Q3 2022 American Express Co Earnings Call
We'll begin today with Steve <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 our financial performance after that we'll move to a Q&A session on the results with both Steve and Jeff.
Let me turn it over to Steve.
Thanks, Gary and good morning, everyone. Thank you for joining us for our third quarter earnings call.
As you saw in our release. This morning, we had another strong quarter revenues grew 27% on an FX adjusted basis and earnings per share was $2 47 up 9% over last year, our investments to drive customer engagement acquisition and retention once again generated great results in our credit quality remained strong.
<unk> <unk>.
Card member spending remained at near record levels in the quarter billed business was up 24% on an FX adjusted basis over the record growth. We delivered a year earlier led by the continued strength in goods and services spending in the ongoing strong rebound in travel and entertainment.
As we said earlier this year, we expected the recovery in travel spending to be a tailwind for us, but the strength of the rebound has exceeded our expectations throughout the year.
In the quarter totaled <unk> spending was up 57% from a year earlier on an FX adjusted basis, driven by the continued strong demand from consumers and small business customers, particularly noteworthy is the strength, we're seeing in <unk> spending in our international markets, which exceeded pre pandemic levels for the first time this quarter on <unk>.
<unk> adjusted basis business travel also continued to recover and overall activity remains strong through September <unk>.
<unk>, we're seeing increased customer engagement with a wide range of travel and dining benefits and services, we offer as part of our membership model for example bookings through our consumer travel business reached their highest level since before the pandemic in the third quarter.
And in dining resi reservation platform continues to see strong growth.
Since we acquired the platform in 2019 resi uses have tripled to reach $35 million and we quadrupled the number of restaurants available around the world on resin.
Goods and services spending grew 16% year over year. The continued growth in goods and services is supported by the structural shift to online commerce that was accelerated by the pandemic and has been sustained since then.
The new online and mobile oriented benefits, we added to our value propositions. These benefits are particularly attractive to a millennial and gen Z customer base, which is our fastest growing customer cohort.
The investments we've made in our value proposition is also continuing to drive momentum in new card acquisitions, we added $3 3 million new proprietary cards during the quarter, our highest quarterly level of acquisitions since the pandemic began and we continue to see strong uptake of our premium fee based products with acquisitions of U S consumer platinum and gold card.
As well as U S business platinum cards, reaching record quarterly highs.
<unk> and Gen Z customers are powering this growth comprising more than 60% of our proprietary consumer card acquisitions in the quarter.
As we sit here today, we see no changes in the spending behaviors of our customers and our credit metrics continue to be strong with delinquencies and write offs remaining at low levels. Even as loan balances are steadily rebuilding of course, we are thankful of the mixed signals in the broader economy as always we have.
Plans in place to pivot should the operating environment changed dramatically and we've been taking thoughtful risk management actions to be prepared in the event of a downturn.
But as I've emphasized many times before we run the company for the long term and make through the cycle investment decisions. Our strong third quarter results show that our strategy of investing in our brand value propositions customers colleagues technology and coverage continues to pay off and our performance is consistent with our long term.
Growth aspirations looking ahead, we continue to see many great great growth opportunities and we will continue to take actions to best position our business for the long term.
As Youll recall, our international businesses were among the fastest growing prior to the pandemic as more countries relax their cross border travel policies and life returns to normal we see tremendous opportunities for growth in key regions. Despite ongoing macroeconomic and geopolitical uncertainties to that point we made.
Organizational change a few months ago to help seize on these.
We brought together our international tumor small business and large corporate management teams under one leader, which will increase our speed agility scale and efficiency in our operations outside the U S. As a result, you will see this quarter, we've introduced a new international card.
<unk> reporting segment.
Looking ahead, we remain confident.
Successful execution of our strategy driven by our outstanding leadership team and a talented colleagues throughout the company positions us well as we seek to achieve our long term growth plan aspirations of revenue growth in excess of 10% and mid teens EPS growth in 2024 and beyond.
Based on our performance through the third quarter. We also remain confident in our full year revenue growth guidance of 23% to 25% and we expect to be above our original full year EPS guidance range of $925 to 965 with that I'll turn it over to Jeff to provide a detail.
Overview of our Q3 results.
Well, thanks, Steve and good morning, everyone. Good to be here to talk about our third quarter results, which reflect another strong quarter and great progress against our multiyear growth plan.
With our summary financials on slide two most importantly, our third quarter revenues were $13 6 billion, reaching a record high second quarter in a row up 27% on an FX adjusted basis.
I would point out that we continue to see a much stronger U S dollar relative to most of the major currencies in which we operate.
