Q3 2020 American Express Co Earnings Call
[music].
Ladies and gentlemen, thank you for standing by welcome to the American Express Q3.
2020 earnings call at this time, all participants are in a listen only mode later.
Later, we will conduct a question and answer session. If you wish to ask a question. Please press. One then zero on your Touchtone phone you will hear a message, indicating you have in place in Q you may remember yourself from the queue at any time by pressing one then zero again.
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I would now like to turn the conference over to our host head of Investor Relations Ms. Vivian Joe. Please go ahead.
Thank you Linda and thank you all for joining today's call as a reminder, before we begin today's discussion contains forward looking statements about the company's future business and financial performance. These are based on managements current expectations and are subject to risks and uncertainties factors that could cause actual results to differ much.
Tearfully from these statements are included in todays presentation slides and in our reports on file with the SEC. The discussion today also contains non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials as well as earnings materials for the prior periods. We discuss all of these are post.
Got it on our website at IR.
American Express Dot Com, we will begin today with Steve Squeri, Chairman and CEO, who will start with some remarks about the Companys progress and results and then Jeff Campbell Chief Financial Officer will provide a more detailed review of our third quarter financial performance. After that we will move to a Q and a session under results with both Steve.
And Jeff with that let me turn it over to Steve. Thanks, Vivian Good morning, and thank you for joining US today I Hope you and your families are all healthy and safe as you saw this morning, we announced third quarter earnings of $1.30 per share on 8.8 billion in revenues, while our results continue to be significantly affected by the impacts of the pandemic we're increase.
Certainly confident that our strategy for managing through the current environment is the right. One overall I feel very good about the progress we made in the quarter and a number of key areas. We've seen we've seen a steady recovery in our overall spending volumes since the lows of mid April in fact, non fee any spending in the quarter, which has long accounted for the large majority of our volumes.
Was up slightly year over year online consumer retail spending was particularly strong up 32% over last year and within our commercial business HP automation volumes continued their rapid growth, although from a small base doubling since last year's third quarter as more businesses adopt digital payment solutions.
Our credit metrics continued to be excellent with delinquencies and net write offs at the lowest levels we've seen.
In a few years. Nevertheless, we continue to be cautious about the direction of the pandemic packs on the economy and this is reflected in our reserve levels, which Jeff will cover in more detail Bob.
Voluntary attrition rates and our proprietary products remain lower than last year, demonstrating that our customers continue to see value in our products and services. We continue to invest in our business by launching our largest ever shop small initiative supporting small merchants in 18 markets around the world.
Also the enhancements we made to the value propositions on many of our card products have produced strong results. Both in terms of increased spending and customer retention.
In addition, we have begun to selectively increased customer acquisition activities across our businesses.
Let me quickly review, our four key priorities for 2020, which I'll remind you include supporting our colleagues in winning as a team protecting our customers and the brand structuring the company for growth and remaining financially strong this last.
This last priority remaining financially strong is critically important in any environment and especially in these uncertain times as it establishes the foundation for executing against our strategic imperatives across our businesses.
I'm pleased to say that we've maintained a strong liquidity position our capital ratios are well above our targets and we continue to pay our dividend each quarter.
In terms of our first priority supporting our colleagues in winning as a team from the beginning our goal has been to take care of our colleagues. So that they can continue to take care of our customers.
As conditions began to improve in a number of countries since moving virtually all of our 64000 colleagues to work from home arrangements in March we have begun the phase reopening of our offices in 25 of our locations, including our headquarters in New York with a range of new safety procedures to ensure the health and well being of our colleagues and.
We are giving our colleagues the flexibility to continue working from home through June of 2021 should they choose to do so.
We're really proud of the resiliency and dedication of our colleagues our colleagues have demonstrated through this period, which has helped to drive our progress on our next priority protecting our customers and the brand through.
Throughout this period, thanks to the efforts of our frontline staff, our customer satisfaction levels have remained strong and have actually improved globally on a year over year basis, our customers have recognized our commitment to service excellence ranking us number one in the JD power 2020 US credit card satisfaction study the 10th time.
We've achieved the top spot.
In addition to the expansion of our shop small program any enhancements to our value propositions, a key differentiator for US has been the timely rollout of short term and enhanced longer term relief programs for customers, who have experienced financial challenges during the pandemic.
We're no longer seeing new inflows into our short term programs in the us and we've expanded our longer term programs to 20 countries around the world.
Our last priority is structuring the company for growth we can.
We continue to selectively invest for the long term you've seen this in the announcements such as our recent acquisition of cabbage, a leading financial technology company, serving small businesses in the us and any official launch of our network in mainland China, where in addition to signing merchants and cementing relationships with key digital partners, we chat and Alipay.
We're currently working to develop David capabilities on our network to capture some of the significant debit usage within China.
Let me step back for a moment and tell you how we're thinking about our financial decisions moving forward.
We've been looking at our strategy for managing through this cycle through the lens of three phases.
The first phase has been about navigating through the peak of the crisis and we've been focused on this pays phase of the past few quarters.
The second phase, which we're now in the early stages of his about rebuilding our growth momentum by increasing investments in key strategic areas.
Our goal in doing this is to enable us to enter the third phase generating pre coded levels of earnings and returning to our financial growth outlook.
While we hope that the worst is behind US we do not know for certain that that's the case, we recognize that there remains a high degree of uncertainty in the environment and Thats why we will continue our strategy of focusing on the four priorities I just discussed.
