Q4 2020 American Express Co Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the American Express Q4, 'twenty and 'twenty earnings call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. If.
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And as a reminder, today's call is being recorded.
I would now like to turn the conference over to our host head of Investor Relations Ms. Vivian Zhou. Please go ahead.
Thank you Alan 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 management's current expectations and are subject to risks and uncertainties factors that could cause actual result.
Different materially from these statements are included in today's presentation slides and 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 the earnings materials for prior periods, we discussed all of.
These are posted on our website at IR Day American Express Dot Com, we will begin today with the square <unk>, Chairman and CEO, who will start 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 financial performance after that we have.
Move to a Q&A session on the results with both Steve and Jeff with that let me turn it over to Steve.
And good morning, and belated happy new year to everyone and hope you and your families are.
And we're healthy and safe as you saw we earned $1 76 per share on $9 35 billion and revenues in the fourth quarter and while we're still seeing the impacts of the Covid pandemic on our business the trends have steadily improved as the year went on and.
At the beginning of the pandemic, we had little visibility into the future, but we did have a plan for managing the companies for this period of uncertainty focusing on for priorities supporting our colleagues protecting our customers and our brand remains financially strong and at the same time, taking steps to restructure our company for longer term growth.
We've made substantial progress against each of these priorities as I talked about last quarter. We see this cycle playing out in three phases phase one has been about managing through the peak of the uncertainty which is what we focused on for most of 2020.
We are now solidly and phase two which is about investing to rebuild our growth momentum our goal and phase II to prepare us for phase III, a return to pre COVID-19 levels of earnings and our financial growth algorithm.
Our progress and managing through phase, one and confirms the strength and resilience of our differentiated business model key elements of this model such as the diversity and scale of our customer base, our brand our global merchant network and our integrated payments platform have given us a solid foundation to build on as we move into the next phase.
As we've seen throughout this period, our customers have been resilient and adaptive since the lows and mid April overall card member spending has steadily improved our card members quickly adapted to the current environment with an acceleration and their shift to online and card not present spending.
Non <unk> spending recovered to pre COVID-19 levels in Q3 and continued to grow throughout the holiday season, and Q4 <unk>.
Consumer holiday spending was up 11% globally year over year, exhibiting particularly strong online growth of 40%.
In addition, our value propositions and brand continue to resonate with our customers attrition rates on our proprietary products remained lower than last year, and our customer satisfaction levels remain above pre COVID-19 levels. We again ranked number one and J D. Power's annual credit card satisfaction study of U S consumers for the 10th time.
In the 14 years. The study has been conducted.
Throughout the year on a merchant network continue to grow globally, we sustained virtual parity coverage in the United States and we added more than $3 7 million merchant locations internationally in 2020.
Credit performance continued to be outstanding thanks to our robust underwriting and risk management capabilities and the quick adjustments, we've made as the pandemic hit.
Our Q for delinquencies and write offs are at some of the lowest levels, we've seen and a few years.
And our best in class our business model has also helped to further strengthen our already strong capital and liquidity position over this period.
And our colleagues have proven to be even more agile and highly engaged and moving the company forward. Despite dealing with disruption of the pandemic debt, which was brought to there which has been brought to their lives at work and at home.
All and all I feel good about all that we accomplished in 2020 and some other highlights of which you can see on slide two.
I am even more confident that our strategy is the right one and position us for growth going forward.
That being said the effects of the pandemic will continue to linger in the short term the pace of economic recovery is dependent on the course of the virus and the speed with which vaccines can be distributed.
For us the timing of how quickly we can get to phase III and return to pre pandemic levels of earnings is also tied to recovery and consumer travel and entertainment spending and therefore dependent on how soon lockdowns ease and travel restrictions lift and the general public begins to feel comfortable traveling again, we continue to be confident that consumer.
Spending on travel and entertainment, we will come back to pre Covid levels, we just can't predict right now how quickly.
Given this environment. We are looking at 2021 is a transition year during which our focus will be on building rebuilding growth momentum.
By rebuilding growth momentum, we mean firing up our core acquisition and retention engines scaling key next horizon and opportunities and retaining the flexibility and our financial model.
To accomplish this we plan to aggressively increase investments and our core strategic business areas with a specific focus on the following and.
And our consumer and commercial businesses, we plan to continue to ramp up our card member acquisition activities inject additional value into targeted products and continue our strategy of periodic refreshes of our premium products.
Additionally, and our commercial business, we plan to continue to invest and scaling our cash flow and supplier payment solutions beyond the card a few examples of how we're doing this include the work already underway to integrate and relaunch cabbages suite of products, including a digital business checking account for small businesses as well as continuing our efforts.
To expand.
The penetration of our AP automation solutions, where we have seen volumes double and the last year alone.
On the network side, we plan to continue our focus on increasing coverage as well as improving perceptions of coverage and welcomed acceptance globally.
We're also investing and enhancements to our network to deliver value to our various partners and to support the growth of debit capabilities in China.
Finally, we plan to continue investing heavily and new and expanded digital capabilities across our businesses. The nature of the pandemic has accelerated customer engagement with many of our digital features and services and experiences we rolled out in 2020 and over the past several years and we think these trends are here to stay.
And a high level those are the key areas, where we plan to increase investments this year to generate the momentum that will help carry us through the recovery and into the future.
Before I hand, the call over to Jeff, Let me and with a few words about how we're thinking about our financial performance in 2021 and beyond.
On last quarter's earnings call I talked about how my confidence and our long term was growing.
Though the near term remains hard to predict.
Today, I'm, even more confident about our growth potential and the medium and long term for him.
And cautious about predicting predicting the precise pace of and recovery in 2021 and.
As I discussed are planned for this year calls for maximizing investments and those areas that enable us to rebuild growth momentum.
With us in mind, we will we will not be focused on a particular EPS target in 2021, though Jeff will provide you with some scenarios and potential outcomes and a few minutes.
And reflecting on Covid <unk> impact on the economy and our business in 2020.
And where we are as we begin 2021, we look at this two year period as a pause and the growth momentum we had had been generating for the previous 10 consecutive quarters.