So you do see a 300 basis points spread between our FX adjusted revenue growth of 27% and our reported revenue growth of 24% as we absorbed some significant foreign exchange headwinds of course, the overall impact on our earnings.
Headwind is less significant because we do have some offsetting positive impacts on the expense side.
Our revenue performance in the third quarter drove reported net income of $1 9 billion and earnings per share of $2 47.
Representing EPS growth of 9% year over year.
Great result, considering the sizable credit reserve releases, we had in the third quarter last year.
Because of these prior year reserve releases. We have also included pretax provision income as a supplemental disclosure again this quarter.
This basis pretax provision income was $3 2 billion up 43% versus the same time period last year.
Reflecting the growth momentum in our underlying earnings.
Before getting into a more detailed look at results. Let me spend just a minute briefly explaining how we've evolved our financial reporting for the organizational changes that Steve discussed earlier.
Youll see in the disclosures that are earnings release, the beginning this quarter. We have moved from three to four reportable operating segments. We first took global consumer services and split the U S into its own segment, creating U S. Consumer services. We then combined the international consumer business with the international portion of small and medium sized <unk>.
Surprises in large corporate creating the new international card services segment.
Commercial services that includes U S. SME U S large corporate and select global corporate clients.
And lastly, our global merchant and network services segment remains largely unchanged and as always includes our global payments network and network partnerships you will see in the appendix of our disclosures that we have recast prior periods to conform to these new operating segments. The new segments will also be reflected in our third quarter Form 10-Q.
Now, let's get into our results beginning with overall volumes looking at slides three and four you can see the continued strength in our card member spending base that Steve noted earlier.
Total network volumes in billed business were each up year over year at 23, and 24% respectively on an FX adjusted basis in the third quarter.
If you were to compare to 2019 third quarter billed business grew 30%.
Celebrating above last quarter's growth rate of 28% relative to 2019.
And importantly, despite the uncertainties in the current economic environment, our spending trends with performance relative to 2019 strengthened as we went through the quarter.
We are really pleased with this growth and the fact, you see strong growth across all customer types and geographies driven by both sustained growth in goods and services spending and continued T in a moment.
On slide five through rate, we've given you a variety of views are as strong growth across our U S. Consumer services commercial services in an international card services segments and the various customer types within each.
Starting with our largest segment billings from our U S consumer customers grew at 22% in the third quarter, reflecting the continued strength in spending trends from our premium U S consumers Miller.
The millennial and Gen Z customers again drove our highest billed business growth within this segment with their spending growing 39% year over year this quarter.
Turning to commercial services, you'll see that spending from our U S. SME customers represents the majority of our billings in this segment.
And that spending from these customers continued its strong growth up 17% in the third quarter.
Our U S large and global corporate customers those smaller part of billings in this segment remains an important foundation for the entire company and these customers continued their steady travel recovery. This quarter. The overall billings are still 13% below pre pandemic levels. We do continue to expect.
Though that this group will fully recover over time.
And lastly, international consumer and international SME and large corporate customers within the New International card services segment were amongst our fastest growing pre pandemic as Steve said and are now in a steep recovery mode. You can see our high levels of growth in Q3 at 34% and 43% year over year.
Year, respectively.
And if you were also to look at international consumer growth by age cohort you would see similar to the U S that the highest growth levels are from our millennial and Gen Z customers, who make up an even larger portion of overall billings than they do in the U S.
One other note on overall billings the majority of our high level of growth. This quarter was again driven by the number of transactions flowing through our network.
Some modest impact from inflation.
Overall, then we are pleased with the momentum we see across the board in our spending volumes, which is tracking in line with our expectations for both the year and for our long term aspirations.
Now moving to loan balances on slide nine we saw year over year growth accelerated to 31% and our loan balances as well as good sequential growth.
The interest bearing portion of our loan balances also continues to consistently increase quarter over quarter, surpassing 2019 levels in the third quarter as customers steadily rebuild balances.
As you then turn to credit and provisions on slides 10 through 12, the high credit quality of our customer base continues to show through in our strong.
Performance.
Write off rates for card member loans remained well below pre pandemic levels flat to where they have been for the last few quarters as you can see on slide 10.
As expected you to now see the delinquency rates for loans have started to modestly pickup, but also remained well below pre pandemic levels.
Turning now to the accounting for this credit performance on Slide 11, as you know there are two components components to our provision expense our actual write off performance in the quarter.
Which as we just discussed remained strong and second changes in our credit reserves, where there are a few key drivers are.
