Q3 2021 American Express Co Earnings Call
Business and financial performance. These are based on management's expectations and are subject to risks and uncertainties factors that could cause actual results to differ materially from these statements are included in today's presentation slides.
On file with the SEC. The discussion today also contains non-GAAP.
So measures the comparable GAAP financial measures are included in this quarter's earnings.
Well as the earnings materials for prior periods. We discussed all of these are posted on our website at IR American Express Dot Com, we will begin today with Steve <unk> Chairman and CEO.
Start with some remarks about the comps.
Financial press and results and then Jeff Campbell, Chief Financial Officer will provide a more detailed review of our financial performance. After that we will move to a Q&A session on the results with both Steve and Jeff with that let me turn it over to Pete Thanks, Vivien and Hello, everyone welcome to our third quarter earnings call earlier.
We reported third quarter revenues of $10 9 billion up 25% over last year's third quarter and earnings per share of $2 27.
These strong results once again reflect accelerating momentum in our core business as billings on our network reached record highs for the third quarter, driven by goods and services spending.
Remarks.
<unk>. This morning, I want to put them into context, the decisions that we've made pre pandemic when the pandemic hit and during the pandemic to drive the growth. We are now seeing and the increased confidence we now have in our business model.
In 2018, we introduced a new financial growth algorithm, which call for high single.
<unk> digit revenue growth and double digit EPS growth.
Prior to the pandemic, we achieved those objectives for 10 straight quarters through focus and increased investment levels in our business, we executed strategies for profitably growing the business, which were based on initiatives to attract new customers and deepen relationships with existing customers in both our consumer.
And commercial businesses and while our differentiated business model gave us confidence in our ability to capitalize on the opportunities. We saw we also knew that the favorable economic conditions. We had at the time to change. So we also develop the plan for winning through the downcycle that focused on protecting our customers and our colleagues and maintaining our capital strength.
While investing strategically and at the right time to rebuild momentum so we could win during a recovery.
Through it all the driving force behind everything we do from product innovations to our investments decisions is to continue to make the American Express brand brand special and back our customers.
Over the last several years, we focused our strategies on broadening the appeal of core products to attract new customers, particularly millennial and Gen Z customers as well as expanding our leadership position with SME customers by providing more ways to help them manage and grow their businesses.
To accomplish those objectives, we made a series of investments and I'll highlight.
We put in place a strategy for consistently refreshing our core premium products, adding value with expanded and relevant new benefits targeted at key consumer and small business customers and we charge for that added value.
We added a host of new digital capabilities for consumers and small businesses and expanded and enhanced our mobile app to appeal to the digital.
C lifestyles of our target customers.
We were an early mover in launching our buy now pay later capability pay at planet, which we introduced to address the evolving borrowing preferences of our customers.
We increased our focus on working with strategic partners to help us enrich our value proposition expand our network and broaden our digital capabilities and.
Digital locks for example, we negotiated wide ranging long term agreements with key co brand partners, such as Delta Hilton and Amazon. We also expanded partnerships with digital Giants, such as Paypal and added a variety of new partners to our ecosystem, including Fintech, such as build dot com and better and lifestyle brands such as equinox.
We achieved virtual.
Offer any coverage in the U S and we increased coverage internationally through a more targeted approach while increasing the number of compelling offers and benefits that our merchants delivered to our card members.
When the pandemic hit unexpectedly in early 2020, we responded by activating our plan for winning through the cycle using the same customer focused approach to concentrate.
<unk>, retaining our customers and addressing their immediate needs, we moved quickly to enhance and expand our financial relief programs to assist our customers with suddenly face financial hardships.
Outline servicing team stepped up to ensure we continue to provide the world class service our customers have come to expect from American Express.
We.
And really the value propositions of several of our premium products, adding temporary benefits on categories that were relevant to how customer spending behaviors have changed such as wireless streaming food delivery and others. This is produced lasting behavioral changes as spending in a number of these categories, including wireless and streaming has proven to be sustainable.
Soon after we turned our attention to small businesses, who needed help by launching the largest global small business campaign in the company's history, creating the stand for small coalition and supporting minority owned small businesses in the United States.
As last year progressed, we learn from our customers what resonated with them in this unprecedented environment.
And we grew more confident to seize the growth opportunities we saw emerging.
So we ramped up our investments in card member acquisitions and value proposition innovations to capitalize on those opportunities and start rebuilding of our growth momentum.
We also saw an opportunity to accelerate our strategy to bring new digital beyond the.
And abilities to our small business customers and acquired cabbage, one of the leading providers of digital cash management platforms.
Importantly, the increasing demand we are seeing for our products and what we learned from the early value proposition enhancements encouraged us to restart our product refresh strategy last year and in July we launched a.
<unk> taken were platinum card in the U S. We're repeating this customer led product innovation strategy with the refresh of the U S business Platinum card, which we launched last week as with the consumer card refresh the new benefits, we added to our business platinum and key spend categories, such as electronics software shipping wireless and others were informed by our card members.
<unk>.
Coming into 2021 were emboldened by the strong results, we were seeing towards the end of 2020 from our customer retention and acquisition efforts and we decided to double down on our investments in marketing product innovation technology and people to accelerate our growth momentum.
All of these decisions.
Remember those that we made before the pandemic when the pandemic hit and through this year as conditions began to improve are driving the results we're seeing today.
For example, customer acquisition to gain momentum over the last five quarters with $2 6 million new cards in force in the third quarter.
Demand for our premium fee based products has been particularly robust.
With the acquisitions of our U S consumer and small business platinum and gold cards, reaching all time highs in the quarter.
In consumer millennial and Gen. Gen Z customers have driven this growth with 75% of new U S. Golden platinum consumer consumer cards coming from these customers and.
Robust. So we had one of the best quarters ever use small business card acquisitions, our focus on meeting the needs of Smes and millennial and Gen Z consumer customers has resulted in these groups being the most resilient throughout the pandemic, leading the growth in spending in fact spending from these groups continued to accelerate in the third quarter with goods.
In commercial versus spending from Smes growing 21% above 2019 levels and overall spending for millennial and Gen Z customers, particularly strong up 38% over 2019 levels.