What's different is that now as we're beginning to see improvements in our business, we'll be placing even a greater emphasis on accelerating investments in core strategic areas in order to build momentum and position the company for long term growth as economic conditions improve.
Key areas of investment will include accelerating customer acquisition activities across our businesses continuing to refresh value propositions on our card products, including new broader lifestyle benefits and additional business centric off offerings developing additional solutions beyond the card to expand our relationships with small biz.
Businesses, maintaining virtual parity coverage in the us and expanding merchant coverage in key international markets, while strengthening and broadening critical partnerships and enhancing our digital capabilities across our business the.
The pace of our investment acceleration will be driven by the economic environment, which as you know is highly dependent on the course of the pen of course, the pandemic takes and the availability of additional government stimulus in the US in key international regions. In addition, while we plan to ramp up investments, we'll maintain our flexibility by controlling operating expenses.
And pulling back on investments if conditions deteriorate significantly.
Now I can't tell you when phase three will begin, but we're confident that the groundwork we will lay in phase II will provide us with the foundation, we need to generate momentum gained share scale in relevance as we exit the recovery phase in return to pre covert levels of earnings and our financial growth algorithm.
Before I hand, the call over to Jeff I want to take a moment to share my personal thoughts on the current environment over.
Over the past few months I spent a lot of time talking with other key leaders across industries, we're particularly with our partners our customers and our board.
I would say that while I'm personally less optimistic in the near term I am more optimistic about the longer term prospects for our economy and for American Express near term there continues to be a high degree of uncertainty about the direction of the virus and its impact on the economy there.
Developments in the political environment, the availability of future stimulus packages and how local governments will react to changes in local conditions. However.
However, I believe we are well positioned to continue operating successfully through this period by being prepared for the unexpected maintaining financial flexibility and quickly adjusting our strategies as necessary.
Looking at the longer term I am more optimistic I believe there's a pent up demand among consumers to travel again once they feel safe to do so after many months sheltering at home at the same time I believe the increases we see an online spending and creative creative pivoting of business models in the small business community will continue.
And I believe we are poised to take advantage of the opportunities these trends present.
I also believe that this crisis has made us even more resilient and.
And agile and flexible as a company, which will continue beyond this crisis and make us even stronger over the longer term.
Having said that no.
No one knows what the future will bring but regardless, we will continue to do what we're best debt.
Focusing on what we can control such as taking care of our colleagues and serving our customers putting the right building blocks in place and creating momentum to drive future growth.
Thank you and let me now I'll hand, it over to Jeff who will walk you through our financial results.
Well, thanks, Steve and good morning, everyone.
As I have the last two quarters I'm going to talk you through a different channel more detailed set of slides from what Weve used historically in order to help you understand how our business is performing in this unprecedented environment the key.
The key drivers of our financial performance in this environment remain volume and credit trends along with this quarter. The early days of some spending on what Steve just call. The phase II, our efforts to rebuild growth momentum. So I'll spend most of my time in these areas, let's get right.
Let's get right into our summary financials on slide three as you can see our results. This quarter are better than Q2 spending rose sequentially. Our credit provision was much lower than we used to these improved results to begin to fund more efforts to rebuild growth momentum that.
That said our results obviously continue to be significantly impacted by the global pandemic and the resulting containment measures that governments are taking around the world third.
Third quarter revenues of 8.8 billion were down 20% year over year on an FX adjusted basis, driven by declines in spend lend and other travel related revenues, while card fee revenues continued to grow net.
Net income was $1.1 billion in earnings per share of $1.30 in the third quarter down 38% from a year ago.
To get into the details of our performance, let's start with volumes as we have all year will continue to show you our billed business performance with a bit more granularity on monthly trends looking at the first few weeks of October I would point out that we have not seen any material changes thus far in October compared to the monthly and quarterly.
Data for Q3 that will focus on this morning.
Slide four shows that after hitting a low in the second quarter overall build business declines have improved sequentially to down 20% year over year in Q3 on an FX adjusted basis.
Our proprietary business, which makes up 86% of our total billings drives most of our financial results, who is down the same 20% the remaining 14% of our overall billings, which comes from our network business GNS was down 16% in the third quarter.
Now when you look at our proprietary billed business today, you really have to talk about TNT spending in non TNT spending separately given the very different impacts. The pandemic has had on these volume trends as you can see on slide five non TNT spending which has long been the majority of our volumes has recovered.
To pre covered levels and actually grew 1% year over year in the quarter TV spending remained down much more significantly though it did show some continued modest sequential improvements throughout the third quarter driven primarily by consumers. These.
These very different trends in non teeny versus Ginnie drive much of the difference in volume performance by segment and by customer type that you see on slide six in that.
In the consumer segment for example, US consumer spending has recovered faster than international consumer due to the higher mix of non Te any spending in our us volumes in the commercial sector segment spending from small and medium size enterprise customers, which historically has the highest mix of non TV spending.
Has been the most resilient so far whereas.
Whereas large in global corporate card spending, which historically has been primarily TNT has been down the most are independent.
As a reminder, this spending from our SMB customers represents the majority of our commercial build business.
We drill down further into all these points as you turn to slide seven which points out the wall historically non TV spending was 70% of our proprietary billed business today 90 any categories represent 88% of our proprietary billed business. This may.
This mix shift has occurred across all customer types as you see at the bottom of the slide.
So what's driving this beyond the obvious decline and TNT spend.