Our loan balances, especially our revolving loan balances grew strongly quarter over quarter and the macroeconomic outlook that we flowed through our models, which was informed by third party macroeconomic forecast as well as the latest fed outlook was slightly worst this quarter relative to last quarter.
Combination of our strong loan growth.
Excuse me in the updated macroeconomic assumptions resulted in a $387 million reserve build.
This reserve build combined with low net write offs drove $778 million of provision expense for the third quarter as you see on slide 12, we ended the third quarter with $3 5 billion of reserves with reserves for loans, representing three 2% of our balances I would point out.
Even with this quarter's reserve build this remains well below the reserve levels, we had pre pandemic driven by our improved portfolio quality today compared to that prior time periods.
Going forward, we continue to expect delinquency and loss rates to move up slowly over time, but to remain below pre pandemic levels. This year.
Do expect to end the year with a higher level of reserves on our balance sheet and where we ended this quarter given our expected loan growth.
The overall level of reserve adjustments will again be influenced by how the macroeconomic outlook evolves in the fourth quarter.
Moving next to revenue on Slide 13, total revenues were up 24% year over year in the third quarter or 27%.
On FX adjusted basis.
Before I get into more details about our largest revenue drivers in the next few slides I would note that service fees and other revenue was up 39% year over year similar to last quarter. This strong growth was largely driven by a recovery in travel related revenues.
Our local revenue line discount revenue grew 26% year over year in Q3 on an FX adjusted basis as you can see on slide 14, driven by both our sustained growth in goods and services spending and the continued momentum in T&D spending that you saw in our spending trends.
Net card fee revenues were up 23% year over year in the third quarter on an FX adjusted basis with growth continuing to accelerate as you can see on slide 15, largely driven by the continued attractiveness to both prospects and existing customers of our fee paying products.
The investments we've made in our premium value propositions.
This quarter, we acquired $3 3 million, new cards with acquisitions of U S consumer platinum and gold card members and U S business Platinum card members, all reaching record highs in the quarter and now each more than two times higher than pre pandemic levels, demonstrating the great demand, we're seeing especially for our <unk>.
Premium fee based products.
Moving on to Slide 16, you can see that net interest income was up 30% year over year on an FX adjusted basis due to the recovery of our revolving loan balances.
Well generally speaking a rising rate environment will be a modest headwind for us due to our sizable noninterest bearing charge balances in actual fact, it has been fairly neutral in terms of impact for us year to date.
Over time, though I would expect rising rates to represent a modest headwind.
To sum up on revenues, we are seeing strong results across the board and really good momentum when looking at slide 17, I would point out that we have now seen six consecutive quarters of revenue growth above 24% on an FX adjusted basis. As we are now showing strong growth even on top of the strong recovery led growth in the <unk>.
Prior year quarter.
I would also point out that we have a couple hundred basis points of difference when looking at revenue growth on an FX adjusted basis versus our reported results.
So while we are leaving our full year reported revenue guidance at 23% to 25% for 2022.
Would expect to be above that growth rate range on an FX adjusted basis.
Now all of this revenue momentum. We just discussed has been driven by the investments we've made in our brand value proposition customers colleagues technology and coverage and those investments show up across the expense lines you see on slide 18.
Starting with variable customer engagement costs. These costs as you see on slide 18 came in at 41% total revenues for the third quarter roughly in line with what I still expect variable customer engagement costs to run for the full year at around 42% total revenues.
On the marketing line, we invested $1 5 billion in the third quarter on track with our expectation to spend over $5 billion.
'twenty two.
We feel really good about the strong demand card acquisitions, especially premium card acquisitions.
As showed on slide 15.
And more importantly, we feel good about the spend credit and revenue profiles of the customers. We are bringing into American express membership, which continued to look strong relative to what we saw pre pandemic.
Moving to the bottom of slide 18 brings us to operating expenses, which were $3 $3 billion in the third quarter essentially flat to last quarter.
And Stephen I have.
Just all year. These results reflect the impact inflation has had on our operating expenses. In addition to our investments in other key growth underpinnings to support our tremendous revenue growth.
You can see based off our third quarter results that we are tracking with our expectations for operating expenses to be around $13 billion for the full year.
And looking at the year over year Opex growth of 22%. This quarter. It is also important to note that we see an impact from the prior year.
Including a sizable benefit.
From net mark to market gains in our Amex ventures strategic investment portfolio. While this year, we saw a modest impairment charge.
More generally we continue to see operating expenses as a key source of leverage moving forward and we would expect to have far less growth in opex and revenues in our ambitious growth plan.
Turning next to capital on Slide 19, we returned $1 billion of capital to our shareholders.
Including common stock repurchases of $600 million and $391 million in common stock dividends on the back of strong earnings generation.