Before the pandemic began.
As a result, we will be focused on achieving our aspiration of being back to the original EPS expectations. We had for 2020 in 2022 and for the company to be positioned to execute on its financial growth algorithm going forward.
I believe we have the right plan for achieving this aspiration. The foundation of our business is solid our brand customer relationships and partnerships are strong our colleagues are focused and committed and we have shown that we can adapt to rapidly changing conditions.
And I'll hand, the call over to Jeff to review our financial results and then we'll take your questions. After that thank you for your time and well.
Well, thank you, Steve and good morning, everyone.
Today, I will discuss our fourth quarter results and the context, what was clearly an unprecedented and full year 2020.
I'll also provide you with a sense of how you're thinking about the future with some scenarios potential outcomes for 2021.
Let's get right into our summary financials on slide three.
On our results and the fourth quarter continued to improve sequentially, but we're still significantly impacted by the global pandemic and the resulting containment measures and governments are taking around the world.
First quarter revenues of $9 $4 billion were down 18% year over year, driven by declines and spend lend and other travel related revenues, while card fee revenues continue to grow.
Net income was $1 4 billion and earnings per share was $1 76, and the fourth quarter down 13% from a year ago.
Now as I've said over the past three quarters. The key drivers of our financial performance in this environment remained volume and credit trends. So I'll again spend the most time on these two topics.
Turning to the details of our volumes first let's start with billed business, which you will see several views of on slides four through 10.
The rapid pace of change and billings has slowed since September and so we have returned to showing quarterly trends and our billed business slide since we think looking at trends on a quarterly basis is more meaningful to the noise, you see and monthly trends from days mix and the timing of holidays.
Starting with slide for overall build business declined 16% year over year, and the fourth quarter, our proprietary billed business, which makes up 86% of our total billings and drives most of our financial results was down on that same 16% and the remaining 14% of our overall billings, which comes from our network business GNL.
And was down 15% and the fourth quarter all on an FX adjusted basis.
When you look at our billed business performance and 2020 and think about what this might mean for 2021, it's important to think about tea and <unk> spending and non TNA spending separately given the very different impacts depend emmick has had on these volume trends as you can see on slide five.
Non <unk> spending which is longer and the majority of our volumes hit a trough and the second quarter, but was back above pre pandemic levels by the third quarter and grew 4% year over year and the fourth quarter as our card members, particularly consumers and Smes have adapted their spending behaviors.
For the current environment.
<unk> spending on the other hand has remained down much more significantly declining 65% year over year and the fourth quarter. So it did show some continued modest sequential improvement.
Driven primarily by consumers.
As a reminder, prior to the pandemic non <unk> spending was around 70% of our proprietary billed business and today. It represents almost 90% as you can see on slide six.
Looking at the billings mix by customer type at the bottom of the slide you see that the majority of our <unk> spending has historically come from our consumer business and that is even more true today.
Taking a closer look at <unk> on slide seven you see the consumer channel continue to recover faster than that of Smes and large corporations and we expect this trend to continue given the pent up demand for travel that we see and our consumer base and our expectations the corporations, particularly large ones will.
<unk> to limit their T&D spending for some time.
You also continue to see different paces 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 for both showed modest improvement sequentially in Q4.
Restaurants spending on the other hand has been the most resilient throughout.
Decelerated slightly during Q4 due to colder weather and the U S and renewed dining restrictions in certain geographies.
Moving on to global consumer on slide eight we continue to see an acceleration and online and card not present spend growth throughout 2020, especially.
And the holiday season, which drove 5% growth and non <unk> spending and the fourth quarter.
Turning next to our global commercial billed business on slide nine non <unk> spending has returned to pre COVID-19 levels and grew 2% year over year and the fourth quarter within our commercial segment you continue to see a tale of two very different customer types.
Spending from small and medium sized enterprise customers, who historically have the highest mix of non <unk> spending has been the most resilient throughout 2020.
And whereas large and global corporate card spending, which historically has been primarily TNT has been down the most during the pandemic.
I'll remind you here that spending from our SME customers now represents 86% of our commercial build business.
You'll also see the impact of different mixes of G&A spend when you look at our international regions on slide 10, which have more travel related spending historically and thus are showing larger overall declines in volume.
More generally and it remains remarkable how much of the world is moving at a fairly similar pattern, which speaks to the global impact of this pandemic.
To sum up on volumes and we feel good about the pace of recovery and non <unk> spending throughout 2020.
And expect it will continue to grow steadily and 'twenty 'twenty one.
But more broadly and 2021, our overall volume recovery to pre pandemic levels will be primarily driven by what happens with TNT.
Non TNT has already substantially recovered.
While we currently expect spending in Q1 'twenty one to remain relatively in line with Q4 of 2020 outside of some impact from normal seasonality on.
Our current assumption is that by Q4 of 2021, T&D spending will have recovered to around 70% of Q4 2019 levels.
Moving next to loans and receivables on slide 11 loan and receivable balances were up for it and 7% sequentially and the fourth quarter relative to the third quarter driven by higher spending volumes during the holidays.
However, loan and receivable volumes were down, 17% and 24% year over year, respectively.
And the fourth quarter, driven by the continued declines and spending volumes that I just spoke of and we also continue to see higher pay down rates on <unk>.
<unk> card members on our credit cards.
Looking forward into 2021, I would expect the recovery on loan balances to lag the recovery and spending volumes if the higher paydown rate trends, we saw in 2020 continue.
In addition, I would remind you that we typically see a modest sequential decline and balances and the first quarter of every year due to seasonal spending patterns.
Turning next to our traditional credit metrics on slide 12, you will see that the credit trends and the fourth quarter remained remarkably strong with card member loans and receivable write off dollars, excluding UCP down, 30% and 59% year over year, respectively.
In addition, our write off and delinquency rates continued to be down year over year and down sequentially and the fourth quarter, reaching the lowest quarterly loss rates, we've seen and several years for both card member loans and receivables.
Looking at the total balance of loans and receivables that are and delinquent status or and one of our financial relief programs on slide 13, those balances continued to decline sequentially to $4 billion at the end of Q4 and now stand at one $2 billion higher than they were pre pandemic.