Well as you would expect we have continued to see an increasing shift to online and card not present spending in the current environment. The shift is most evident in the consumer business, whereas commercial spending in the non TV categories has been predominantly online for quite some time as you can see on slide.
Okay.
You see more about these shifts on slide nine with consumer online spend continuing to grow in the double digits at an accelerated pace relative to pre cobot levels up 20% year over year in the third quarter, even as offline spend has gradually recovered from the April in our culture.
In our commercial segment in contrast, since most of the spend was online even pre pandemic the online and offline trends are more similar.
You see other drivers of the growth in non TV spending as you look at the categories of non TV spend by segment on slide 10 for consumers you see the growth in non Janney spending is driven by strong growth in online retail spending in line with the growth. We just spoke about.
For commercial since the bulk of spending was already online. The most significant area of growth is in advertising media and communications, particularly from small and medium sized enterprises as they evolve their marketing and customer engagement strategies in the current more digital environment.
So overall, we see the consumers in SMS in particular have adapted their behaviors to the challenges of the current environment, which is why non TNT spending has recovered to pre covered levels and is starting to show some growth.
Now coming back to TV on Slide 11, as a reminder, the majority of our Ci any spending has historically come from our consumer business and that is even more true today and can.
And consumer TNT spending has continued to see a much faster recovery as shown on slide 12, followed by small and medium size enterprises, and then large corporations, we expect this.
We expect this trend to continue given the pent up demand to travel that we see in our consumer base and our expectation that corporations, particularly large ones. We will continue to limit their kidneys spending for some time.
You also see the different pace of recovery within the categories of Janney cruises, which are a very small part of our business have been slower to recover followed by the airlines restaurant spending other on the other hand has been the most resilient throughout in B.
In between you see lodging and other achieve any where you continue to see spending volumes modestly recover but at varying paces for example, spending on home rentals and at resorts, focusing domestic leisure travelers have been performing better than spending at hotels in urban locations you.
You see the impact of different mixes of TNT spend when you look at our international regions on slide 13, which have more travel related spending historically and thus are showing larger overall declines in volume.
US spending volumes continued to steadily recover throughout the third quarter.
On the other hand, the volume recovery in Europe, and Asia has moderated a bit somewhat in line with some additional restrictions in key markets for amex, such as the UK parts of the EU, Japan and Australia.
And finally, as we look at spending in the us across our six largest states from a volume standpoint on slide 14.
I would say that the trends across states have been perhaps surprisingly similar given the variance in medical trends and government policies.
So moving next now to loans in receivables on slide 15 loans declined by 17% year over year in the third quarter, primarily driven by lower spending volumes as you've heard from many other institutions. We also saw higher pay down rates in the third quarter, which drove a small sequential decline in loan volumes. Despite the improvement in spend very.
Versus Q2.
Based on what we see today, if you assume some continued improvement in spending levels I would expect this quarter to be the low point for loan balances and looking forward for those balances to start to grow modestly sequentially beginning in Q4, mostly driven into beginning by transaction volumes rebounding.
Card member receivables on the other hand were up 9% sequentially in the third quarter relative to the second quarter driven by the improvement in spending volumes I just spoke about.
So let's go now to our traditional credit metrics, which you see on slide 16, and you see the credit trends in the third quarter were solid and remained best in class.
Card member loans in receivable write off dollars, excluding GCP, we're actually down, 3% and 15% year over year, respectively in the third quarter.
Good to see an increase in write off 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 in these traditional credit metrics. So we would expect to see some impact on these metrics in future quarters.
In addition.
Our delinquency dollars in rates continued to be down year over year end sequentially in the third quarter and in fact, our third quarter delinquency rates are the lowest we've seen in several years, which is certainly unusual given the economic environment.
We feel good about our credit performance, our risk management capabilities and the work we've done to manage our exposure. So far it 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 as well as the way we mobilized our organization to ensure that we have the appropriate programs and people and.
Plays to support our card members, who needed financial assistance.
Course like others are customers are also helped by external factors such as the impact of record levels of government stimulus and the broad availability of forbearance programs.
As a result, we do remain cautious about the potential for future shocks to the economy and that caution is reflected in the macroeconomic outlook that informs our credit reserves.
Moving on to Slide 17, you will see that our provision expense for the third quarter is significantly lower sequentially and also declined 24% year over year simply reflecting our strong credit performance as well as a modest adjustment to our reserves.
As we think about the range of economic outcomes that are used in our modeling of Ses or reserves due to expected lifetime loss of the receivables and loans on our balance sheet you will see on slide 18 that the range of macroeconomic assumptions, we have used in our calculations are more divergent.
For the third quarter relative to Q2.
The baseline scenario has improved a bit from the prior quarter, but the downside scenario is more pessimistic and we have waited it more than we did in Q2, given the continued high level of uncertainty in the economy and the pace of recovery the issue.
The impact of this more cautious set of macroeconomic assumptions on our reserve models was offset by our favorable credit metrics and also a modest sequential decline in loan volumes this quarter, resulting overall in there being very little change to our reserve levels as you can see on slide 19.
We ended the third quarter was $6.5 billion of reserves, representing 8% of our loan balances and 1% of our card member receivable balances respectively in line with Q2 and up.
And up 2.2 billion from their pre pandemic levels.
So how do we feel about this level of reserves in today's environment.