<unk> ratio was 10, 6% at the end of the third quarter within our target range of 10% to 11%. We plan to continue to return to shareholders excess capital, we generate while supporting our balance sheet growth.
That then brings me to our growth plan in 2022 guidance on slide 20.
With each quarter of this year, we have demonstrated consistent progress against our 2020 guidance and our long term growth aspirations of delivering sustainable high levels of revenue and EPS growth.
For the full year 2022, we are reaffirming our reported revenue growth guidance of 23% to 25%, although I would point out as I said earlier that I would expect our FX adjusted revenue growth to be above that range.
We now expect.
Above our original EPS guidance range of $9 25 to $9 65.
And uncertainty in the level of our final EPS for the year remains the possible impact on credit reserves of how the macroeconomic outlook evolves in the fourth quarter.
I expect our actual credit performance and metrics to remain healthy it's harder to predict exactly how the macroeconomic outlook might evolve.
In addition.
We are working towards our 2023 plant.
And expect revenue.
Above our long term aspirational targets, which should create a platform for producing strong EPS growth.
Of course, we'll have to see how the economic environment evolves versus where we are today.
In any environment, though.
We remain committed to executing against our growth plan and running the company with a focus on achieving our aspiration of delivering revenue growth in excess of 10% and.
And mid teens EPS growth on a sustainable basis.
$1 24 and beyond.
And with that I'll turn the call back over to Carrie to open up the call for your questions.
Thank you Jeff before we open up the lines for Q&A I will ask those 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 Star then one on your Touchtone phone.
You'll hear a tone, indicating that <unk> been placed in Q.
You may remove yourself from the queue at any time by pressing Star then two.
If you are using a speakerphone, please pick up the handset before pressing the numbers.
One moment please for the first question.
Our first question comes from the line of Ryan Nash with Goldman Sachs. Please proceed with your question.
Hey, good morning, guys.
Good morning, Ryan.
So maybe just start on the top line, Steve solid results once again, although clearly as you and Jeff articulated FX was a headwind in the quarter.
And I know you mentioned youre not seeing any changes Jeff mentioned the strength over the quarter can you maybe just talk about what youre seeing from a spend perspective, maybe relative to what you saw 90 days ago any changes under the surface and then maybe just flush out a little bit further your confidence in the ability to generate.
Mid teens top and bottom line growth into 2023. Thank you.
We're confident.
Look the spending speaks for itself.
Just look at some of these numbers you got.
Goods and services up 16% of our U S. Consumer is up 22% millennial spending is up 39%.
Our teeny.
<unk> spending is up 57% international spending is 37% we haven't seen any change and you can look at this quarter over quarter end.
The reality is is that last quarter was a record level quarter in terms of spending and this is like a $1 billion behind or something like that but if you look at year over year growth.
We're not seeing any changes in consumer spending behavior.
It will.
And look that's not to say that things may not change, but I can only look at what I'm seeing right now and if I look from a forward perspective.
A question that we get is what about CNA continue spending holds so forth and so on and look I think.
You heard Ed Bastian last week, and he talked about not only what's been going on at Delta, but what they see going on through the holiday season, you I think you've heard Christmas setup as well say the same kinds of things and what's happening with Hilton.
Two of our biggest partners and so when we look at our consumer travel booking we see.
Higher higher bookings than we've seen.
You don't want a long long time, I mean that goes pre pandemic. So if I look three out because the next question that people ask is.
What is the holiday season look like well the holiday season from a travel perspective looks really really strong because people are booking three months out and if youre going to be traveling you're probably going to be built in our restaurants, and if you're traveling someplace, probably bring in presence with you as well so.
We don't see anything really changing over the next over the next three months in.
And as we go into next year.
Still we still feel really good about.
Our growth plan is and.
The only thing I would say is because I think I need to say this is that if things change.
We will be prepared to pivot.
And I think people saw that during the during the pandemic. We've got we've got our recession playbook you have a credits credit cycle playbook, and we will pull that playbook lever, if we need to pull it but to pull it at this particular point in time does it make does it make any sense, we're seeing strong growth and we're seeing <unk>.
Strong credit results overall, so right now nothing nothing new in the way I would headline is that.
This quarter it looks like the first quarter, which looked like the second quarter.
And it's the third quarter, it's another strong quarter for us in the only thing that I would say is I mean.
<unk>.
When you look at our model.
I think so.
Not only this quarter, but this year it really shows the strength of our differentiated business model, we have a different model than other people out there in the market and I think thats coming through in our statistics year over year earnings growth and.
Sure.
