second about this I think people sometimes forget they look at our small business segment and they think Oh my gosh that.
Restaurants in some of the harder in sectors, that's not actually who are small business card members are yeah. So just the other the other pointed out question. This is in that fr fee program.
Jeff said his historically.
80% wind up paying us.
And when they do that now.
They will get their membership back and what have you but.
Out of that there's more more consumer UNEV RP right now than there is.
Small business, but I think what's really important about small business you've got to look at the merchant business and you've got to look into small business card business. There are two completely different businesses and.
While we have.
Huge preponderance of the restaurants across the world and particularly in the United States from a merchant perspective from a merchant acceptance perspective, only 3% of our small business customers are actually restaurants are the concentration of our small business portfolio is professional services legal finance insured.
Real estate about 14% construction about 10% in health care about about 5% so.
When you think about small businesses is all wide variety of of small businesses and I think we tend to think about small businesses as the restaurant and the local retail shop, we don't tend to think about small businesses from professional perspective and.
You know there's lot of people getting a lot of things done in their homes, because they're not going anywhere at this particular point in time. So we're seeing good activity in those in those segments. So I think thats an important distinction between what our merchant base looks like and what our small business card base looks like.
Our next question will come from the line of Mihir Bhatia with Bank of America go ahead. Please.
Hi, Good morning, Thanks for taking my question I wasn't.
Sure your comments on the discount group, we use remaining strong MPC on the near term, but the Oakland quietly God been fourth did decline for the first diamond quite awhile. So I was curious is that just driven by smaller acquisitions and if you could maybe just provide some more color on just what you're seeing in terms of accretion trends than what youre doing to grow.
Hi retention in going.
Well, so maybe a couple of points first I'd, just remind everyone that context here.
Is that for a couple of years the fastest growing part of our revenue line by far has been net card fees, we feel really good about the level of card member engagement that that represents an even this quarter in the face of all the challenges that line grew 15%.
For 1.2, as Steve pointed out when you look at our overall attrition levels. They have not gone up at all and are flat to down to where they were a year ago, which we think is a really strong statement about the and kit continued engagement of our card members what we.
Did do is that we slowed our pro active acquisition.
Because there's just not enough visibility into the actual credit quality quality of applicants. So you saw our.
New cards acquired which is also disclosed in parts of the press tables.
Were down significantly year over year. The other thing you would expect us to be doing from a risk management perspective is we have been very diligent about looking at people who are in active card members.
And canceling goes card you don't want to have an active card sitting out there in the middle of a economic downturn. So so really that combination of slower.
New card member acquisition, along with some of the inactive kind of cancellations that we're doing a why when you look at that total card number.
You see the numbers you do but we feel really good avodart attrition levels, we feel really good about our card member and I'd expect to see net card fees continue to grow into double digits. Yes, I mean, most important thing. So if you look at exactly the number you looked at Thats, what you see the most important thing for me and looking at the business is.
Voluntary attrition.
And voluntary attrition levels are down year over year.
And.
From an acquisition perspective.
You don't want to be the spender or borrower here of last resort and so we have been very very.
Circumspect about how we keep the channels going and what have you in who we take in who we don't take it but what we've done is we've kept all we've kept our channels open because you've got to keep those channels open because you want to be able to turn them on at the appropriate time, there will be a pent up demand and I don't want to have to sort of.
Region, all the channels debt that we have but the thing and I look at on a weekly basis and we look at this by card by card level car type and I'm not going to get into it with you, but the reality is in managing the business I look at voluntary voluntary attrition.
And that is and that is down and of course in a in a situation like we're now where you are caught overtime weve been feeding the card acquisition machine you don't feed into the same extent that we Ben feeding it and so it is down significantly which is why you've seen a marketing expense go down which is why you've seen us pivot our market.
Being investment from quite acquisition.
Two.
Card member value and card member engagement, so I'm not concerned at all about to proprietary card numbers those numbers will come back up as we turn acquisition back on but I do what I do what I do watch very carefully is the voluntary attrition numbers and Jeff points right. I mean, we will cancel people because you do not want contingent.
Liability.
Out there in the.
In India in any environment, if they hadnt been using you before more than likely you don't want him to be using your net.
We'll go next to Chris doing that with Piper Sandler go ahead. Please.
Hi, Good morning, Thanks for taking my question one to ask about.
The impact of bankruptcies on your financial state and some of that you how we've seen some corporate issuers and identify American expressed as a creditor and we did team and the variance analysis in the presentation that had a $53 million write off for receivables for corporate clients. So.
Can you just remind us sort of how those low like in terms of recoveries do they show up in different places in the income statement and how do they typically play out.
Yes, so Chris the kinds of losses year, mostly referring to which are when a merchant goes out of business in a situation where either to merchandise this money or we're going to made good uncertain card members.
Who didnt get their goods or services delivered those are generally not going to appear as part of the credit provisions are generally going to appear in opex historically that number has been.
Completely insignificant we've taken some modest isn't that tens of millions of dollars are charges. The last two quarters, we manage it very closely.
The one larger number you talked about if you and very quick reading on your part to get to the very insects Lineation you would also note that.