Historically, the credit outcomes and card members that are enrolled in these programs are better and delinquent card members that do not with around 80% of enrolled balance of successfully completing these programs and the repayment and trends of the card members currently enrolled and FRP have been in line with our historical experience.
It is unusual to see credit performance was strong and in an environment like this it all starts with the changes we've made over the last few years and our risk management practices, which give us a solid or gave us a solid starting position us well as the way we mobilized our organization to ensure that we had the appropriate programs and people and plays to <unk>.
Support our card members, who needed financial assistance from <unk>.
Of course like others are customers are also helped by external factors such as record levels of government stimulus and the broad availability of forbearance programs.
As a result, we do remain cautious about the potential for a significant downturn and the pace of economic recovery and that caution is reflected and the macroeconomic outlook that informs our credit reserves.
Moving on to Slide 14, you will see that the macroeconomic assumptions that were used and the modeling of <unk> reserves for the expected lifetime losses of the loans and receivables have modestly improved and both the baseline and downside scenarios since Q3.
But the two scenarios do remain sharply to Virgin.
And our reserve calculations for the fourth quarter, we continued to wait heavily towards the more pessimistic downside scenario due to the continued caution that I just spoke about.
Despite this caution the impact of this modest improvement and the set of macroeconomic assumptions on our reserve models.
And our strong credit performance led us to release $674 million of reserves and the fourth quarter as you can see on slide 15.
This reserve release, coupled with our low write offs drove a provision expense benefit.
From a $111 million and the fourth quarter.
We ended the year with $5 8 billion of reserves, representing seven 3% of our loan balances and <unk>, 6% of our card member receivables balances, respectively, and we believe that the reserves on our balance sheet, which are up one $5 billion from the pre pandemic levels are appropriate given the broad range of <unk>.
Economic outcomes envisioned and our baseline and downside scenarios and our caution about the potential for a significant downturn and the pace of economic recovery.
Turning now to the details of our revenue performance on slide 16, and fourth quarter revenues were down 18% year over year, driven by declines and spend lend and other travel related revenues, while net card fees continued to grow as you can see on slide 17.
And net card fee growth remained strong throughout 2020 and grew 12% and the fourth quarter demonstrating the impact of the continued 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 this crisis and the second quarter.
Although we started to ramp up new card acquisition, and the third and fourth quarter and we will continue to increase investments in this area. This year. It will take time for card fee growth to re accelerate as a result, I do expect card fee growth to dip into the single digits midway through this year before it starts.
Two eventually reaccelerate.
Moving on to the details and net interest income and yield on slide 18, net interest income declined 17% on an FX adjusted basis roughly in line with our loan to clients. We saw on the fourth quarter net interest yield on our card member loans increased 10 basis points year over year, and the third quarter, driven by modest tailwind from funding cost and pricing for risk.
Mostly offset by declines and revolving loan balances.
Looking forward I would expect net interest income to be relatively flat to Q4, and the first quarter and then increase modestly as loan volumes recover.
Turning next to our largest component of revenue discount revenue on slide 19, as expected the contraction and discount revenue continued to be a bit larger than the decline and build business due to the difference in <unk> on T and E. Billings trends. This difference drove an 11 basis point decline and the average discount rate and the fourth quarter relative to the prior year.
As a reminder, we on average on higher discount rates with TNT merchants versus non PND merchants. The discount rate was also down modestly sequentially due to the seasonal trends, we typically see in the fourth quarter low.
Forward into 2021 I'd.
I'd expect discount revenue to recover and generally in line with billed business with the discount rate trends impacted by the pace of <unk> recovery.
Coming back to total revenues on slide 20, you see that the overall revenue trends in 2020 are broadly moved in line with billed business trends given the spend centric nature of our business model.
And while I would expect first quarter 2021 revenues to be broadly in line with Q4 outside of some impact from seasonality.
T&D spending recovers to around 70% of 2019 levels by Q4 as I mentioned earlier you.
And you'll probably see overall revenue growth of around 9% to 10% for full year 2021.
And if <unk> recovers more slowly or quickly you would see full year revenue growth, but somewhat lower or higher than that nine to 10 per cent.
Moving on to slide 21, we're continuing to break out our expenses between variable customer engagement expenses, which moved naturally in line with spend volumes and benefits usage and marketing and Opex, which are driven by management decisions.
Variable customer engagement expenses in total were down 24% for the full year, driven by lower spending and lower usage of travel related benefits the year over year declines and variable customer engagement expenses provided around 50% offset to the full year revenue declines we saw in 2020 and the fourth quarter that offset was closer to 40%.
As we began to see some higher spending and usage of travel related benefits and I would expect that relationship to continue into the first quarter of 2021.
Moving on to the marketing expense line, we invested $1 billion and the fourth quarter as we ramped up our investments and new card acquisition and continued to invest and value injection and.
As Steve mentioned and.
In 2021, our focus is on rebuilding growth momentum and maximizing our investments to do so.
As a result, we could spend as much as a little over $4 $5 billion and marketing this year.
Our ultimate marketing investment levels will be governed by the universe of attractive investment opportunities that we see as we move throughout the year and the pace at which we wind down our value injection efforts as customers begin to experience again, the full benefits of our existing value propositions.
Turning to operating expense as you can see that they were down 6% year over year and 2020 years, we kept tight control over our expense base, while selectively investing in areas critical for our long term strategies.
In 2021.
We expect our operating expenses to be around $11 5 billion.
Below 2019 levels as we continue to keep tight control over our operating expenses, while also investing to rebuild growth momentum.
Last while you saw some quarterly volatility this year and our effective tax rate. The final fourth quarter tax rate was a bit below 23% and I would expect around a 23% effective tax rate in 2021 absent any legislative changes.
Turning next to capital and liquidity on slide 22, our capital and liquidity positions remain tremendously strong as they have been all year. Our CET one ratio ended the year at 13, 5% after hitting and the third quarter, our highest level. Since we began reporting this ratio and our cash and investment balance ended the year of $54.