The topline revenue growth is.
Not something you're used to seeing from us unless you've been looking at the last six quarters.
And Ryan let me just add maybe a few other.
Comments to try to dimension, when Steve and I use the term like what we know how to pivot if we need to.
I would remind everyone that GDP in the U S shrank in the first two quarters of this year and.
And we've been putting up revenue growth in the 24% to 30% range steadily right through that.
I'd remind you that I talked about our credit reserve is influenced by macroeconomic forecasts and so you can go look at what the fed said.
In September you can go look at what Moody's is saying and they are predicting modest upticks in unemployment and Thats contemplated in everything Steve and I have said in the guidance that we provided.
If you look at October October is just a continuation of all that Steve just talked about thus far so.
We feel good about the guidance we've given.
We are acknowledging the environment, we're in but I I don't want people to overplay.
Our reaction to the fact that growth has been pretty slow in the U S. Because we work with our differentiated business model as Steve just pointed.
Pointed out performing very strongly in this environment.
Thank you. Our next question comes from the line of Sanjay <unk> with <unk>. Please proceed with your question.
Thanks, Good morning, just.
I wanted to follow up on that.
<unk>.
Steve you talked about the recession playbook, maybe we could just talk about.
Your comments about operating the business for the long term and if we were to see a slowdown how we should think about managing expenses marketing has been boosted quite a bit and you wouldn't want to grow as fast as as you are right now in the backdrop. So maybe you can just talk about the flex there how we should think about the aspirational targets in the backdrop.
The recession mild one event and then Jeff could you just hit the reserve rate I know people tend to think about that reserve rate as a result, as it relates to seasonal day one.
Do you see yourself getting back to that level, given how low losses are right now.
Yes.
So if you if you think about operating sort of in a recession operating in.
The playbook.
The first thing you have to realize is that.
When you look at.
Sort of credit and you look at how you acquire customers and how you underwrite customers. Those are things that we do on an ongoing basis right and so we've been we make adjustments.
Daily Weekly I mean, the models are constantly being updated and changing in our return thresholds are changing and so as we say we manage through the cycle. When we look at it basketball card members we we.
Manage that so that coming through that there was profitability, okay and so we will continue to do that and then I'll point you back.
To the pandemic and what we did you have a pandemic because I think thats.
That's a really good it's a really good model for us. So what did we do well you pulled back on your card member acquisition because number one we didn't have enough transparency at that particular point in time.
And number two maybe werent feeling good about sort of.
The card members that we could acquire at that point, but we never shut it down.
Scott when you when you get into it you're tightening that up as you go along and as you see it any signals and then the last thing I would say as you get into credit and collections and your ability to help out card members in a thoughtful way.
And your ability to collect money and I think that a lot of the programs that we introduced.
During.
During a pandemic with programs that we would be taking off the playbook and the last point I would say is.
Card base is not representative of the U S.
Economy.
We when you look at the share of cart that we have in this marketplace and in a number of card members, it's obviously well below double well below double digits and.
They're not necessarily separately representative of the.
What's going on in the broader economy and the last point that I would make is a lot of people try and equate what's going on with the stock market and going on and spending there is no correlation in our history of that the thing that you do worry about is on EM.
And in particular white collar unemployment and so as we think about professionals that could potentially be laid off.
Something that you look at but again are our models take all that into account and we've been through this we've been through that kind of stuff before and I think we're very well prepared for it.
Before I get to credit reserve Sanjay I can't resist just adding though you said well what would you do in a mild recession I don't want to get into the whole debate here about semantics, but some could argue that from a growth perspective, we're in a mild recession.
We're just grew revenues 27%.
And return it to our credit reserves, our credit reserve adjustments do include the latest economic forecasts, which have unemployment ticking up a little bit next year and that's included in all of our forward looking comments.
As you point out and maybe to help everyone. Sanjay I think it's on slide 12 in our deck today are day one.
Our credit reserve percentages of total loans were four 6% this quarter. They were all the way down at three 2%.
I will point out that if you look across the industry that is by far the lowest percentage. It's also the lowest percentage relative to day, one there's differential timing.
All of the different financial institutions have had over the last cut.
A couple of years, just due to the vagaries of the way the attack.
Works here, but as you sit here today, our reserve balance both on an absolute basis and relative to that day, one basis is below the industry and that makes sense Sanjay because we have by far the most premium book in the industry, we have by far the strongest credit metrics and relative to pre.
Pandemic in that day, one number our credit profile is stronger today, all the talk you hear from Steve and I, and Doug and others about our success, bringing more premium consumers into the franchise over the last couple of years has an impact on credit profile as well.