We believe that the reserves on our balance sheet are appropriate given the broad range of economic outcomes envisioned in our baseline and downside scenarios and.
And looking at the balances that are in delinquent status or in one of our financial relief programs on slide 20 those be.
Those balances continued to decline sequentially to $4.2 billion at the end of Q3 and.
And now stand at $1.4 billion higher than they were pre pandemic.
As we wound down the short term customer pandemic really program that we put in place at the height of the crisis in March we've continued to see that the majority of the balances that have exited program the remained car.
The increase in our longer term financial relief program balances over the past two quarters reflects the effectiveness of the work we have done to help card members that need financial assistance enroll in the right longer term program for them.
Historically, the credit outcomes of card members that enroll in these programs are better than those that do not with around 80% of enrolled balances successfully completing these programs and.
And the repayment trends of the card members currently enrolled in F. RP have been in line with our historical experience.
Only time will tell what the ultimate level of write offs will be given a completely unprecedented nature of the global environment, but we feel good about our risk management practices. The way we are managing our exposure to the current environment and the resulting level of reserves we hold.
Moving on to revenues on slide 21 revenues were down 20% year over year in the third quarter, given the spend centric nature of our business model revenue declines have improved sequentially in line with volumes since the lows in mid April.
Turning to our largest component of revenue discount revenue I would move you ahead to slide 23.
As expected the contraction in discount revenue was larger than the decline in billed business due to the difference in TNT and non Te any billings trends. This drove a 12 basis point decline in the average discount rate in the third quarter relative to the prior year since we on average earn higher discount rates with TNT merchants versus.
As non TNT merchants looking.
Looking forward, if we see any spending continues to modestly recover we would expect to see slightly less year over year discount rate erosion in the fourth quarter.
Turning next to slide 24, net card fee growth has been strong throughout this year and grew 15% this quarter demonstrating the impact of the continued strong card member engagement that Steve discussed.
But growth has been decelerating steadily because of our decision to pull back on new card acquisitions as we were managing through the peak of uncertainty during the crisis I do.
I do expect some continued deceleration in growth rates, but I would still expect double digit that card fee growth in the fourth quarter.
Moving on to the details of net interest income and yield on slide 25 on the left hand side you see that net interest income declined 15% on an FX adjusted basis, which was slightly less than the loan declines we saw in the third quarter due to the year over year expansion in yield that you see on the right hand side of the page net interest yield on our card member loans increased.
40 basis points year over year in the third quarter, driven by modest tailwinds from lower funding costs mix and effectively pricing for risk.
Looking forward into the fourth quarter and assuming we continue to see higher pay on rates from revolving card members I'd expect net interest income to be relatively flat sequentially.
Moving on to Slide 26, we are continuing to breakout our expenses between variable customer engagement expenses, which come down naturally to spend declines in benefit excuses changes and marketing and Opex, which are driven by management decisions.
Very well customer engagement expenses in total were down 27% year over year, driven by lower spend and lower usage of travel related benefits the year over year decline in variable customer engagement expenses provided a 50% offset to the revenue decline in the third quarter.
In the fourth quarter I'd expect to see somewhat less of an offset if the recent modest uptick in teeny rewards redemptions and usage of travel related benefits continues.
We are clearly seeing evidence of pent up demand for travel in our membership rewards base as card members are banking points to use on future travel as a ripple as opposed to redeeming them on one of our many non travel related redemption alternatives.
In contrast to the declines in variable customer engagement expenses marketing expenses were up 23% year over year. This alone.
This aligns with Steve's earlier point that we have entered the second phase of our strategy for managing through this cycle, which is about rebuilding growth momentum.
The increase was driven by the enhancements, we've made to our value propositions and by the approximately $200 million, we spent on our largest ever shop small campaign.
Based on the current economic environment, I would expect our marketing expense in the fourth quarter to be at levels similar to the third quarter.
Finally, operating expenses were down 8% year over year in the third quarter as we executed on our cost reduction plans. Looking ahead, we have begun selectively spend in areas critical to rebuilding growth momentum as we enter phase two.
As a result, we expect our Q2 through Q4 year over year Opex declines will be somewhat less than the $1 billion. We initially discussed back in April which in hindsight was at the moment of peak uncertainty about the future.
Moving last to capital and liquidity on slide 27, our capital and liquidity positions remain tremendously strong as they have all year, our cetone ratio increased to 13.9% our highest level. Since we began began reporting this ratio, reflecting the retention of capital generated by stronger earnings this quarter.
Our cash and investment balance remained at a new record high of $55.5 billion in the third quarter.
We obviously remain confident in the significant flexibility we have to maintain a strong balance sheet and liquidity in periods of heightened stress and uncertainty looking forward. We are committed to our dividend distribution end to our long term CE Q1 target ratio of 10% to 11%.
As the economic situation becomes clear and as the fed allows banks to resume share repurchases.
In summary, though the external environment remains uncertain in the near term we are confident in how we are managing the company for the long term.
The investments we are making in phase II will provide us with the foundation, we need to rebuild growth momentum to gain share scale and relevance as we exit the recovery phase in return to pre cobot levels of earnings in our financial growth algorithm in phase three.
With that I will turn the call back over to Vivian.
Thank you Jeff before we open up the line for Q and eight I will ask bill is in the queue to please limit yourself to just one question. Thank you for your cooperation with that the operator, well now open up the line for question.
Later.
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 placing Q.
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One moment please for the first question.