<unk> billion dollars and has been at record highs since the start of the pandemic due to art distinctly counter cyclical balance sheet.
We remain confident and 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 and to our long term CET one target ratio of 10% to 11% we plan to resume share repurchases starting this quarter up to <unk>.
Our maximum debt authorized capacity of around $440 million and Q1.
Beyond Q1, our capital distributions will be a function of the fed's guidelines, our capital generation and the growth and our balance sheet.
To sum up we feel good about how we've navigated through the unprecedented challenges of 2020, and we feel well positioned to rebuild our growth momentum and 2021.
We now know a lot about how our customers and our business are performing in this environment.
The two areas that do remain harder charter to predict for 2021, though are the same two we have talked about since the pandemic began the ultimate credit outcomes and the pace of the recovery and T&D spending as I mentioned earlier.
That said the range of potential outcomes on credit and reserves as the most impactful to our performance in 2021.
And so on slide 23, we have outlined two scenarios.
Most importantly scenario one assumes that the caution we have shown in our Q for credit reserves about the potential for a significant downturn to the pace of economic recovery turns out to be warranted.
Such and economic outlook would likely put some pressure on our current assumption of a 70% T&D recovery by Q4, and this would likely drive a somewhat weaker revenue recovery.
The combination of these things could lead to an EPS outcome as low as around $5.
Scenario two most importantly assumes that we do not see a significant downturn and the pace of economic recovery.
Leading us to continued strong credit performance and having no need to maintain our current level of credit reserves.
And this sort of economic outcome would also likely drive us somewhat stronger revenue recovery.
The combination of these factors could lead us to a much stronger EPS outcome and the area of $7.
In either scenario.
Our investment levels will be governed by the universe of attractive investment opportunities that help us to rebuild growth momentum along with the trajectory of our value injection efforts not by focusing on a specific EPS outcome.
We run the company to maximize value for our shareholders and the long term.
Although we can't predict precisely where 2021 EPS will land or provide and EPS guidance range. At this time, we believe that our focus on managing the company to rebuild growth momentum is the right one to help us achieve our aspiration of being back to the original EPS EPS expectations, we had for.
<unk> 2020, and 2022 and.
And for the company to be positioned to execute on its financial growth algorithm.
And with that I'll turn the call back over to Vivian.
Thank you Jeff before we open up the line for Q&A I'll ask that was in the queue to please limit yourself to just one question. Thank you for your cooperation and with that the operator will now open up the line for questions operator.
Ladies and gentlemen, if you wish to ask a question. Please press one and then zero on your Touchtone phone, you'll hear a message, indicating you've been placed in Q you may remove yourself from the queue at any time by pressing one and then zero again.
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Our first question will come from the line of Sanjay Sock Ronnie.
And with K B W.
Go ahead. Please thanks and good morning, I appreciate and Sanjay how are you.
Appreciate all the context for 2021 and 2022, because I know, it's pretty fluid, but I guess as we think about the assumptions you've outlined how confident are you on the 70% T&D rebound.
In the fourth quarter of 2021, I mean, do you need a broad scale reopening or do you think just naturally the behaviors will be better this year versus last year and when we were and shot kind of post Covid and then I'm just wondering how much of and.
And uptake are you assuming from the new customer acquisitions that started last quarter and could that be additive to your guidance and then last one on the assumptions just the reserve releases like how much of that are you assuming in your $7 number.
And this year versus 2022, thank you all right well, we'll try those three questions.
And it's all around one theme.
[laughter].
For the first thing I will say US there was no real guidance I mean.
We gave us some scenarios, but let's let's talk about the first part of the of the string here.
And then.
I think Jeff can jump in at the end with the releases but.
We are in a completely different spot and we were sort of last year I mean, when we were talking last year on any given point in time.
We didn't have a vaccine and so while the vaccine right now is what I would call. It fits and starts I mean is there enough that at the beginning there wasn't enough places to Sarasota.
Vaccine distribution now that you have vaccine distribution points, but you don't have.
You don't have enough vaccine to distribute hard to get appointments. So theres a lot of disconnect that will sort itself out.
And it will sort itself out over a period of a couple of months not over a couple of years and so we believe that by June or so you will either have sort of a herd immunity or perceived herd immunity the other.
Other thing that we believe is that there is a huge pent up demand for travel.
And it's probably and nobody on this call it doesn't want to travel or go someplace or don't know their friends or family you don't want to do the same thing and so on.
When we look at it I don't think Youll see a whites widespread international travel, but you will see domestic travel and domestic travel being domestic travel here and the United States domestic travel sort of within the European Union things like that you're probably not going to see a lot of long haul this year and.
Look I'm I'm fairly confident that.
We will see.
And the predictions that we have.
Come through as it relates to travel I mean, we're talking about consumer travel potentially being back about 80% with overall travel being back about 70% business travel will come back a little bit slower, but I'd be shocked if we're sitting here at this time next year and.
And we say Gees, we.
While we really missed it on travel and I, just don't see that happening and I have a lot of confidence and the vaccines, but again. These vaccines are going to take some time to get into the marketplace. I mean, what do you have like 20 million people and the United States at this point sort of vaccinated or something like that and it's only January.
And so I believe that as we get into this summer season June July August and September you will see a rush for people to travel, especially air travel and cruise lines.
It's more of a 2022.
Phenomenon. So we feel we feel really good.
About consumer consumer travel coming back I think our airline partner with Delta and said the same thing on his on his earnings call. So we feel feel real confident about that and as far as new card I mean look.
New card take a while to get.
To get back to get into the get into the mix, but what we what we have booked and are sort.
Our own internal forecast not the scenarios is that the cards that.
We booked last year will behave probably slightly slower than normal cards would behave just because youre not going to have those card members traveling right out of the gate there'll probably be more of a second half phenomenon and so theyre spending may ramp a little bit slower than normal having said that we are really focused on getting.
<unk>.
We don't talk a lot about cards for cards lead to build business acquired which we do talk a lot about we are really focused on ramping up our acquisition engine and we believe there are a lot of good card a lot of good opportunities out there for us to to acquire cards.