So all else being equal you would not expect.
Our reserve percentage of loans to get back to where it was day one seasonal because the average credit profile is stronger than it was day one seasonal.
Yes.
Okay.
Thank you. Our next question comes from the line of Mark Devries with Barclays. Please proceed with your question.
Yes. Thanks.
Could you discuss what's driving the accelerating new account growth off of already higher numbers and how sustainable you view account growth anywhere near these levels to be in.
Any color you can provide on kind of a ramp in spend you would normally observe from new accounts as they age and then.
Finally did you see a surge in new account applications from Gen Z around your JAK Harlan concert.
Yeah.
Okay.
Can't comment on that.
Jack Harlow concert not that I can't comment on I'm not.
We're of the the surge in account and account acquisition I'm sure. It it didn't hurt us.
You know look I think that.
What you've seen here is we're not going out and just trying to grab the lots and lots of cards I mean.
We're out there, we're adding high value cards, and you know the value proposition is strong and the value propositions are really playing well with millennial and Gen Z. It's 60% of our of our card Act acquisition and while I don't have the numbers handy with me in terms of how the.
How the ramping goes in.
And sort of in year, one spending here.
Well I would point out is we're acquiring 60% of the cards that were acquiring are millennial and gen Z and that cohort was up 39%.
This quarter so.
This whole concept of generational relevance in bringing people into the franchise early in.
And bringing them in on a premium product that they can really embedded in your lives into.
It has really helped us out tremendously as opposed to bring them in on a fee free product and then trying to upgrade them along I think.
A lot of millennials and Gen Z are using the using this product and again as we as we've always said just a payment product I mean, we view ourselves as a lifestyle brand and as a lifestyle product.
And the JAK Harlow concert is.
Is it is a good example of kind of kind of the things that we do to embed ourselves in People's lives and.
And we talked about Ramsey and we talked about.
Travel and those services in those bookings are going up and.
People are using that and so it's just more than just a payment product. So.
Again.
Again, Mark I don't have the subtle.
First year ramp up spending but.
39% is a pretty good indication as far as we're going to acquire 3.3 million cards next quarter I don't really have any idea I mean, you know will acquire those cards that as we underwrite them. They makes sense for us to go they will they will be profitable through the cycle could that be 3.3, yes, it could be three points or it can be.
2.9 could be three five we don't we're not in part acquisition targets. What we're looking at is acquiring those card members that meet our criteria and it just so happened that it was 3.3. This particular quarter. The only two comments I would add mark are.
Amongst the <unk>.
Modest risk management adjustments, we've made to cross the course of this year as we have significantly actually raised our financial.
Hurdles required for some of the new card members that were bringing in and still just brought in a record level, which tells you something about the level of demand that we see right now due to all of the trade succeed just talked about I'd also point out as I said in my earlier remarks that that average customer who.
Behaviors retract track every single month.
Is coming in with much higher spend patterns much better average credit quality.
Much greater average fee component than what we were seeing pre pandemic.
It's harder to qualify to get a card we're getting more.
Just to cut to the chase.
Thank you. Our next question comes from the line of Betsy <unk> with Morgan Stanley . Please proceed with your question.
Hi, good morning, Thanks, so much for the time.
Had.
Hi, I, just wanted to understand a little bit about.
How you thought the FX impacted yourself in the quarter.
We can see a variety of ways that you present, but just want to understand from your perspective what.
What the.
And what the impact was on the revs and on the expense side in particular, the reward side and then give us a sense as to how you think about the revenue guidance.
Range. If it was FX adjusted you know for the year and for what Youre expecting in the fourth quarter. Thanks.
So thank you for the question Betsy I will say I think foreign exchange movement.
The dramatic right now and more dramatic than they've been in many years I think are a little difficult to communicate and hard for a lot of people to fully understand so.
You've seen dramatic move in many of the currencies that are most important to us from the yen to the euro to the pound.
So when you look at our revenue growth. This quarter. That's why you saw a 300 basis points difference between the FX adjusted revenue growth and the reported revenue growth.
94% now on the bottom line. It is a much more muted impact Betsy because of course, we also have a very large proportion of our colleagues.
Outside the U S to grow with all of that business that we do around the globe.
The cost of rewards and all of those countries is in the local currencies. So the impact on our earnings per share is pretty de Minimis. I think we have a 10-K disclosure where we talk about over the course of a full year movement may be costing you.
10 cents, that's pennies a quarter. So that's why I don't really call. It out when I think about EPS when you convert all that into our guide.
It's why we're very comfortable saying, we're going to be above our EPS guidance range. We left our reported revenue growth number.