Our first question comes from the line of Don Fandetti with Wells Fargo. Please go ahead.
Hi, good morning.
Hi, Jeff.
October you said hasn't changed much but if you look at September I mean in the you asked most of the states.
Sort of ramping up in terms of their year over year has that right.
Handbook continued or has that stalled.
Yes. Good question, Daniel we chose not to add the first half of October this time, because the trends all content. So what that manages you'd do continue to see.
Modest, but steady improvement in the us and you to continue to see a little bit more caution in Europe and markets like Australia, and Japan. So I think if you look at those July August September trends. It gives you a pretty good sense of what were seeing right up through today.
Next we will go to line of Betsy Graseck with Morgan Stanley. Please go ahead.
Hi, good morning.
Hi, Thanks for the time selling question on the phase to entry into phase two in the marketing I heard you're moving into the phase two here wanted to understand what you saw in your customer set.
This is the right time to do this now and how that feeds into.
Im not only the marketing piece, but the other investments you're making should we take from that that you know.
Year on year is now going to be more normal than down and then the other piece of that question is yes. This more negative scenario that you outlined very cleanly and clear.
And clearly in your deck on.
The negative environment, if that were to happen do you flex back to the phase one environment. Thanks.
So let me I'll take that Betsy.
And let me provide a little bit of context overall on how we think about this when I first took over I was asked the question how I would navigate in a car.
In a credit situation nobody ever asked me the question high navigate a pandemic.
But I was asked that question I was also asked that question when we had our investor call. This year and what I said was.
We would invest for the long term through a crisis.
And Thats what were doing so why start now and look we entered phase two basically.
Towards the latter stages of the of the third quarter as far as I'm concerned what we saw is exactly what Jeff just talked to Don about we saw a steady improvement in billings, we have a real understanding of what's going on from a credit perspective.
And for US it makes sense to invest in the business and let's let's look at sort of how I think in how the executive team thinks about this when.
When we look at this particular quarter. If you dive into these numbers. What you will see is that our marketing expenditure in this quarter was up 23% year over year not sequentially, but year over year.
And I don't know how many people had that either in their calculus or sort of in their models, but you know during times like this probably to go to move is to reduce marketing.
But we don't believe that Thats true what we believe in a situation like this is the most important thing that we can do is solidify our foundation and.
And our foundation is built on two things it is built on our card members or.
Our merchants card members and merchants and our brand.
And what you saw us do in the third quarter from a merchant perspective, and a brand perspective.
We invested $200 million in 18 countries over 12 weeks in the largest small business campaign that we've ever done in the history of the company.
And that has given us.
With our constituents in small business a lot of a lot of.
A lot of positive impact it has had.
Helped the brand it resonates on who we are from a card member perspective, we continue to make value injections and the reality is what has happened is that you see attrition levels lower than last year.
And you know a lot of our card members are fee paying card members and they are sticking with us because number one we continue to invest in the relationship number two we continue to provide the best service.
In the industry. So it was very important for us to solidify that foundation and I said Thats, what we would do and that is exactly what we are doing this.
The second point I would make and this gets to investing for growth.
Was once you solidified foundation, how do you build on that foundation and we did three very specific things in the quarter.
The three things that we did where our number one we stepped up card acquisition sequentially quarter over quarter with 40% increase in cards acquired we acquired 1.4 million card members in the quarter versus $1 million, that's down from last year, but were selectively doing it because what we are doing is we have more line of sight right now into behaviors, we have more.
Our line of sight into the potential customers that that we can acquire.
We went out and we acquired cabbage.
Cabbage is going to accelerate our efforts in small business.
From a platform perspective by anywhere from 18 to 24 months, what we would invest in ourselves and cabbage will help us create really an SMB digital banking platform.
Which is all inclusive and so we feel good about that and we launched our net.
Our network in China.
And we certainly feel good about that and we continue to invest in coverage. So you know as I sit here. It would have been pretty easy for me to say to team led to reduced marketing by 20%, let's do this and so forth and if you look at sort of the numbers that we reported our.
Our between our increase in marketing and the lack of a reduction as like a 40 cents EPS swing. So if I were to reduced marketing by 20% as opposed to increase marketing by 20%, we'd be sitting here potentially talking about $1.17 EPS, but the reality is in this environment a $1.17 EPS is short term short lived.
And not what we're focused on as a company. We are focused on as a company is continuing to build this brand and to build this franchise for the long term and the investments that we're making.
We will play out for years to come to your question about where we pulled back and what do we need to see about pulling back we'll continue to watch the credit markets. We will continue to see how our card members behave we'll continue to see how governments open up. So for example, if everything was closed it made no sense to do that small business promotion.
We have decided to do that small business promotion really in early may at the right time, and we waited till the end of June to launch it in the United States because stage for an opening so we will pull back on marketing from both an acquisition perspective, and a support perspective, if we see closures or if we don't have the line of sight insight and a nice.
Part about that is is we have the flexibility to do that.
And we're not committed but what we are committed to doing is to continue to invest in this franchise for the longer term.
Next we will go to the line of David Togut with Evercore ISI.
Uh huh.
I think we lost some money.
[music].
Okay.
We got the first half for yes.
David can you press one zero again.
Okay.
David are you there.
Yes, I am can you hear me now yes, yes three.
Thanks, so much.
Steve you called out maintaining virtual parity coverage in the us with visa and Mastercard and you articulated some initiatives. There I'm wondering if you could talk a bit more about.