Our initiatives to protect our customers at the beginning of the pandemic has driven retention and satisfaction metrics high.
And pre pandemic levels and the digital capabilities. We've introduced has driven steady increases in digital engagement. For example, approximately 85% of active card members are digitally engaged with us and we had the highest ever daily active user engagement across the web and mobile in August with a nearly 17% increase year over year.
These examples show the strategies, we implemented to profitably grow our business before the pandemic began coupled with the decisions. We made in executing our strategy to manage through the pandemic and to win journey of recovery have generated strong consistent momentum as the environment continues to improve.
And what we've learned through this past year is informing our strat.
And for investing to profitably grow our business moving forward.
Looking ahead, we're operating from a position of strength and we see even more opportunities to build on the momentum. We've created so we will continue to invest strategically in seeking to drive even higher levels of sustainable long term revenue and EPS growth.
<unk> that I'll turn it over to Jeff to discuss our third quarter results in detail and then we'll take your questions. Thank you.
Well, thanks, Steve and good morning, everyone. It's good to be here today to talk about our third quarter results, which reflect strong momentum in our core business driven by the investment strategy that Steve just spoke about.
See this momentum.
With summary financials on slide two with third quarter revenues of $10 9 billion up 24% year over year on an FX adjusted basis third quarter net income of $1 8 billion and earnings per share.
A $2 27.
To get right into a more detailed look at our results, let's talk about how the strategies the Steve.
And <unk> discussed have helped to drive our volumes back above pre pandemic levels as you can see on slide three.
You will notice in the several abuse volumes to begin on slide three that we continue to show third quarter volume trends on both a year over year basis and relative to 2019 as we find that it provides.
Steve just a clearer picture of the progress we are making in building growth momentum we.
We did see continued momentum in spending volumes in the third quarter with total network volumes in billed business volumes, both up around 30% year over year and up 4% relative to 2019 on an FX adjusted basis.
This growth in billed business is being driven by continued momentum in spending on goods and services, which you can see on slide four represented 79% of our overall build business and was up 19% versus 2019 and strengthened sequentially versus Q2.
We.
Very pleased with this continued strength in goods and services spending given the investments we've made in premium card member engagement prospect acquisition growing our coverage and expanding relationships with key partners focusing first on our consumer business on slide five overall spending was 9% above 2019 levels as.
We are a big goods and services volumes accelerated to 20% above 2019 and in the third quarter for many years, we've been focused on attracting and engaging younger cohorts of card members through expanding our value propositions and digital capabilities.
Aided by these efforts you see that millennials and Gen Z customers are leading.
Growth in spending reaching 38% above 2019 levels for the quarter older age cohorts have shown continued steady those smaller improvement as well.
Turning to our commercial business as you know we've been very focused on helping our small and medium size enterprise clients run their business by expanding the range.
The growth products and capabilities to meet their BTB payments and working capital needs.
This strategic focus on SME has been key in driving the performance you see on slide six.
Global SME spending which represents the bulk of our commercial build business remains the most resilient across all of our customer types.
<unk> with spending up 11% versus 2019, driven by strong growth in <unk> spending on goods and services, which grew 21% above 2019 levels in Q3 in.
In contrast, large and global corporate card spending, which historically has been primarily for travel and entertainment continued.
It just show fewer signs of recovery.
We've said all along that we expect this will be the last customer type to see travel recover.
Digging into goods and services spending trends on slide seven we continue to see strong growth online and card not present spending which was up 27% versus 2000.
<unk>, even as offline spending fully recovered in the third quarter, demonstrating the lasting effect of the behavioral changes we've seen during the pandemic.
We also saw growth across all categories of goods and services spending with both consumer and SME is driving the strong growth in retail and wholesale spending.
And Smes, leading the growth in advertising and media spending.
Turning now to G&A spending on slide eight you continue to see a recovery that is on track with our expectation that we will reach 80% of 2019 levels in the fourth quarter.
Genie spending improved sequentially versus Q2.
And we're pleased to see restaurant spending our most resilient and now largest T&D category back above pre pandemic levels in the quarter. We did see some modest impacts from the Delta variant in the airline category, where the pace of recovery slowed a bit in August but it has strengthened again in September and.
And into early October.
The trends, we have seen reinforce our view the travel and entertainment spending will eventually fully recover but at varying paces across customer types and geographies and we remain focused on maintaining our leadership position in offering differentiated travel and lifestyle.
Ill benefits to our consumer and commercial customers.
<unk> returned to travel.
Turning to our last look at volumes on slide nine you do see that the overall build business volume recovery continues to be led by the U S.
First surpassed 2019 levels in Q2 and was up 9%.
<unk> third quarter.
Currently though growth in goods and services spending has been strong both in the U S and outside of the U S. Overall spending is only weaker outside the U S. Because historically, we have more travel related spending in our air in our international regions and International <unk>.
And hovering more slowly than in the U S. Given cross border travel restrictions.
Looking ahead based on current trends, we still assume that overall <unk> spending globally will recover to around 80% of 2019 levels in the fourth quarter of 2021, and even more importantly, we.
<unk> continued strong growth momentum in goods and services spending so all in all a really good story on spending volumes.
Moving on then to receivable and loan balances on slide 10 loan balances continued to slowly recover in the third quarter and were up 9% year over year and 2%.
Sequentially.
Relative to 2019, though loan balances remained down 10% as we continue to see the liquidity and strength amongst our customer base, leading to higher pay down rates, which is also driving the very strong credit performance I'll talk about in a moment.
I'd point out that we have hit an inflection point on revolving loan.
Loan balances.
It will take time for those balances to rebuild as pay down rates are likely to remain elevated in the near term. We believe over the long term, we can get back to growing our loan volumes faster than the industry for the next few quarters, though I continue to expect the recovery in loan balances to lag the recovery in spending.
Volumes.
Turning next to credit and provision on slides 11 through 13 as you flip through the slides there are few key points I'd like you to takeaway.
Most importantly, we continue to see extremely strong credit performance with card member loans and receivables write off and delinquency rates.
Remaining around historical lows.