Due to a little bit of a core can accounting, yes, we had a 53 million dollar.
Loss with a and international merchant on the other half Thats actually a merchant where we had some credit insurance. So we would expect to more or less fully recover that loss. It appears on a different line item.
In the personnel so thats all carefully footnoted there in the appendix. So look we we work closely with all of our merchants are we watch this very carefully but historically these just aren't big numbers for us.
We'll go next to the line of Craig Wasserstrom with DBS go ahead.
Hi, Thank you.
Losses from.
When you question.
It was interesting of course to see the renewal with.
With.
At this but you're not today.
[music].
Really speaking as you approach in co brand renewals.
And to what extent are the current trends influencing how these deals are being struck ethanol differently from the path.
Yes, so look we've done in the quarter, we did to renew we did two we did a renewal and an extension.
We extended our Marriott agreement early in the quarter.
And today, we announced the renewal to 2028 of.
Of B of British Airways.
So let me just give you the context on how I think about these things if I was thinking about these renewals.
And for a 12 to 24 month period, I Wouldnt do them.
But I'm thinking about this business for the long term.
And in the long term.
These have been terrific partners British Airways has been a terrific partner of ours for over 20 years Marius Mario it's been a partner of ours as as they did the Starwood acquisition, we had starwood for a number of years and we're very happy about that relationship and the reality is that.
This pandemic will end.
And as I mentioned earlier.
When I look at the Delta and I will look at the Hilton card Deezer cards that are actually performing.
You know even better than some of our proprietary cards into reason for that is you have to great brands together.
With a great that with great value proposition. So as we think about these.
Renewals, we think about them.
Over the long term, we don't think about them just in a short term period end.
You see that in both of these renewals there were upfront.
I'm purchases of of points and.
Thats in a way for us to help out help out our our partners, but also to help out our shareholders as well so.
These are.
Again long term partnerships that have tremendous value and we look at them over the the life of these deals and over the life of these deals.
These would be good things for our for our shareholders and good things for our customers and show.
And that that's why we we extended both of these both of these deals at this particular at this particular point in time.
Our next question will come from David Togut with Evercore ISI go ahead. Please.
Thank you good morning.
Steve you've highlighted.
Search for more kind of card holder value in your comments and we've seen from most of the card issuing banks for the second quarter reports and even in the visa and Mastercard intra quarter updates the strengthen debit.
And I'm wondering whether this isn't a time for American express to introduce debit card to the extent, we're in a multi year search for value here tough economy.
Doesn't that doesn't that play to the.
The consumer value proposition that they could be with us for awhile.
You know, it's something that we look at on and on an ongoing basis.
You know economics were a little bit different.
In in debit.
And so and the value is.
The value that you were able to put on a debit card given the economics are a little bit different but we continue to look at at ways to fully service our customers not only from a lending perspective, but a transaction.
A transaction spending perspective as well so it's something that we'll continue to look at and it. If in fact, we believe it will add more value. Then we will look to proceed.
It was part of why we did our deal with pay Pal to link venmo in.
We felt that while we didnt need our own debit product the ability to have.
You know the transfer of from Venmo to American Express and vice versa.
His was good and look as we launch China that will be a both a debit and credit market for us. So I get some that we constantly look at it and as you can see there with to sort of there'll be two sort of flavors of that while not having our own issue debit card at this particular point in time.
Our next question will be from dominant Gabriel with Oppenheimer go ahead.
Thanks, so much for taking my questions.
As you guys look at your billed business growth.
Numbers versus the pure data I think some of the spend growth trends reflect the prudence of your customer base to dial back perhaps some of their discretionary spending can you just talk about some of the green shoes if any.
As to where your customer base has been diverting their spending from travel to other categories.
Excuse me and and how that spending behavior.
We have changed on a temporary basis versus more permanent thanks, so much.
Yes look I think that are our spending base has been traditionally.
You know with hot from a consumer perspective, more high end consumer more discretionary spending more luxury spending.
Over the last couple of months, it's been hard to do that in.
It has been hard to take those trips it has been hard to even go shopping for luxury goods, we've seen more online spending obviously.
People are eating out last in there they are buying more groceries and what have you, but we believe there is a pent up demand within our within our consumer base.
To spend I think what you're also seeing is.
Lots of spending from our perspective in sort of home improvement area and with with people like lows in home depot and things like that where our card members are spending.
The other piece of our overall spending really is as you think about our corporate spending our corporate spending is is down by 50%.
And so and that's traditionally the t. any piece the b to B piece is still relatively strong. So I think you know while.
While we look at it we haven't really seen our consumers really break out a lot of their spending at this point, which you know from my perspective.
It's not necessarily a bad thing because number one it gives us more opportunity sort of down the road and we are more than holding our own.
Obviously from a financial perspective, both credit and profitability and from a card value perspective, with what we with what they're doing but I think time will tell if there were a permanent shifts.
In spending, but I think that as I said before our consumers like to consume and they will find other ways to spend and they'll find ways to get more luxury goods and things like that.
We'll go to the line of Mark deliveries from Barclays Go ahead.