Your thoughts around the AMDR and how that could evolve going forward and then international expansion.
You also highlighted you pulled back in Europe, and Australia with GNS being effectively shut down how are you thinking about expanding and in some of these international areas. This in.
This environment is it more with the proprietary card going forward while the.
Well, let me let me just answer the second question first and I'll come back to the first one but yes look I think you know in.
In in Europe and in Australia.
The way sort of regulations work.
Our economic model doesn't really work in a GNS environment and so to remind people, we do have a premium discount rate.
Within you know within within Europe, and within within Australia, and within Europe. If in fact, we had gone to a four party model, which we had a very we had a four party model and we had three party model.
It would have regulated our interchange and therefore reduced our margins significantly. So we're effectively out of GNS as it relates to our Europe and as it relates to Australia.
If you look at our business the two fastest growing pieces of our business pre pandemic.
It was our international SMB business, and our international consumer business and you know with the advantage that we do have is we are able.
To really target.
Card members, who are looking for a tremendous value within the products and so you see.
A preponderance of of both.
As a fee based products in international with a lot of value from a card member and driving significant spend.
Into those into those markets. So we continue to invest in.
In Europe in card acquisition, but more importantly, right now we are investing in merchant coverage and what we've done is we've looked at sort of our international markets and we've talked about strategic markets and and sort of the top markets that we invest in but we also look at the cities, where our card members live and where they travel to the obviously carves out traveling anywhere right now.
Now, but we do look at the top cities across the world and we have focused that caught our coverage efforts in really to get a lot more targeted coverage and weve had lots of success. We will continue to do that so and we're using the same kinds of tools that we did in the United States, whether it's what we call.
While we can't use and Optblue program any in Europe per se, we're using our role one point eases telemarketing and so forth and we see a significant coverage increases in in those markets.
In international So we are we're still committed.
We're still investing and once we get through this pandemic. They will continue to be some of the fastest growing pieces of of our business as far as the U.S. and let's just talk about the discount rate for a second.
We saw actually a sequential increase in the discount rate this quarter obviously it.
Decrease year over year and that is really due to mix and so when you look at mix.
With teeny being 69% down year over year, and those industries, having the higher higher MCR.
That's what's really driving it maintaining virtual parity coverage we are there.
Any any discount rate a rhodesian that was either contemplated or Don has been done as it relates to optblue and virtual parity coverage. So we're beyond that I think what you're seeing now in the in the discount rate erosion is really due to mix of business and what our expectations are.
When we get back to a more normal environment whenever that may be you.
You will see a normal mix, because we believe and look I don't know about you, but im going a little bit crazy just sort of staying in my house and and.
And not travelling and not being on the road seeing customers and partners and colleagues are taking vacations with my family and so there is a pent up demand certainly after consumer travel and you're seeing a little bit more of that very very small right now, but there is going to be a big pent up demand and will be will be there and ready to serve that demand when it.
Come to fruition.
Next we'll go to the line of Bill Carpaccio with Wolfe Research.
Thank you good morning, Steve and Jeff. If we look ahead 12 months from now hopefully we're in an environment, where traveling spending will more fully normalized but retaining existing customers until we get to that point seems like a critical element of your strategy can you frame for us how you think about the dynamics around the cost of retaining an existing customer today.
Versus the cost of losing that customer and having to re acquire them later.
Well I think the dynamics very simple it is it has traditionally and overtime and will always be a lot cheaper to retain a customer than it is to acquire a new customer and so it is an investment that we're making and we will continue to make I mean, just just think about.
Got what it takes to sort of mine to go get new customers and end to bring them along from a spending perspective, we have.
So to work with our customers here too.
To target their spending and.
What we're seeing is obviously some of our some of our customers are spending in areas now they hadn't spent before and if you look at sort of some of the things that we've done with streaming credits and even with our wireless credits and even shipping credits, we have actually engaged our card members to spend in areas that they hadn't spent in before and it's always amazing to me.
You know that that dynamic of how people compartmentalize their spend and you would just think that.
You know everybody who is using the product would use it consistently across these things, but some of these programs that we've had to retain customers have actually helped to open up new categories, and so where they are with their spending with us and so what happens here is as we open up those new categories that will continue and be consistent overtime as they then.
Bacteria travel spending so I think some of the investment in some of the spending that we're seeing.
Now is going to benefit us going forward. So bottom line much much cheaper and I can't I can't give you the exact numbers the ROI is and so forth, but much cheaper to retain existing customer than it is to mine for Newell RCR I might just also point back to your earlier comments about our attrition rates being down.
Around versus pre pandemic the foundation of our business.
Very long term customer relationships are and when you look at our best customers.
Attrition rates are remarkably low customers stay with us for a very long time, and so thats, what we build the company on so and that's what we're focused on maintaining through the pandemic.
Next we'll go to line of rich Shane with JP Morgan. Please go ahead.
Thanks for taking my questions and really appreciate the dish additional disclosure, it's very helpful. In understanding a lot of these trends.
Just looking at slide 20, I am curious if the financial relief programs that you're offering are disproportionately being offered to.
The SMB borrowers and if thats an area that we should be watching in terms of merging credit.
So that's actually a really good question, Rick and since you flipped to page 20, I'll encourage everyone to flip because the really interesting thing.
Is that if you go back to April so the peak moment really in hindsight of uncertainty in.
In April there were a disproportionate number of our SMB customers, who signed up for our very short term through one month as you recall.