As loan balances begin to rebuild more meaningfully we do expect delinquency and loss rates to slowly move up over time, however, given how low delinquency rates are today, we don't expect to see a material increase in write off rates in the next few quarters.
<unk>.
This strong credit performance combined with further improvement in the macro economic outlook drove $191 million provision expense benefit in the third quarter.
It's the low write offs were fully offset by the reserve release as shown on slide 12.
That said we are my.
Mindful that the last of the government stimulus and the industry forbearance programs have yet to roll off and that there are remaining uncertainties in the medical and macroeconomic environment. In addition, we are closely monitoring how the card members exiting our financial relief programs are performing well.
All the early performance of the card members that.
That have exited these programs has looked quite strong.
As you see on slide 13, we ended the quarter third quarter with $3 $6 billion of reserves, representing four 5% of our loan balances and 0.1% of our card member of receivable balances, respectively, which is only slightly below the reserve levels. We.
Pandemic, so given that our credit metrics are still around historical lows I would say that we continue to hold an appropriate the significant amount of reserves driven by the remaining uncertainties I just spoke about.
Moving next to revenues on slide 14 total.
<unk> were up 25% year over year in the third quarter, we had double digit growth in all of our noninterest revenue lines and we are starting to see growth in net interest income as well.
Before I get into more details about our largest revenue drivers in the next few slides I would note that other fees and commissions and other revenue were both up.
Revenue sharply year over year in the third quarter, primarily driven by the uptick in travel related revenues, we are beginning to see though they still remain well below 2019 levels.
Turning to our largest revenue line discount revenue on slide 15, Youll see it grew 33% year over year on an FX adjusted basis.
There is now comfortably above 2019 levels. This growth was primarily driven by the steady momentum in goods and services spending that we've seen over the past few quarters.
Net card fee revenues continued to grow as consistently as they have throughout the entire pandemic up 27% year over year in the third.
Quarter. These.
These card fee revenues are now 27% higher than they were back in the third quarter of 2019 as you can see on slide 16, the resiliency of the subscription like revenues demonstrates the impact of the continued attractiveness of our premium value propositions to.
This is an aspect and existing customers.
Turning to net interest income on slide 17, you can see that it was up 6% year over year.
So still growing slower relative to the other revenue lines, we have clearly hit an inflection point.
Growth is slower than the growth in lending due to the strong liquidity demonstrated.
Both prior customers, which is leading to both our historically low credit costs into higher pay down rates that are driving lower net interest yield and a slower recovery in revolving loan balances.
We did see a modest sequential improvement in revolving loan balances in the third quarter, but looking ahead I continue to expect the recovery in net interest.
Australia.
The recovery in loan volumes, so to sum up on revenues the momentum of our revenue recovery strengthened in Q3 as you can see on slide 18 with revenue up 24% year over year on an FX adjusted basis.
Looking forward with the strength in goods and services spend growth we have.
<unk> seen in the first three quarters of the year, we now assume that full year revenue growth could be around 15% if current trends continue.
The revenue momentum we've seen this year has clearly been accelerated as a result of the investments we've been making in marketing value propositions technology and people and.
<unk> customers show up across the expense lines you see on slide 19, let me start at the bottom with operating expenses, which were up 3% year over year in the third quarter looking forward I still expect our full year opex to be below the $11 $5 billion. We originally expected as we continue to keep tight control over operating expenses.
Those investors, while also investing in technology and our people to drive long term growth in our business.
Moving on to variable customer engagement expenses at the top of Slide 19, there are a few things to think about most importantly in 2020, we added some incremental benefits to many of our premium products in an effort.
We refer to as value injection, because our customers were not able to take advantage of many of the travel related aspects of our value proposition.
The cost of this value injection effort generally showed up in the marketing investment.
And are now winding down we are able to wind them down because our customers are.
Expense and engaging more with the travel aspects of our value propositions, which is a good thing in terms of a longer term customer retention and growth prospects.
It does however mean youll see more year over year growth in these variable customer engagement costs as.
As one example of the financials.
And cancellations of customers again, engaging and travel related aspects of our membership rewards program.
And the rewards line, we made a roughly $200 million adjustment this quarter to our membership rewards liability to reflect the higher mix of redemptions in travel related categories.
Forward.
As I've said in the past few quarters I would expect these variable customer engagement costs overall to run at around 40% of total revenues.
Turning next to the marketing investments, we're making to build growth momentum you can see on slide 20, EBIT, we invested $1 $4 billion in marketing in the third quarter as we continue.
Continued to ramp up new card acquisition, while winding down our value injection efforts.
We acquired $2 6 million, new cards up 87% year over year, and 6% sequentially in the third quarter much more importantly than just the total number of cards, we focus internally on.
Third overall level of spend and fee revenue growth were bring on from new acquisitions and revenues from this quarter's acquisitions are trending stronger than what we saw pre pandemic.
One key driver of this performance is the great demand for our premium fee based products with new accounts required on these products.
Products more than doubling year over year, and representing 65% of the new accounts acquired in the quarter.
In particular acquisitions of new U S consumer and small business platinum and gold card members were all time highs this quarter and this was again one of the best quarters for small business.
On the acquisitions in the U S.
Based on the opportunities we've seen in the first three quarters of 2021, we now expect to invest over $5 billion in marketing for the year we.
We feel really good about the results we've seen from our strategic investments and see an opportunity to continue to invest during.
New recovery to maximize sustainable long term growth.
Turning next to capital on Slide 21, our CET one ratio was 12, 6% at the end of the third quarter, which declined from the prior quarter, but remained above our target ratio of 10% to 11%.
Quarter, we returned $3 6 billion of capital to our.
The record orders, including common stock purchases of $3 $3 billion and $337 million in common stock dividends on the back of the starting excess capital position and strong earnings generation.
Looking forward, we expect our CET one ratio to migrate to our target range over the next few.
Shareholders as we continue to return to shareholders the excess capital, we hold and generate while supporting balance sheet growth.
So, let's close by talking about what the signs of momentum we saw in the first three quarters of this year might mean for the future.
As a reminder, we started the year with a wide range of scenarios of.