The same as it was previously I would expect to be a couple of hundred basis points above that reported revenue guidance on an FX adjusted basis. So I'll conclude by saying in some ways, what we're saying is.
Our revenue performance has exceeded our expectations of 90 days ago that has sort of offset the foreign exchange headwinds, which are a little bit greater on the revenue side than what I would've expected 90 days ago, but at the bottom line, you don't really need to factor in that much.
Okay.
Thank you.
Thank you next question comes from the line of Bob Napoli with William Blair.
Proceed with your question.
Thank you and good morning.
I'd love to get a little update on SMB and online spending I mean, the F&B. Obviously is a critical business for you and yesterday, obviously growing strongly but any any color you can give.
On SMB any changes and then online spend has actually been pretty steady I mean, a lot of.
I guess.
Discussion around what is the right growth rate for online spend versus offline.
Over the long run I think theres, a little bit of a T cell and maybe an offline, but steady and online. So just any color on SMB and your thoughts on the long term growth of online spending.
Well I mean look let's just start we will talk about little about goods and services spending, which I mean, which is really when you start to talk about online and offline look our goods and services spending is 16% and it's.
The growth rate is split pretty evenly in fact offline maybe growing slightly more than online.
But both in that 15% to 17% range. So.
And I think that's sustainable I think that.
Obviously online spending pop up.
But offline spending is is back above pre pandemic levels. So.
We feel really good about both I think.
Consumers are.
Dry pass the ball I mean consumers are out there shopping in.
And spending and they are also you know ordering online and so I think it's a.
It's a sort of a double hit for us in a very positive way. So we're very comfortable with the 16% goods and services spending and thats approximately 70%.
Of all of our spending as far as small business small business continues to perform very very well and we've had you know in this quarter, we had 17% growth and that's a it's a large a large piece of our business and we're doing more and more things.
With our with our checking account with cabbage and small business loans.
And so forth. So we feel so good about small business and it continues to perform really well for us.
Thank you. Our next question comes from the line of Rick Shane with J P. Morgan. Please proceed with your question.
Guys. Thanks for taking my question I wanted to revisit a topic, we raised last quarter.
Historically your product offering basically positive caused the customer base is positively selected for spending pay and the product offering essentially a bitchy weighted them.
Pattern.
Now you're offering a product that.
Offers revolve on day one.
And as you move into a younger demographic do you think over time, despite the upward move in terms of the credit profile that that will change credit performance that you will actually increase your paid into the credit cycle, because you changed the way you capitulated your customer and how you've selected.
Yeah, So I think Greg it's a good question because you are.
Good to point out that there has been a significant change as we have from our perspective added more functionality for all of our customers.
On what our traditional charge products and many to most of those customers still use them as traditional charge products and leave it paying off every 30 days and some occasionally take advantage of their new functionality and being able to carry a balance if they want.
For a little bit, but when you think about the impact on the company Steve used the term a couple of times today, our differentiated business model.
If you look over time, our net interest income is about 19% 20%.
Of our overall revenues.
And that's where it was many years ago, and frankly, that's where we'd expect it to be many years from now because as much as we see an opportunity to get a little bigger share of our consumer and small business customers lending wallet.
We grew fees, 23% this quarter.
And we are seeing tremendous growth and discount revenue. So we do get great growth and expect to continue to get great growth on the lending side, but I don't actually expected to make a big difference in the overall mix of revenues that we have as a company are in the business model. We have no I don't think its going to make it.
A difference in the in the mix of.
As Jeff said in the mix of our overall.
Yeah.
Breakup of revenue and a breakup of revenue, but I think what it also gives us an opportunity to actually acquire more spending.
When we did not have that feature.
That group May have started off with a.
With it with a competitive lending card.
Or we may have put them on a blue cash have you part and so what's happening is and I think this bears this out and the spending numbers of 39% growth.
That cohort is consolidating their spending and they are consolidating their spending with our product and its giving them an opportunity to earn more rewards.
And so I don't really think it changes the credit profile I think it gives us an opportunity to actually capture more spend and to ultimately capture more revenue and a more important part is I think the lifetime value of these customers is going to be a lot more than the lifetime value of where we acquired previously because we're going to run these people right, where we're going.
To run these these consumers right through the cycle and it's going to be with us from day, one and I think that's really important.
So I don't think it changes the profile of our of our revenue I don't think it changes the profile of <unk>.
The riskiness of our company, but I do think it gives us an opportunity to grow more spending and obviously to capture more revenue from this from this segment.
Thank you. Our next question comes from the line of Dominic Gabriel with Oppenheimer. Please proceed with your question.