Customer pandemic relief program.
The really interesting thing, though as the months have gone by is when you go to today into the numbers on the far right of page 20 in fact.
The SMB customers are no longer a disproportionate share and so it appears to us that the small and midsize enterprise customers I think prudently said well heck not sure what future whole defense programs out there I'm going to sign up for back in April but.
But most of them have pulled out of it have not signed up in disproportionate numbers for the F. RP programs and so we feel good about small business and in fact, I think it's probably worth reminding everyone that our small business card members.
Our predominantly people like contractors architects and lawyers, who for the most part are thriving in the current environment and only a very small percentage of our small business card members are in some of the hardest hit sectors like restaurants or.
Our online retail.
Or excuse me offline region.
Next we'll go to the line of Bob Napoli with William Blair.
Thank you and good morning, Steve.
Steve.
Aided the payments market is an area that you've done.
And actually kind of a lot of investing in and I know it's off a small base. He bought it take home pay your partner.
You are partnering with build that palm late middle tree with people with others.
What is the long term vision for that business when does it become non top of a small base and that is this something that could be 10% or no.
No real material portion of the American Express business over the long term.
Yes, well look I think that you call out a number of the partnerships that we have whether it's with Cooper, whether it's with S&P, whether it's with the Reba.
You know obviously, the our E com pay our own product that's only a component of it I would argue that.
A lot of the B to B is built into the SMB piece of it right now because you know look 80% of our SMB volume is non Te any and you know if you are a small business if euro euro lawyer or Youre your contractor, you're you're buying your your supplies to run your.
To run your company that way, so I think what you're really talking about Bob is the automation piece of that right and even if you look at our corporate card business.
Our corporate card business obviously.
Yes. This is nobody.
I mean hardly anybody that is that is sort of traveling at this point.
And a teeny teeny component of our of our corporate car business is is real is really really down.
And the reality is is that component of our business is only 6% of our overall business and yet our corporate card business is not down nearly as much as the corporate card teeny piece because of some of the inroads we made would be to be from a corporate perspective, and so I know it I think what we probably need to do is figure out how to frame.
Tim this a little bit better, but the reality is is that so much of our SMB and corporate spending is actually be to be today, what we're really talking about is how do your automated.
And Thats what were working on and I think over time that will become bigger, but I would argue a lot of that spending is a large percentage of our growth right now in SMB and I think when you get into large corporate there is a big opportunity to do that and Thats. When you look at the partnership with with Bill Dotcom, obviously that is not targeted at.
At a large corporation that is targeted at an SMB and our E com pays the same thing so.
More to come on that but I think it is a it is a growing piece and what youre seeing with the doubling of a comp a automation is the actual automation versus the normal card usage that you would normally see.
Next we'll go to the line of Jamie Friedman.
Donna.
Thank you for the additional disclosures Steve.
Steve Jeff I, just wanted to ask the GNS actually declined less than proprietary.
I was just.
Maybe minor detail, but I was just wondering is that because the easier comps or is that less wealthy any ngls that Jamie if you think about the fact that because as Steve talked about earlier, we have had to pull out of the GNS business in Europe, and Australia, or what's left is not necessary.
Okay.
A group of business that is representative of whats happening around the globe in fact, a handful of company countries.
And for a large percentage of the volume in those countries happened to be places like South Korea.
And Japan, and Brazil, and Israel So.
Particularly with South Korea is the largest single country and if you think about how they have done with their particular approach to to control the virus area economy. It kind of makes sense that it would be a little bit stronger, but it's not really those numbers aren't reflective of kind of an average across the whole rest of the world is what I would say.
Next we'll go to the line of Mark Devries with Barclays.
Yes, Thanks, Jeff as you alluded to earlier.
You maintain that 10% to 11% economic capital requirement and prior to the pandemic you had managed down to a quite effectively.
But its obviously expanded again with the roll off of balances here.
And the suspension of the buybacks can you just help us think through when you'll be able to return to buybacks is that just going to be fed driven based on the results of your new stress test or is there going to be also self determined based on what you see and when you feel comfortable buying back shares at what pace.
Should we think about your kind of drawing that down back to your longer term economic capital requirement yes.
Yes, all good questions Mark.
So a couple of things I mean, clearly we do need to wait until the fed allows share repurchases again, but but as I say that I would remind everyone that for us the fed requirements on capital are well below our 10% to 11% target. So they're not really a constraint on being at that level there on the constraint because right.
Now they've just Blanketly said to everyone you can't do share repurchase so so once they give the green light. The other thing is we do want to make sure we have visibility into the future direction of the economy. As you sit here today Weve talked a couple times full Stephen I about the fact that while our baseline.
And as things continue to get a little bit better we have to be ready for the fact that they may not we'll have to see so we need a little bit of economic clarity and then we'll go and we'll start working towards our 10% to 11% target.
I wouldn't expect mark to see.
Have us do an accelerated share repurchase and get there in one quarter, but you'll see us go back to the kind of pace, we were doing before which will get us there over the course of a relatively small number of quarters.
Next we'll go to line of men.
Deutsche Bank.
Hey, Thanks for taking my call Keith.
Chemo just wanted to check in with you in your conversations with some of your larger partners one.
Wanted to get a sense on how they're doing and whats continuing to be worrisome to them. This climate in going forward. Thanks.
Well I mean, if you look we've got we've got lots of partners right I mean, you know.