Few court of outcomes for 2021, as we did not know how the medical and an economic environment would evolve during the year and the impact it would have most importantly on our credit reserves now three quarters into the year macro outlook has steadily improved and our actual credit performance has remained incredibly strong.
We've already released $2 3 billion.
Accounting for over $2 of EPS year to date.
That still leaves us however, with a lot of reserves to the remaining uncertainties I spoke about earlier.
So our updated scenario one on slide 22 assumes that this uncertainty persists that the medical.
Hermine and economic outlook does not improve further and that we therefore don't release any additional credit reserves this year.
That could lead to an EPS outcome as low as around $8 90 per share.
Our updated scenario two in contrast assumes that we continue to see strong credit performance.
<unk> advises the remaining stimulus and forbearance programs roll off and then.
Also see continued improvement in the economic outlook, leading to less uncertainty.
In all likelihood a lower level of credit reserves in this scenario, our 2021 EPS could be as high as around $9 50.
<unk> in closing, we feel really good about the progress. We've made this year as a result of our investments in marketing value propositions technology, and our people and as the year has gone on we've gotten even more confident in our ability to deploy significant resources towards building sustainable long term growth momentum.
Based on all these current trends we are confident in our ability to be within the high end of the range of EPS expectations. We originally had for 2020 in 2022.
And to continue to drive towards higher levels of sustainable growth over the long term and.
And with that.
The call back over to Vivian.
Thank you Jeff before we open up the lines for Q&A I'll ask those in the queue.
Without to just one question.
Operations and with that the operator will now open up the line for questions.
Matt.
Ladies.
I'll turn gentlemen, if you wish to ask a question. Please press one then zero on your Touchtone phone, you'll hear the message, indicating you've been placed in Q and you may remove yourself from queue at any time by pressing one to zero again.
If you're using a speakerphone please pick up your handset before pressing the numbers.
And one moment please for the first question.
And our first question comes from the line of Ryan Nash with Goldman Sachs. Please go ahead.
Hey, good morning, Steve Good morning, Jeff Good morning, Ryan.
So as we look ahead to next year, Jeff you said that you expect to be on the high end of your original 2020, which is what you had mentioned last quarter.
Sure.
If we look back to that timeframe youre expecting mid to high loss mid twos mid to high twos losses provisions were going to be in the three $5 billion to $4 billion range versus where I look now losses are running sub one and you know that you don't expect them to move up that much for the next few quarters. So can you maybe just one Jeff talked.
Talk about some of the puts and takes that such that you wouldn't be above the high end given how much leverage you have from credit and then second Steve maybe you could expand on the comment that Jeff made to continue to invest to maximize the long term growth that can help you sustain the financial algorithm that you laid out at the beginning of the call.
Thanks.
So let me start Ryan by pointing out.
In our remarks, we've already.
This year because.
The environment added over $2 of EPS for our earnings just from releasing credit reserves. So as you think about my comments about two.
2022 we assume next year, we will have strong credit results, but as you go from having a several billion dollars. Good guy on the provision side this year to having more of a.
Normalized for the new world of lower credit losses provision expense next.
Year, So we see that as a.
Pretty impressive grow over to in fact be confident in getting to the high end of where we originally thought we'd be in 2020 next year, considering the magnitude of that grow over considering that it is not reliant on a full recovery.
Across all of our businesses, we actually see tailwind that probably will help us in 'twenty, two and into 'twenty 'twenty three and that's why as I turn it over to Steve I think we are so emboldened by the progress we've seen bringing new people into the franchise Ryan that we think we have an opportunity here to continue.
We need to invest significant resources to drive longer term, even higher levels of sustainable growth.
Look at.
If you would've asked me at the beginning of the year would be invest almost $5 billion in marketing. This year I would have said no.
But we're not governed by.
What level.
Continued ink, we should or what anybody thinks we should hit we're governed by the fact that there are tremendous opportunities out there and when you look at what is going on sort of what our acquisition activities right. Now look we brought in $2 6 million cardholders.
And what we really focus on is what revenue those card.
We really bring in and what we're seeing is we're seeing a cardholder base that is spending more that we're bringing in that has a better FICO profile.
And it's skewing millennial and it's skewing fee pay and so.
As we run our models.
<unk> will be governed by.
Can we can we continue to acquire these card members and and we are and the reality is is that.
That said this from day, one we are running this for the long to medium to long term and the reality is if we continue to find those.
Those great opportunities in the consumer base in the SMB base and some opportunities beyond the card that we might have.
We will continue to invest so.
As we look at it right now.
Our plan is to continue to be aggressive with our investments.
Constrained by our investment return models not constrained by a certain level that people think we should or should not be at <unk>.
That's that's just the way we've been running the business for the last.
A few years and we'll continue to do that and I think it's really served us well.
We're.
<unk> I don't think you would have thought that this year, we would have spent that kind of money and but I think the key point is we are spending that money to grow the business profitably, we're not spending that money.
Because we're in some battle to keep up with the Joneses here Okay.
Underpinning. Our next question comes from the line of Betsy <unk> with Morgan Stanley. Please go ahead.
Hi, Good morning, Hi, Betsy Hi, Betsy.
Couple of questions here first just following up on that on the marketing side. It seems like that is in.
Fine with what you've been spending historically as a percentage of revenues.
So should we take your comments to mean that you would ramp that up from here or there.
At.
There is.
There is there is a trajectory of marketing expense spend that's going to be similar to what you've had in the past as a percentage of revs.
<unk> well I think.
That's what you should take is that we're not governed by thinking about okay. We got to keep the percent.
Of revenue the marketing represents constant or similar to where it was in 2019.
We're governed by the universe.
A really attractive opportunities, we see to build longer term growth momentum.
That's what has driven our marketing spend now including value injection to over $5 billion. This year much higher than Stephen I started the year thinking it would be.
And.
We think about 2022, we're very confident in the kind of EPS outcome that we've been talking about.
But the ultimate amount of marketing that goes with that is going to be a function of the attractive opportunities and because we're getting such great growth.
From the spending as Steve talked about we're actually generating.
As we more revenue from the dollars that we're investing in marketing than we were pre pandemic the marketing starts to become a little self funding or.