Sanjay I'll add two things on card and then talking about reserves I would point out on cards, we were really pleased and the fourth quarter to see and the U S consumer business, our platinum and gold New card member acquisition numbers were essentially at 2019 levels. That's a really good sign to us the other point I'd make us just to reiterate what Steve said.
Ed is that it's really a 2022 impact for a great extent 2021 is about rebuilding new card acquisition numbers. It won't affect the 2021 results that much because the 2021 results and then to go to your last question are all about what happens.
Credit and I guess I'd encourage everyone to think about two numbers.
So I cited in my script debt relative to the beginning of the year, we now and the year with $1 $5 billion more and credit reserves.
We also relative to begin and year ended the year with $1.2 billion more and.
In delinquent accounts and accounts and our financial relief programs.
And yet I also pointed out that historically, 80%.
Of the dollars that go into our financial relief programs.
We ended up collecting and doing fine with us so what that should tell you is that our credit reserves assume a fairly conservative economic outlook and so you have to see more bad stuff happened in the economy small businesses going bankrupt lots of consumers being laid off.
You have to expect more bad things like that to happen for all of those reserves to be needed. So, we're not making and economic call Sanjay, we're saying well.
And if all that bad stuff happens like in the real downside scenario of our economic forecast and then we're going to need all those reserves, we have on the books and Youre probably.
That's sort of where the low scenario comes from card.
Conversely, if wall Rocky Theres, a fairly steady recovery.
A lot of excess reserves that you probably are going to release and that sort of lead you towards the high scenario. So we'll have to see but either way our focus remains rebuilding growth momentum this year, because it's all about 2022.
Our next question will go to the line of Betsy <unk> with Morgan Stanley.
Hey, good morning.
Hi, Betsy.
Okay. So this question I had was around your proprietary card acquisition trends, what you put in the deck and I just wanted to get an understanding as to which programs are you.
Are you seeing drive this kind of.
Betsy.
Operator, you rely on us.
MS. <unk>. Your line is still open please check your mute feature.
What else should we just go ahead and answer what we think that there was in the middle of asking Steve.
And on New card acquisition, and I think Jeff just really answered it I mean, when we look at new card acquisition.
Our platinum and our goal levels are.
We're at levels of 2019, and so we feel really good about that I think.
Our cash back cards, we're actually doing doing quite well as well, what we have not seen and.
And it makes all the sense in the World is our co brand our co brand acquisition and our co brand acquisition I mean look the reason you do co brand cards.
You do that to combined value proposition between us and our partners, but you also get tremendous distribution and right now not a lot of people standard hotels, not a lot of people taken flight. So you lose the distribution opportunities.
Having said that.
What our co brand cards, though are performing.
Other than the United States are and in other markets at or better than our proprietary cards from a spending perspective, because as I've said all along people spend.
To gather those points to take that to take those trips because they have such a pent up demand for travel and and our retention.
Retention.
Numbers on our co brand cards are at the same levels. They were in 2019 so.
We feel good about proprietary acquisition, which again is being driven by platinum and gold and some cash back or co brand acquisition is not is ramped up because we depend on our co.
Co brand <unk>.
Channel, but having said that our co brand performance is really really good and and Ed made that comment.
Ed Bastian made that comment and his and his earnings remarks as well. So hopefully that's why we provided a little bit of.
Somewhere around to answer you.
And I answered. The question you were you were you were trying to ask before he got cut off.
Okay.
Our next question will come from the line of Mark Devries with Barclays Go ahead.
Yes, Thanks had some questions about the scenarios.
Just clarifying the 2021 scenario was a scenario to essentially <unk>.
Jeff for all the things you've kind of outlined for your expectations such as the you know the 70% rebound and TNT spam and eight or 9% to 10% revenue growth and.
And everything from marketing.
And opex as well as benign credit and then second part of that is just 2022 aspiration kind of what do you guys need to see to get there.
Well, maybe I'll take the first part Steve and you should take the second and so on 'twenty and 'twenty one.
Mark I guess the point is the overwhelming driver.
The low scenario for our highest scenario or what happens or is going to be what happens with credit as I.
Said, a few minutes ago.
Now sure.
Credit turns out to be really strong your revenue is going to be a little on the strong side and vice versa for.
What we're trying to do if you go throughout my remarks, I will give you a very clear sense of how we're going to manage the company. This year and Thats why I told you what we're going to manage opex to and what we might spend on marketing.
And we're going to do those things because we're all about rebuilding growth momentum this year.
Ultimate credit outcome and just how quickly discount revenue has come back is going to be driven by the external environment.
And Thats why you have a low and our highest scenario, but it really is not going to impact how we run the company this year, which of those two scenarios comes out. So that's what we're trying to communicate by calling these scenarios.
As opposed to a guidance range and and Steve maybe you want to talk about yes look I think 2022 to top line assumptions you have consumer TNA fully recovered.
And you have a reasonably healthy economy and 2022.
So we're not expecting corporate travel to come back I don't think thats going to be a driver of it and.
And so if you have that as your baseline then I think we're right within right within where we want a b and the debt.
The key the key thing that we need to do is is and we've said this as well.
Went through both of our remarks, our investment levels will be higher than they've ever been.
And Thats our plant and we are planning provided we have and we have light.
Two we see light at the end of the tunnel in terms of investment opportunities. We will continue to invest and take advantage of all those investment opportunities that are available to us. If they are not there we will put we will pull back but we believe they will be there.
We will look to ramp up our card acquisition, we will look at value injection early on and the year, we will look at value proposition.
<unk>.
Refreshes throughout the year, we're going to focus on welcome acceptance and keeping parity coverage in the United States, we're going to drive really hard at international acceptance I mean look we signed $3 7 million merchants internationally last year, not including China take China off the table for a second but we're going to drive we're going to drive.
And international acceptance as we've said, we're going to continue to work and invest.
And our network, we're going to launch cabbage, and our small business checking account and get more primacy with our small business customers and we're going to get some traction in China as well so.
We are really focused in 2021 and investing across all dimensions of our.
Each one of our business lines.