I had a conversation with Dan Schulman heat up you don't have a lot of work has been and there. They are doing great and we're doing great partnership with them between.
Hey, good points in and being embedded within the paper ecosystem. That's a great partnership for us and we're not when I talk to Ed Bastian I think I think delta is doing a great job navigating the crisis, but they are at the mercy of how people feel and.
But when you look at our cards with with with Delta.
You know that spending is at or better than the spending that we have in on all our other products in the same thing when if I talk to you know, Chris the set and arnie or that.
Over at Mariana, Chris said at Hilton.
Their perspective is it's a slow it's a slow recovery here and when you think about sort of the hotel industry conventions is a big part of it and thats not going to probably come back anytime soon but they are starting to see.
An uptick in in a more localized stays where people can drive to a hotel and not travel and even delta is starting to see a little bit of a pickup as well, but I think consistent with what I've said I think you are looking to see a tick up in consumer behavior from a travel perspective.
Sort of towards the end of the first quarter next year, but I think were all consistent in terms of.
How we feel about.
Business travel, which is probably not going to be to late 2012 late 2021 early 2022, but what I would say is that whether its Hilton BA Mary.
Maryann to Delta we are really pleased with the partnerships that we have from a co brand perspective, and those cards in the markets. They are in are performing at or better than our overall portfolio and it's because as I've said many times.
People are in our invested in their products for the longer term. They are invested in their miles you're invested in their experiences and when you put great brands like that together and create great experiences.
You know people will people will hold on and that's that's what's happening in this will pass when it's going to pass I can't tell you, but it will pass and you know as a society as a world we will figure out how to navigate this.
Over time.
Next we'll go to the line of Craig Maurer with autonomy.
Research.
Yes, good morning, Jeff and Steve.
Greg Greg.
So two questions for you first on the merchant discount rate you know.
More specifically.
Typical seasonality would suggest that the implied rate or the calculated rate.
I would fall in fourth quarter.
Curious is your expectation is a teeny will recover enough in the fourth quarter to offset the typical decline and secondly professional fees were materially higher than what we had expected.
And was curious if that was driven by support for things like the small business campaign.
Well the answer to the first for Greg.
I do expect fair or the steady improvement, we're seeing in GMI will more than offset any of the normal seasonality are in the discount rate I would.
Remind you that even hone TNT is down a lot more than non TV. If you actually look at the rate of improvement from the second quarter to the third quarter, Craig TNT is improving faster because your counsel March and so we expect that.
In general to continue and then the professional fees remember, we're up we're constantly moving back and forth between particularly on the technology side work, we do in house versus work we do.
Through a variety of different firms, we work with around the globe. So you really need to focus overall on Opex, which we feel good about being down a couple of hundred million again this quarter versus the prior year and of course being down much more than that versus our original plan.
Our final question will come from the line of Sanjay Sakhrani.
Okay.
Thanks, Good morning, So I wanted to follow up on.
On the improvement going forward the back part of this year.
Are you guys concerned maybe the cooler weather might effectively.
Yes, hi.
Closure stimulus small business initiatives that you have.
Okay can you just talk about your confidence in that in the acceleration of the growth and then.
These new accounts that you're bringing on when do you expect to get traction on the top line from those.
Well look I think just to the first piece of this.
You know.
As I said in my remarks, I mean, there's just so much uncertainty on everything that you. Just just mentioned, which is why I think it's so important to keep that that flexibility I mean, everything that you said could come to pass well, whether it does or not I do not know.
And Thats why we need to keep keep flexibility and that's why also we we did our investment in sort of small business. When we did it we will.
We will still do our small business Saturday on a global basis, we're committed to doing that and where we will continue to continue to invest in those brand building brand building activities, but I think Sanjay luck I mean, I think when you look at the northeast you don't know whats going to happen in terms of restaurants, you don't know if you're going to be at 25%.
And you're going to be a complete closure is going to be pretty hard to eat outside in the snow and things like that but then if you go to Florida, you have 100% openings right. Now so you have inconsistency across across the United States you have inconsistency across the globe and so we're going to have to just continue to watch that.
And we're also going to continue to make sure.
That we are.
Taking into account from an investment perspective, how the two of those things meet up but what I will also tell you is look we've got we've got salespeople out right now doing face to face calls, obviously, social distancing masks and so forth and the reality is they want to get out and people want to see them. So you've got a very different environment, depending upon where.
Are you war.
In the in the in the United States as far as sort of topline topline growth for new cards acquired I think it's going to be hard to see the topline growth because you got this compression that's happened due to travel. So you know we'll be looking.
That obviously, we're adding on more cardmatch.
Numbers, they're adding on spend but even as the add on spend it's you're not going to be at us either because they are not going to have to travel component within.
Within early on and so I think you know, we'll look at it but as far as from the outside perspective, you're still going to have this push down on revenue year over year up until the first quarter of soda next year, probably just because of what has happened to the economy and so I think it's more so.
Second third and fourth quarter of next year, where additional card members that we add you'll have a grow over over over 2020, but when I think about this into team thinks about this we anchor everything off 2019, I mean, we want to get back to that normal state and to get to that grow over from 2019. So.
That to US is truly a return to a return to normal.
With that we will bring the call 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 questions operator back to you.
Ladies and gentlemen, the webcast replay will be available on our Investor Relations website at IR Dot American Express Dot com. Shortly after the call you can also access the digital replay of the call. Thanks.
Thanks, Kevin.
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