Hitting our EPS targets if the opportunities are there. So that's what's going to drive us in terms of how much marketing we do next.
<unk>.
And was there a second part to Betsy the operator keep Sean.
My apologies. Our next question comes from the line of here.
With Bank of America. Please go ahead.
Next year.
And.
Good morning, Thank you for taking my question.
Not surprisingly I also have a question on marketing engagements.
So in terms of maybe just talking about it at a little bit of a higher level in terms of competition I understand that American express is always good in a very competitive market for many.
Maybe talk about the dimensions of the competition has been changed post competition are you seeing different players and also just in terms of your marketing and customer acquisition spending how is it different today than it was maybe pre pandemic like in 2019 is there.
Are you, making investments and disciplined things our customers.
Yes.
So.
Look it is the only time I'd say competition sort of ramped down was during the pandemic when nobody was really.
Acquiring.
A lot of cards, but.
We look at the range of competitors you have to realize that we're looking at competitors.
In global basis.
By country, we're looking at competitors across corporate card small business.
Consumer cards, and I think as we talk to.
Quite honestly as we've talked to you guys about competition, where the drive tends to be is consumer.
Returns on our competition in the U S and and the reality is is that this has been a competitive market.
Since the financial crisis, I mean, I think the consumer card competition really heated up after the financial crisis when.
The Big money Center banks decided to really.
<unk> serious about their consumer card business and.
A lot of them done a really good job.
And we compete very vigorously with them.
And so I don't really think it in my mind I don't I don't think it's changed all that much I think it paused a little bit.
During the pandemic.
Really I don't think it I don't.
It's changed at all the other thing that I would say is there are a range of of other competitors out there.
Fintech and what have you and.
We continue to to watch them whether it's.
Competitors in the corporate card space.
But.
Competitors in in other places from a buy now pay later perspective.
That's not.
Really a big competitive threat to us I mean, when you think about buy now pay later.
It tends to be targeted at low FICO it tends to be targeted at a lot of lot of debit card.
Users.
It's used as a customer acquisition vehicle.
And that's just not the game that we're playing we've had a buy now pay later products since 2017.
And it's just another way for our card members to manage their <unk> to manage their spending within the overall American express relationship.
It's a transaction by transaction management tool, which quite honestly is a lot more flexible than point of sale buy now pay later, because you don't know who's going to actually have point of sale.
You know at every merchant you go to and then for the pain for people, which is also another.
The other thing Thats out there, which is a version.
A buy now pay later, they're actually our charge card product gives you more float and gives you reward so.
But you have to look at all this stuff whether it's <unk>.
Whoever's coming into the space. So we look at.
Look at competitors, all the time and you have to evaluate how it attacks your customer base, but I think the way.
Run this business and you've seen this over decades, as we continually to put more value and build a bigger moat around our customers and just look at what we've done with the platinum card here, we refresh this product.
While it was going gangbusters both of them.
We were.
Were at record levels of platinum acquisition before the refresh and yet we went out and refreshed and went out and raised the fee and how can you do that because you are adding more value both on the consumer side and both on the small business side and so look in the third quarter, we have record levels of <unk>.
Not only gold not only partner.
Gold card acquisition for a base so we.
So we feel really good about that I think as far as how you spend your money.
<unk>.
Look we do obviously the industry has changed you do a lot less.
Direct you do a lot less direct mail than you used to do you do.
A lot.
Sort of aggregator.
Acquisition, but I think what's really important about us as we look at our at our marketing spend we look at our marketing spend not only for prospect marketing, but we invest in our customers and we spend marketing money on our customers too.
Lot more than you to grow their spend to upgrade their product to introduce them to our lending capabilities.
Creates a flywheel right because what you do is you bring these prospects in and then you manage these prospects and get them to become more and more profitable and one of the things that we we hang our hat on as we look at our customers as a platform for growth and.
You can continue to do more and more with your customers. They will generate more revenue youll have more loyalty and youre seeing that youre seeing that in our retention metrics and so we really look at our marketing spend it's not just acquisition. It's also with our existing customer base.
And that's probably changed a little bit more over.
And if you've we've invested more and more of our customers as our as the.
A product set that we have continues to expand and Steve one of the best examples of that last evolution you talked about is the fact that.
Our member get member program, where our existing card members, who are so attached to the brand.
Using it other card members and friends to also get attached to the brand that has come from almost nowhere a few years ago to being one of our most significant acquisition channels and I think it's a real commentary on everything you just talked about.
And we do have those.
The big questions from Betsy <unk> with Morgan Stanley. Please go ahead, sorry about that.
No problem. Thanks.
Yeah I you mentioned during the prepared remarks that this was one of the best quarters for acquiring small business and I wanted to tie that into you know an article that was out recently, saying that youre going to be.
Follow up working with Goldman Sachs to enable b to B for your.
Clients. This is really in the corporate card the 200 and you know the top 250 companies globally that you work with and in this article that suggested that you would not be.
Offering transaction account directly from yourself, but you know you're tying in with with a partner to enable that and maybe you could give us some color as to how this offering.
Is.
It to drive.
Business opportunities talk about the transaction account banking piece of that and then if you could tie in.
<unk> seeing in SMB, and what you can be offering to SMB clients too that'd be helpful. Thanks.
It's.
Good to clarify that so look we're very excited about the partnership with Goldman <unk>.
Look we.
We have a we have relationships with 60% of the fortune 500 companies.
And when we compete.
What you are.
You know as we compete sometimes we compete with other money center banks that have corporate card programs and also have transaction banking and they tend to <unk>.
Great that and so Goldman is very interested in getting into transaction banking not as necessarily as interested in getting into the corporate card.
Pete do a number of things.
With Goldman Sachs.
From a customer perspective, they're a customer of ours, where customer there and John and David and I were talking about things. It looked like a really good opportunity. They are they were trying to ramp up their transaction banking, we have the corporate card.
<unk>.
And putting those things together in that space, a space that we really weren't going to get into transaction banking as it related to large banks. It's not it's just not our space. Okay. Corporate card is but not transaction banking. So we decided to look at the top 250, and if that goes well and there's no reason why it will not go well.