Yes. Thanks, So if you cover this in the prepared comments, but.
Normally card member rewards kind of move with with Bill business, but this quarter. It was down a lot more was that a product of of just lower spend and TNT, which has higher rewards attached to it or is there something you did actively there to manage that expense and also if.
Revenues remain weak for prolonged period of time are there other things are looking to due to lower expenses.
Yes, so actually Mark are you are sort of get are normally people should expect rewards to move roughly in line with billings.
This quarter it went down more and that was driven by the fact that you're correct. The higher cost redemptions R&D redemptions that people do for travel related rewards one of the shifts just by expanding the was just talking about has shifted a little bit from travel into other types.
Of spending both so reward shifted from the higher cost traveled to other things, particularly some.
Our of the online the things, we do with some of our partners and so Thats why for this quarter you saw rewards come down.
A little faster than just the billings I don't know that IDEXX I think that trend may have played itself out we'll have to see.
The other thing that we did about a year ago is we did a deal with pay pal to be able to burn points at every pay Pal merchant in the United States. In so we were starting to see pay Pal kick up and it was all about providing our card members with more and more options for rewards and so again is.
Data is that a permanent trend now, but I think we were starting to see that so I think we'll have a little bit more balanced and redemption going going forward as well.
We'll go next to the line of Craig Mauer with Autonomous go ahead.
Yes, good morning.
How are you guys and good how are you Craig.
Great. Thank you I wanted to go back to Sundays common and asset you retain these disclosures after the pandemic.
Just just a suggestion.
I wanted to ask.
If.
If you are seeing any I'm trying to think through what retailers are doing now in response to what's going on this seems like this might be a once in a lifetime opportunity for retail for retailers to disintermediate their highest cost cards, meaning travel based rewards pro.
Grams and try to permanently pusher narrative away from that.
How are you thinking about that how are you reacting to that.
And are you hearing any discussions of that from executives and then just a numbers question for Jeff.
Jeff what was the reserve coverage in the assuming portfolio. Thanks.
So Craig I Havent heard any of that I think right now retailers restaurants and anybody else's is is trying to welcome people would open arms.
Now is not the time.
To be aggravating your customers in any way shape or form and I think.
When customers are coming into two establishments.
They go there with the.
Intent to not only support the establishment, but to have a good time and I'm not so sure they really want to be a badgered or suppressed or anything else.
You know I don't see that I have not seen that I haven't heard that I haven't heard that from other card executives.
And certainly havent haven't seen that within our own.
Within our own portfolios. The other thing I would say is that.
You know.
I'm not seeing.
A big push on store cards, right now either which is probably not.
The most credit worthy segment, so I haven't seen it we're always liquid Craig we're always looking for that.
And that's why we're always trying to deliver value on both sides of the equation by driving in high spending customers and I just I just think at this time its full hearted for a merchant to sort of give their customer any reason.
I do not want to come back to the store so I haven't seen it at all.
And Craig in response to your second question as I said in my remarks overall, you had a percent of our card member loan balances reserved in about a little more than 1% on the card member receivable side, and really reflecting something else I said earlier one of the.
Things that has pleased assuming that last 90 days is that when you look at the reserve percentage on the loan side, which is where most of the exposure is actually lower for smbs at 7% than it is for consumer which is a little bit above 80% 90 days ago to the honest there was not clear to us that square that trend.
Is going to go.
But that makes us feel pretty good on the receivable side on both the SMB and consumer side it around 1% yet just one other point on that there was an.
Early on coming out of the pandemic.
Thank you saw a group of merchants that we're adding on sort of regardless of how you paid anywhere from a 3% to 5% Covance surcharge that were actually calling it a covance surcharge.
They got ripped in the press and they got rip by their customers.
If your cost of going up raise your cost, but don't surprise somebody at the end. So I think people right now.
Our just happy with people come in with people coming into this store, albeit what that means coming into a store. These days, whether you're eating out in the street or your you sort of dropping drive by should drive by a pickup for shopping. So I just don't see that are happening in the in the short to medium term.
Our final question will come from will from Don Fandetti with Wells Fargo go ahead.
Thanks, Jeff.
Turn to the state's disclosure.
Do you think about consumer TNT, how impactful through sort of your top one or two markets New Yorker, California, if we see one of those open up or slowdown just to get a sensitivity what could do to TNT.
Well, so you're correct. The states we chose to show in the slides are for larger stage, Texas, Florida.
New York, and California, I don't think we've given the exact numbers John in a while by state what I'd kind of step way back remember, we're a global company to US is only two thirds of the business to begin with.
And of course, we are spread across all 50 states. So no one state.
Opening or closing at various levels is going to have a material impact on our trends the other point I'll come back to John.
That I do think is not completely intuitive to people is when you look at the varying rates states have opened up it was a little bit of difference between states. If you look at that charges, New York, New York is still down a little bit more than in Texas, or Florida, but it's a pretty modest difference. So the most important thing is more.
Where is the overall global economy going at what rate do we make some real medical strides here and our business for respond.
Thanks.
Okay, all right with that we will clean the cost to an end. Thank you Steve. Thank you Jeff.
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 question operator back to you.
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