And preparing ourselves for 2022 by building that strong foundation of retaining card members acquiring new ones and building net net merchant network and continuing to build a network capabilities and digital capabilities, we believe with the healthy economy and TMT.
Consumer spending just about fully recovered will be within our range.
We'll go next to the line of Rick Shane with Jpmorgan go ahead.
Hey, guys. Thanks for taking my questions. This morning.
I'd like to start with a question about non marketing non rewards expense and.
Q4 that was literally the only line item that is comparable to 2019 levels.
I'm curious if you think that there is going to be better opportunity for.
For operating leverage on that metric and what sort of drove the normal rate there versus everything else we saw on the business.
Well, let me Rick.
Take it up one level and then come back if you don't think this is responsive and what we are focused on overall us managing the operating and expenses of the company, which I will.
Is everything other than the variable customer engagement costs.
And marketing.
And we have a very clear plan in 2021 to manage those provide 11 $5 billion that is below 2019 levels. If we're to look at some businesses. We've sold over the years, it's frankly about where the number was.
A decade ago, and 2012 and 2013. So I think we think we have a very long track record.
Of being very disciplined about managing what I think of us the infrastructure costs of the company, which means that as revenues and billings recover and grow there's tremendous leverage from holding that a little below 2019 level, there's always a little bit of quarterly noise, particularly the queue for some of the.
Line and Opex Youll see.
Every year, if you go back and look at history go up a little bit, but that's the disciplined approach that we're taking here.
Don't know if I got to the number of your <unk>.
Question, Rick, but thats, probably how we think about it yes. The other thing I would add is that.
If you look at this number on the face of it it's pretty much the same number we've had in 2000 and swap.
From an operating expense perspective, but yet the business is very different than it was in 2012.
We're focused on different things, we've acquired a bunch of a bunch of companies, which are which are in here.
And our focus has been completely different and so I think the team has done a really good job of on an ongoing basis, taking expense out and then putting in.
Investment back in and so as you as you think about this.
What you need to do is constantly look at this operating base and way we look at it that's providing us leverage. So if we think about the core business that we had we're getting enough leverage out debt to fund other opportunities within the business whether that be cabbage, whether that be the acquisition of a messy or <unk> or a lounge buddy.
And so forth and so on and yet you go back 10 years, where at the same place and so.
We believe.
When we look at as managers of the business, we're getting tremendous operating leverage because we're able to add these things on without layering on a lot of operating cost and that's how we look at it.
We'll go next to the line of Ryan Nash with Goldman Sachs Go ahead.
Hey, good morning, Jeff Good morning, Steve Good morning, Ryan.
So maybe a two part question. So Steve you noted in your color that for 2022, you expect <unk> to be on the consumer side to be fully recovered and a healthy economy. So maybe first can you maybe just talk about what some of the drivers would be in terms of the shortfall from.
Lower corporate travel and then potentially higher spending you outlined to Opex and marketing this year could be for $5 billion will there be a pullback in spending or could we see revenues accelerating us card member growth picks up and then secondly, you talked earlier in your remarks about attrition being below pre COVID-19 levels were and this kind of weird transition.
Period, right here, where consumers have pent up demand like myself, but can't leverage anything in the near term. So can you maybe just expand on the comments about injecting greater value in and how youre thinking about product refreshes and <unk>.
Does the pandemic at all change the way you approach refreshes in terms of what's included and the value proposition.
Yes, So I think let's talk about the second one first and if I remember the first question and I'll come back to it.
And it seemed like a couple of minutes ago. So just teasing you Ryan.
But when.
When we look at sort of value injection I think because people couldn't travel what we tried to do was to do two things to not only provide them value in the short term book.
And the shortest shift their mindset on how they use the card.
And so when you look at what we did with platinum and with open platinum and Centurion by putting in things like.
Our streaming credits and wireless credits and some shipping credits, we had 78% of our U S. Platinum card members take advantage of those.
Of that value injection, we had about 50% of our small business customers take advantage of that but the really interesting point and consumer platinum.
17% of our base was not putting wireless on their card.
Our net so we had us uptick of 17% now this is something that any of you who have embedded your card and a payment stream to try and get it out is very difficult.
Our recurring billing is probably the stickiest thing you have and so for the first time, 17% of our platinum card base actually put wireless on our card which is.
You might think surprising, but people put spending and compartments and 10% put streaming on the card. So the value injection is meant for us to do two things number one steer people, where we want them to go and number two provide real value to them and and we did and we did that and I think that.
And that has really helped us from a retention retention perspective, because obviously people want one value will continue to do that.
And then we'll look at our overall value proposition is just as we've had over the course of the last three years and continue to refresh those and I think youll see those refreshed and will expand the aperture of that so you will expand beyond traditional teeny.
Value proposition enhancements, we will look at other teeny value proposition enhancements, because safety and traveling will become even more important I think to our premium premium card holders and will work with our partners a lot of the value. We put in is either co funded or merchant funded and we will continue to work with our partners to do that.
We have.
And we feel really good about the retention the retention that we saw and we feel really good about the value injection because it a behavioral shift that it drove and we believe that that will be sticky, which is why you see increase in our non <unk> spending on a sequential basis and.
We believe that will that will continue so so that's the first part as far as the second part of your question.
And look we do believe the first question was we believe that consumer travel will be back because it is the pent up demand.
Yeah.
I just I see the vaccine is working we see herd immunity coming and we certainly see that happening by the fourth quarter.
If god forbid the vaccines.
The efficacy proves it doesn't work, we got a whole different issue for the entire economy and we're not talking about American express traveling we're talking about different things at this particular point, but all indications on vaccine will work it will be distributed and off we'll go as far as corporate spending look our corporate card business, which is.
And near and Dear to all of Us.
Drives about 9% of our overall billings and about 60% and that is <unk>.
There are companies that are still traveling and see any piece of corporate spending is across multiple disciplines its across lodging it's across.
Restaurants, it's across car rental and it's across air as well and so we.
We have.
Pharmaceutical sales reps that travel by car and they stay in hotels and they spend for food that's still going on.