Then we can put it put it a little bit more downstream to say the S&P 500.
We have a different perspective as it relates to the SMB space, which is why if you remember what we've talked about from an SMB perspective, as we want it to be the working capital providers for our small businesses and now in the small business space.
We have a very good footprint not only in the United States, but good footprints in internationally. We also remember journey.
During the pandemic, we bought cabbage and what is cabbage.
<unk> basically a transaction banking platform right and so what average has <unk>.
Cabbage does short term loans.
<unk>.
It does working capital loans merchant financing loans. It has a transaction banking account.
It has debit card attached to it and we have our American express card attached to it. So we have a very different philosophy as it relates to small businesses, where the commitment of capital to commitment.
<unk> of cash that we have to put out and the commitment from a loan perspective.
We will be much smaller and be much more.
Used across the entire SME base and so we believe it's a sweet spot for us.
And that was the <unk> piece of it we did not believe that transaction banking was a suite.
<unk> bought for us from an S&P 500 and above.
And we're really thrilled to be partnering with Goldman on this.
Got it thanks.
And our next question comes from the line of Bob Napoli with William Blair. Please go ahead.
Good morning, I guess.
Wanted to follow up on Steve and Jeff on the SMB business and.
The competitive environment in that space and your movements and adding additional products and services. There is a lot more competition I guess from venture backed companies like Brooks and Debbie and ramp.
Thank you Debbie No party.
You build that Tom laid out.
Do you see those companies are growing very fast and you're providing I think spend management.
The business spend management services.
How do you view that competition relative to your.
SMB efforts.
But there are additional products and services and ecosystem you're building for your SMB.
Clients.
Well look I mean from an SME perspective.
Pretty good quarter.
Or up 13%, so we feel pretty good about that.
And I think I'd just point you back to what.
I'll respond to that do it obviously, we went out and bought cabbage and cabbage has.
You know look it has cash flow analysis on it it has.
Transaction banking it has debit it has the ability to sell loans and so now what you do is you take a fintech platform like cabbage you.
I just.
American Express with over 3 million small business.
Customers.
And a sizeable balance sheet.
And a sizable brand and a lot of capabilities you put that together and we believe it gives us a really great offering as it relates to.
You take and be base, and I look and I am not going to discount any of those ramp with <unk> or <unk> or any <unk>.
Never discount antibody.
And you look to learn from people as well, but we believe that the combination of what we have in the space that we're in and.
And putting together.
So our cabbage and also integrating into cabbage.
<unk>.
E comm pay in our AP capabilities, our automation capability AP automation capabilities.
It puts us in a very very good position to continue to compete in this space and continuing to grow and continue to win.
Together. Our next question comes from the line of Erin <unk> with Citi. Please go ahead.
Maybe if you could touch on capital distribution a little bit.
Buybacks for the quarter were.
Well above I.
I think more than double what the street was expecting.
That kind of level.
More of a catch up or do you expect to have kind of an elevated level of capital return for the next couple of quarters.
Well you are correct.
Aaron is quite elevated probably our largest ever quarter of share repurchase has been a truly strictly a catch up right. This is our first quarter, where we were completely free.
Of any fed constraints on our buyback we have been very clear for many years that our targeted CET one capital ratio was 10% to 11%.
As you all know that is actually well above the regulatory.
Minimums are truly more governed by our own view of the balance sheet and our ratings.
I just didn't see the balance sheet, so sensitive constraints from the Fred were lifted while we don't want to disrupt the market. We did buy more aggressively I think you will continue to see us.
By above what I would call a steady state level for our.
Our steady state level is pretty high as a company.
30% ROE, we generate a lot more capital than we do.
Need each year.
But it will stay elevated until you get back down into that 10% to 11% range, which I'd expect to happen over the next couple of quarters.
And we do have a question from the line of Rick Shea.
<unk> with J P. Morgan. Please go ahead.
Thanks, guys for taking my questions. This morning.
I think when we look back at what's happened over the last year, we really see the strength of the American Express franchise and the core business.
And in a lot of ways.
Things have stayed the same.
I'm curious when you look forward what do you think is different about the business as we emerge.
From the Covid crisis is that the demographic of your customer is at the expansion.
Sure.
With cabbage.
What what's going to be different in the next three years because of what we've seen in the last.
At year.
I think that if you look at sort of what's what.
What's happened here I think we've bedded down customers a lot more than we've ever better them down in the past and that was because.
We really focused on a lot of this value proposition.
Enhancement and one of the reasons that.
I started my remarks today with sort of pre pandemic at the pandemic and during the pandemic was to show that this was a bit of a continuum here right. When you think about this what we talked about.
A number of years ago was really focusing in on our customers.
Focusing in on refreshing, our our products and services, becoming more digitally engaged.
And expanding that organic core products and services and what I think what we saw during the pandemic here was that we saw an accelerant as it related to online or online spending.
Has accelerated.
<unk> tremendously I think.
27% up in the in.
In Q3 here, a goods and services.
19% growth over.
Over.
Over 19, and so we've been able to direct our card members.
In ways faster than we probably.
We would have gotten there without the pandemic.
And again I think.
Looking at our overall strategy of refreshing. These card products has led us to expanding our overall base as we expand the value propositions when you look.
We're talking about over 70% millennial and gen.
Position.
The platinum card, where we just raise the fee to $695.
It's obviously speaking to that base and I think that's one of the things we've seen over this time period is how much more we are speaking to that to that customer segment and so when you when you put that all together and you add the SME.
Semi piece of it which is a complete expansion with cabbages that we're opening up a lot more doors for.
For us to do business with our SMB customers and one of the things. We've learned is that the more products that you have with your customer.
The higher retention rates that you have obviously the more revenue that you have in.
And the more engagement that you have and so I think we've probably driven faster to where we thought we were going to get ultimately as a result of the pandemic, but we haven't fundamentally changed where we were going and that's why I wanted to start. This conversation. This morning with this as a continuum for us.
But again like we've talked about in the environment online has been accelerated probably three years from a macroeconomic perspective, and I think we're seeing our strategy that we were looking to continually to implement that has been accelerated and it's proven to be right.
The one financial piece, Rick and Steve.
I'd add to that is very similar is that our funding structure has actually changed quite significantly over the course of the pandemic to be more heavily weighted to our depository.
Products, which are our lowest cost of funding and when I project ahead three years that trend.
<unk> continues that is actually I think perhaps a little noticed but very positive change for us as well when you look a little longer.
One other point that I'll, just make it not to beat on this but.
When you look at the fact that we've when you look at our acquisition and you see where we are requiring these card members.
It has actually expanded our playing field and so with that playing field expanded.
That's why you're seeing this broader broader marketing spend because you have more customers to go. After you have more archetypes now that you can go after than you did probably three or four years ago, because the product.
Speaking to a broader set of consumers out there now broader in terms of the demographic and broader in terms of age and so forth and once the needs. The products are getting are all getting broader and a product can now appeal.
Two multiple customer sets and youre seeing differentiation between the.
Products, it's just not an upgrade when you look at the gold versus the platinum there is specific differences here that speak to another.
A different a different consumer or different small business customers. So I think that has probably changed as well.
And we do have a.
Question from the line of Dominic Gabriel with Oppenheimer. Please go ahead.
Great. Thank you so much for taking my questions I was just curious on the 3 million SME customers.
As you look at the total U S. SME spend does that volume growth typically track the total market.
Given how penetrated you are there with your relationships and.
And I guess would that include any cash conversion or I know it represents inventories is most of that done on card anyway.
Yes look I don't have sort of market share information on that but yes.
Sort of at the tip of my fingers here, but it is.
We think from a 13% growth perspective, we are probably growing.
At or above market at this particular point in time, but.
When we when we look at this.
What is down from an SME perspective is <unk>. So you.
You are seeing a conversion.
<unk> of check or cash or wire to card and I think we saw that during the pandemic and I think that's where some of the investment in sort of our AP automation has helped as well and when.
When you talk about <unk> spending.
Approximately 80%.
Of SME spending is <unk> spending maybe 85% of SME spending is <unk> spending and they use it for lots of different things. They you know theres some inventory management, but remember our asset base is so broad.
And its professional services lawyers, HVAC, so forth and so on and so.
They do.
But they do use the product for goods for resale as well I mean, it's a you know auto glass companies use it to buy auto glass and plumbers users to buy supplies and so forth and so on and you're probably seeing a little bit more cash conversion, but.
So we're pretty pleased with that with that 13% number of growth plus.
<unk>.
Component of that being down.
And we do have a question from the line of Lisa Ellis with Moffett Nathanson. Please go ahead.
Hey, good morning, Thanks for squeezing me in I.
Another like a follow up question on the growth that youre seeing and the millennials.
Is that you called out on slide five.
Can you just take a step back and comment a bit on what features and reward specifically or like which card profiles that youre seeing are particularly attractive attracting those consumers like have you. How have you been Scott. This successful over the last couple of years.
And then also can you give us any sense of the percentage of your U S card base or some some measure along those lines. That's currently in those younger cohort.
The last part we don't we don't really we Havent I don't know if we've disclosed the last point.
But let me go let me go with the first point well Dave.
Feverishly look for that answer Lisa sitting around the table with me.
But as far as the first part look you know well.
Plenty of and Gen Z are about experiences and thereabout access and I can speak for experience, having a house full of them and so they love to travel they love to do.
Things and when you look at the platinum card products, which had always been position as hey, I'm, a I'm a real high spender I need to have that platinum card product.
You have to look at the utility of this product and you look at fine hotels and resorts and you look at the value that you get out of a fine hotel and resort booking with.
Early check in and of late checkout or free breakfast at $100 credit.
At the at the hotel.
And then you look at <unk>.
Streaming credits.
Our online shoppers.
It is rewards accelerators. This travel credits there's access to tickets has access to.
Special Special card member events. It is a range of a.
Our range of services that they use and look equinox is another benefit that we put on and look we just added.
Walmart Walmart plus men.
Membership, which a.
A majority of our platinum card holders.
Shop at Walmart and we think this is a great benefit as well so when they look at this product. It really is a lifestyle product for them one that ranges from their everyday activities of online spending and streaming all the way to traveling.
And the credits they get whether it's global entry and TSA pre.
And all those kinds of things. So it is a it is a wide ranging value rich product.
Four.
For the younger people.
Older people like myself.
But basically added this particular cohort, it's 27% of our overall spending and.
In the third quarter that grew 38%.
So we feel pretty good about that.
As we move and so that's the I think that gives you the answer to your second question.
Okay.
And we do have a question from the line of Meng <unk> with Deutsche Bank. Please.
Thanks for taking my questions I wanted to ask about potential M&A are there sort of any areas in your product set that might benefit from possible bolt on acquisitions, and then has there been more opportunities to engage in the fintech space, where I have high valuations continue to be a headwind to any sort of activity. There. Thank you well I mean look I.
You've got let's take a little history.
Go ahead go walk down memory Lane, but we have we bought.
<unk>, which is a great bolt on acquisition for us.
With dining and it becomes a great system for new card members, because we don't just you know.
<unk> two.
To our cardholders and then.
We added lounge body, which is the lounge finder, which provides our card members not only with access to our Centurion lounges, but other relationships that we have over 1200 lounges and it'll also give them perspective on if our lounges are full or not then we bought messy and we bought cake in.
A few others and then obviously.
Obviously cabbage.
So look we're constantly looking and E com paid we bought as well so we're constantly looking for those bolt on acquisitions.
Things that will continue to drive our overall organic core and make our overall products that better.
Okay.
Some of the things are.
Obviously the prices for Fintech.
Cheers.
<unk>.
Obviously some of these things are.
Highly valued and obviously the math the math doesn't work, but you know the way we've looked at it is if something makes.
Strategic sense overall.
We will look at doing it but I think the big thing for US is we have a feeder system with Amex ventures.
Where we have.
Probably investments in 40, plus 50 different entities.
Entities right now and it gives us an opportunity to test.
They cover them it gives us an opportunity to learn and through some of these investments it led to us acquiring.