And where you see not a lot of teeny spending as consultants, who cannot go actually to their clients, but when you think about industrials and manufacturing that is still going on and you think about local salespeople that still need to get out to some of their some of their accounts, but having said that we don't anticipate that coming back, but we don't believe.
Thats, a big driver of our overall profitability as we've said, it's not a big driver of our revenue that 9% billings does not equate to either 9% revenue or 9% profitability and.
And we believe that we will gain from our consumer and our small business perspective will more than make up for any shortfall that would occur on our corporate card business and I would just add two other things Ryan.
Other leg of the stool is small business, where travel just isn't that big a piece of their spending and those small businesses are already going strong and we just need them to continue the steady recovery. The other thing I just wanted to clarify for everyone is reminding you that when we went into 2020% 12 months ago on and <unk>.
Annually and call. It seems like years ago. We gave you guidance for 2020 year of 80 to 85 to 925, and that's the kind of targets that we're <unk>.
Firing to achieve and 2022.
Our next question will come from from our line of credit on that with Piper Sandler go ahead.
Good morning, Thanks for taking my question in terms of the merchant discount rate Jeff.
You said that it would depend on the T&D spending I'm, just wondering where we are.
Taking a longer term view on on op blue and some of the downward pressure you've seen on the MBR in recent years and we basically through that and can we expect maybe.
The more likely scenarios that you see an increase and MBR as you see more T&D spend or is there any downside risk to the so so two things we're completely through any downward pressure from from op blue.
That's in the rearview mirror.
And obviously, if you look at what's happened at discount rate discount rate has been driven down by mix.
And it's like I've always said I always focus on discount rate by industry and mix overall, because if you look at sort of where we are right now 225 or I think that's where we are right. Now is two to five you said Oh My God you were at 225, but youre at 225 with 65% tier.
<unk> decline.
And so as T and he comes back that MTR will move back up.
But <unk> will not have any any pressure.
And on at discount rate. So we expect as <unk> moves up overall overall discount rate will go up but having said that it's teeny, if non teenie winds up going through the roof and that puts pressure on MTR. That's fine we're okay with that because again, we manage this industry by industry.
And I can't control mix, but if in fact, our non <unk>, which is has a lower MTR on average than Fannie.
That continues to grow and grow I think everybody would be happy with that.
We'll go next to the line of Mihir Bhatia with Bank of America.
Good morning, Thank you for taking my questions.
I appreciate 2021, Youre looking at us as a little bit of an investment year and repositioning maybe positioning the company for growth. So EPS is not that much of a focus maybe in 2021, but is there another metric that maybe we should focus on whether it's billings growth new card acquisitions, something like that as we go through the year.
And I guess, how will you or should or do you think investors should judge American express as progress towards.
Through the year towards for 2020 to Golar and getting back to you and I'll call. It $90 a share bogey and could provide maybe on card acquisitions, though.
Something else, maybe that $2 million.
Quarter, and new acquisition and something like that anything you could talk about debt.
<unk>.
Well I think it all comes back from here as you pointed out to rebuild and growth momentum and so that's a function of watch our success and bringing new customers into the franchise and and putting new products into the hands of our existing customers and we'll talk about that every quarter.
Watch our success on some of the longer term things that Steve talked about how we're doing with China on how we're doing with the <unk> acquisition watch externally, what's happening with credit and what's happening.
And the recovery in <unk> spending and those are the key things that I think you want to watch and it's what we're managing the company for and what we will give you an update on each well and we'll continue to we'll continue to update on those things as well as merchant acquisition.
Which is also going to be important so sort of the <unk>.
Things that I talked about and my first answer exactly what Jeff just said it.
Again, as we said we don't.
I think as you see more card acquisition momentum that is a good that is a good sign you see us put more value propositions and there, but also take a look at our and our merchant network us as well and.
And then the macroeconomic and the sort of.
And that helped us.
The state of health not only in the United States and in the World in General.
We'll move onto the line of Lisa Ellis with Moffett.
Athens and go ahead.
Hi, good morning, and go on to be joining these calls.
My question is on the bite and administration in two areas.
And regulation.
On stimulus just given your overall experience with 2020, how would you expect and the proposed next round of stimulus to affect 2021, meaning overall.
Good day, because of the boost and spending and reduction and delinquencies or or more bad because consumers are using a lot of these funds for debt debt reduction and.
And then second on regulation and Biden has indicated on.
And increased focus on consumer protection and other aspects of banking regulations and so what are what are his policy areas are you most focused on keeping an eye out for thank you.
It's kind of hard to figure out at this point what.
And what they will do what will be done from a consumer regulation perspective, you don't know if thats going to be done on debt collection, you don't know.
And where that will be but look we've been around 170 years through lots and lots of administrations.
We started this sort of regulatory.
Journey I guess over the last really really focus on our industry over the last 15 years or so and it all started I think what you'd app.
And look we will comply we.
We will comply and we will do what we need to do and.
I don't think it's going to be a major deterrent to us running our business and in any way I mean look look have we added more compliance people over the years, yes, do we spend more time with regulators yes.
Could that be more yes, it could probably be more but when you think about the underlying economics of our business.
We don't think it's going to impact our spend and if you think about our model. Our model is a get the card have a fee spend and then we have learned we're not as dependent on.
On lending revenues or lending profits as as our as our as our competitors or which is probably where a lot of regulation will come in.
If it does come in so we'll see we'll just see how how that all how.
And that all plays out and.
We've been through I've been through many administrations since I've been at American Express, we will do what's required and we've moved on and we've demonstrated we can have success.
And under on they're all under all scenarios and what Theyre not talking about us.
They're talking about consumer and protection, we're really not talking about discount rate regulation that has not been broached at all and any of these conversations and the only comment Lisa I'd add on stimulus is given the demographic of our customer base clearly we are.
Not what we want our healthy consumers and healthy small businesses, who are spending lending is not as you know a big part of our business model. So.
And the system being awash in liquidity results and higher pay down rates for that we're happy to take that trade for a healthier economy and for more spending and for more recovery. So we feel good about the credit performance and the spend performance, we've had thus far and more stimulus should that be.