Companies down the road. So look you never say never about anything and Thats, probably as far as I'm going to go but we're always interested in things that are going to be accretive to the company overall.
Australia, and we do have a question from the line of Mark Devries with Barclays. Please go ahead.
Yes. Thanks.
Steve I wanted to ask you about how you were thinking about about crypto.
As you as your attracts more of these millennials and Gen Z are digitally native.
How important is to think about offering.
So either the ability to pay.
Or integrating it into your rewards prop.
And then also on a related matter how are you thinking about whether there is a role to play developing kind of a supplemental settlement where to address interoperability issues and then finally when should we expect you to buy a crypto pumpkin.
Yes.
Okay.
So look we think about a broad range of digital currencies from.
Crypto to stable coins to government backed digital currencies and love.
There as we think about crypto currency much more as a.
As an asset class at this.
This particular point in time.
Don't use our card.
To sort of buy stock.
People don't use our card to buy stock and I don't think people are going to use our card anytime soon to buy to buy crypto.
So I don't.
I don't see that as a big big role, having said that within closed ecosystem.
Punk ftes and stable coins and things like that you.
You said I mean, we're on NBA Topshop you can use the card there and there's a few other places where you can use the card and we will.
We will see how that all that all plays out I think there are opportunities down.
The road potentially.
<unk> membership rewards and things like that as redemption options, but.
I don't see I don't see at this point.
And I don't foresee it.
At any point, where crypto currency is going to be a threat.
Traditional credit card.
Payments and there's a lot of reasons.
<unk>.
Obviously, there's rewards.
This service.
There is the ability to dispute.
And there's also the ability to extend credit so.
There's always a role I think because I get asked this question is it is it is it going to displace.
For that traditional credit cards, and I think the answer to that is the answer to that is no I think there is a role though.
For digital currencies I think he can make.
Cross border payments, a lot more seamless and.
A lot easier to conduct and so we'll see how.
Government digital currencies and other stable coins play out.
Yeah.
And we do have a question from the line of Sanjay <unk> with <unk>. Please go ahead.
Thanks.
We look at that.
The year over year.
<unk> and goods and services.
Is there a way to parse apart how much of that is sort of your same customer growth versus new customer growth versus inflation I'm, just trying to think about how that cycles through when travel and entertainment comes back.
I have one follow up after that thanks, alright, well.
We don't we don't think it's a hell of a lot of inflation at this particular point in time as far as new customer.
We're in a lot of new customers, we acquired last year.
So same same customer sales are.
Driving quite a bit.
But we don't.
I don't have that at my at my Fingertips at this point, but.
I think what I would say is that when we see what we've seen from a value proposition.
Injection perspective last year, we saw a lot of that stuff sticks. So we saw more card members, putting wireless on we saw more card members putting streaming services.
So on and that has continued to to flow through we've seen.
More of our card members' putting online spending on so.
Thank that.
Our belief is that's going to stick and when you look at sort of goods and services growth, it's 19% over.
2019.
It's 18% over 2020 so.
It has been it has been that it has been consistent so that I think that's here to stay and I think what will happen is we will get that travel other thing I would say as we talked about the millennial cohort before and that being up 38% or boomers are not.
Back in.
And so the majority of our traditional card base is not back yet and that that is not growing at 38%, but the reality is they will come back and they will come back as they feel more safe and.
And so we think that's a tailwind for us going forward alright, that's very helpful.
And then I guess, Jeff is there a way to be more specific on the provision next.
Next year, I know, it's going to be dependent on loan growth in the macro but as you're thinking about what's embedded in your expectations for the high end of the range. I mean is it close to several billions of dollars I mean, maybe you can just talk through that please.
Well.
I think Sanjay the way to think about it is like many financial institutions, we are still holding and appropriately put significant level of reserves driven by the uncertainty in the medical and economic environment.
At some point.
That.
Level of uncertainty is kind of.
Decrease down to zero and at some point those reserves being held for that half two.
Also go pretty much down to zero now so that's that's kind of happened probably mostly over the course of next year on the other hand as loan growth.
Begins to pick back up which it has in the last quarter.
As delinquencies start to drift up I don't think theyre going to spike up that they will drift up a little bit then the actual what I'm gonna call VA you part of your provision is going to start to drift out what's really hard to predict those.
Sunday is the relative pace of those two things.
Next year, what I feel very confident though.
Pointing out as I did a few minutes ago is that relative to this year, where you had billions of dollars that have led you to a net benefit on the provision line I certainly.
We expect that next year, which is why we feel pretty good about the confidence in the range. We've given given that it actually represents several billions of dollars of improved business performance from a pre provision perspective, but those are the dynamics that we think about.
Alright.
Thank you.
Yes.
And our final question comes from the line of Don Vendetti with Wells Fargo. Please go ahead.
Hey, good morning, So I'll close it out with a question on regulation. Just you know a lot of things have been going well for the company just want to check in.
Certainly it's typically on the U S side to see if you are feeling.
Feeling comfortable as you can.
With the environment.
Yes.
Dan I'll answer it I think.
Whereas comfortable as we could be at this particular point in time for everything that we know.
But.
Especially you're always worried about everything.
You know and regulation is one of those things, but I think right now.
I think we're I think we're okay and when we think about regulation, we specifically think about you know.
Things that have happened in Europe, and things that happened in Australia, and so forth and we'd really.
See that happening in the U S. We'll see what happens as it relates to the CFPB is.
And how that all plays out but.
I think we've we've lived in this environment a long time, we know how to operate in this environment.
I think we'll just be fine, but I don't I don't see any sort of.
Curve balls, if you will coming down the Pike at this point so.
That's what I have to say about it.
Okay.
With that we will bring the call to end and thank you again for joining today's call and for your continued interest in American Express CIO.
Team will be available.
Annabelle for any follow up questions Greg back to you.
And ladies and gentlemen, the webcast 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 a digital replay of the call at 1866.
2071041, or four zero to 90 700 847.
Access code 873 to 937 after one P M eastern on <unk>.
At February 22nd through Midnight October 2009.
That will conclude our conference call for today. Thank you for your participation you may now disconnect.