The political outcome here I have to view us as a good thing for us.
We'll move onto the line of Bob Napoli with William Blair.
Thank you and.
Good morning, sorry, good call.
On the 2022 targets I think a couple of the keys.
Are the Reacceleration of international and that was your highest growing.
And I guess geographically.
Prior to the pandemic.
And then also I mean, I think the BTB payments cabbage and I think.
And there's some comment Steve about watching cabbage.
So just some commentary around your confidence debt.
And what you're seeing internationally I know you are adding locations, but are you confident you are at least on obtaining market share or gaining share.
And here's what I would say.
It's interesting Bob is that we are adding a lot of locations, obviously international is being a little bit more challenge than than the us on international spending our international cards tend to be a lot more <unk>.
<unk> focused and so they are down they are down a little bit.
A little bit a little bit more but.
But we believe that will come back and so.
We haven't run the numbers on on sort of market share at this particular point, but as you know, we're certainly gaining market share.
And in eight of the key markets that we participate in and we believe again that theres that pent up demand for travel or our attrition numbers or are the same.
Showing the same sort of signs that they show and the United States. When we talk about attrition, we talk about global attrition and there really is no no difference between.
International how international is performing versus how the US is performing so we feel good that that will come back and both small business and consumer international.
Two of the fastest growing areas as far as cabbage goes I think.
And that we're really excited about us cabbages it gives us a platform.
And that we can interact.
With our small businesses and so to be able to go to one platform to not only get a working capital loans to get a term loan.
And to have now a business checking account.
And to be able to have your card product to do cash flow analysis on the platform. It gives us.
And sort of and.
All in one platform to serve the needs of small businesses, which is why we did that and what we were what we've been shooting for over the last couple of years. It was just a a very fortuitous time and a very fortuitous acquisition for us.
And that will be we'll be rolling that out and of Q1 into Q2 and continuing to make enhancements.
On cabinets, so we're really excited about it and.
The opportunities that it brings from a small business perspective.
We'll go next to the line of Bill card Cashew with Wolfe Research go ahead. Please.
Thanks, Good morning, Steve and Jeff.
Yes.
The return on each dollar of investment spending today is trending versus pre pandemic levels on the consumer side, how does the acquisition costs and I are of new accounts, you're acquiring today and compare versus historical levels and on the commercial side. How are you assessing the profitability of those investments.
Well I think what I'd say overall bill is I would take you right back to our comments that our investment levels in 'twenty, one and are going to be driven by that universe of attractive opportunities not necessarily buy a particular budget. So we were really pleased with what we saw in Q4, citing the example of the U S.
<unk> platinum and gold progress, we talked about earlier and we also have some non travel co brands on the business side that have been very strong. So we feel good about the returns I think you've heard Steve and I say for many years that we always generally have more good investment opportunities or marketing opportunities with <unk>.
Additive returns then we can fund and were setting off and 21 too aggressively rebuild our growth momentum.
Yeah.
We will go next to the line of Dunson and day with Wells Fargo. Your line is open.
Good morning.
On competition, you pretty hard and to offense on the same thing from Chase and then is there any significance to their CX loyalty acquisition.
My sense was maybe it was just playing catch up or.
And anything more strategic for that competitively.
Look I think when we think about competition and you got to think about competition across a wide range of Av.
And places that we compete.
And there is no more competitive.
Spaced and the consumer space in the United States I mean, there is obviously, we've got competition and the U K. We've got some competition, obviously from small business here corporate competition and so forth.
And I do just important to understand you compete on many many fronts and why.
All the consumer businesses is a large piece of it.
And probably the most highly competitive and it has been for probably 10 years.
Look we anticipate that not only JP Morgan, but.
Bank of America Citi capital.
He is going to be out there looking to to get card members to bring more into the fold and to drive top line revenue. So.
I don't think Theres been a step down and competition I think you will see a I think Jamie said on his call and <unk> stepping up as investments and I think pretty much every every CEO would say the same thing so we anticipate that.
It's going to be just as just as competitive.
And as it's been as we have seen over the last few years.
And look we're while we look forward to it and we look forward to competing and we believe our value propositions will will continue to stand up well to our competitors.
And I don't know about their.
<unk> and and what it is that there.
Trying to.
And trying to achieve they got a lot of smart people over to Jpmorgan and I.
I think they do a really great job running running their business and get a lot of respect for them and so I am sure. They will figure out how to integrate this into their value propositions to compete.
And the most effective way that they deem as is the right way to go about it and and we will continue to do what we do and we feel we feel good about the hand, and we hold and.
And off we'll go and we'll see what happens but.
I think for more and more color on that and I would ask Jamie and Gordon.
And our final question will come from the line of Craig Bauer with Autonomous Research go ahead. Please.
Good morning, everyone.
Hey, Craig.
I wanted to ask quickly about trends Youre seeing U K can you discuss how their lockdowns impacted volume at the end of the quarter and into first quarter and secondly, what type of rebound are you seeing and Australia as that country has now become relatively COVID-19 free.
Well two comments in the U K and Europe more generally as you would expect credit you saw in December and now under January some significant declines and restaurants.
And other G&A.
But what you continue to see stability and those the non <unk> spending. So it's an interesting observation that is Europe is locked down more and has the expected impact on.
On restaurants, and lodging that people were doing locally, but it doesn't have an impact on on <unk> and to go to Australia.
Australia like many of our non us markets was heavily heavily.
And are more heavily than in the us driven by tier knee and of course <unk>.
And that country is completely shut itself off from the world in terms of cross border travel and there are also on many restrictions on cross state travel within Australia, So non <unk> spending and Australia as it does around the world looks good.
But the T&D spending while restaurants are a little stronger there than you might see elsewhere and the world.
It's not where the bigger dollars are the bigger dollars us on.
On other parts of travel and that's going to be slower to come back and it is going to await a lessening of the government lockdowns.
With that we will bring the card to an and.
Steve. Thank you Jeff. Thank you again for joining today's call and thank you for.
Renewed interest and American express the IR team will be available for any follow up questions operator back to you.
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