Hey, good morning, Thanks, so much for taking my question.
The loan growth was up as you just mentioned about 31%, that's really industry, leading levels of loan growth and I know you've talked about in the past that you were trying to penetrate your existing customer base and so you <unk>.
Effectively underwritten these people through their spending habits over time.
And you in a while ago I think you provided how much of the loan growth was coming from an existing customer base spending cohort and at not could you just provide.
Some of the breakdowns that are giving you this supercharged.
Loan growth versus the industry again, thanks, so much.
Let me just start dominant with a few.
Stats that I think are important and then Steve may want to add I mean.
The biggest thing driving of course, the 31% growth in loans tremendous growth and spending right. So we are in a recovery mode.
Of spending and seeing tremendous progress there Ann.
<unk> are also beginning to rebuild balances a little bit. So I think it's fairly natural so yes, I think when you look at those who have reported thus far you're seeing industry, leading growth in loans, but you're also seeing industry leading growth in spending I think that's very very important.
To put those two together so I think we feel good about the trends and.
Expect them to continue and I would expect long term just as we were before the pandemic.
To grow a little faster than the industry on lending and to do it while still maintaining best in class credit, Yes, and I think what's also important to realize is that this loan growth is not all revolving balances here right I mean, so that's an important point, but.
Spending growth like we've had will drive overall loan growth and yes. It is.
We've had a.
Large.
Year to date sort of spend.
Spending in growth, but if you just if you just look at it.
Sequentially quarter to quarter.
Because we had pretty much the same cargoes do you only have about $4 billion in.
Overall loan growth on a sequential basis, but you do have quite a bit.
Year over year, so it's not like all of a sudden this thing just jumped up spending continues spending has continued on a on a quarter to quarter basis and that drives up lending.
Loan growth excuse me.
Thank you. Our next question comes from the line of Moshe Orenbuch with Credit Suisse. Please proceed with your question.
Okay.
Thanks, maybe maybe as a follow up I think Jeff you had mentioned that the interest bearing portion.
Continued to grow faster kind of helping net interest income can you just talk about when that levels off how does that.
I guess, Steve had sort of mentioned just in the and the answer to the last question a little bit about.
Kind of.
Fair amount of that growth.
Linda adopting kind of interest bearing balances. So as you as you look at that going forward.
How do you think that.
So how do you think that develops.
So I would expect.
Most for the next couple of quarters to CV revolving or interest bearing portion of those balances grow a little bit faster than the overall loan growth because we're not quite back to pre pandemic levels or behavior. I think our expectation is over time and I think it may take while still you will eventually.
They get back to pre pandemic types of behavior. The other factor I would point to cause a little bit to Rick Shane earlier question, which is you do have this evolution going on as we've added a little bit more functionality.
Some of our charge products, so those customers who have the traditional charge products, but have that pay overtime feature.
To use it less than your traditional credit card or revolving customers. So that that's putting a little bit of.
Complexity in tracking our numbers here, but I think in terms of watching the macro trend I would expect loan balances to grow a little bit faster than the industry I.
I would expect for the last couple of quarters, the revolving portion to grow a little bit faster than the loan growth.
Would expect all of those things to really set out into steady state levels about where they were pre pandemic.
Thank you. Our next question will come from the line of Dan Fannon getting with Wells Fargo. Please proceed with your question.
Oh, yes on the international or change.
Does that signal, maybe a faster pace of investment I know, it's always been a kind of a balancing act and international markets. And then also is there anything new on the Tech investment strategy. So you were sort of ramping up hiring seems a long way from the game for that.
No I think you know the.
The Tech investment strategy remains the same.
There was an article on us ramping up hiring.
And that's.
There's a lot of contract conversion that we're doing I mean anybody that's in financial services has their own employee base and has a large contractor base and so it's not necessarily an indication of increased head count in in technology, nor is it an indication of being late in the game when it is an indication of his.
A balancing act between our contracted population and our overall colleague population so.
We've been pretty steady with our tech investment over the last couple of years and we'll continue that that same level of.
Of Tech investment.
This year and what was your first question Don.
Oh, so the internet.
The international piece of this I think from an international perspective.
I just think that there is.
When you run it when you run a global company. It is it is really important.
To make sure that you bring the best in bridal to bear on all the problems and solutions and issues that you have and when you think about acquiring card members engaging card members and retaining card members.
Yes.
Uh huh.
Having a a sort of a dual or tri market structure.
Sometimes can slow down your speed and your agility versus having a single market leader.
Looking at making what are the right investment decisions for.
For that market and so how many small business cards, we could acquire how many consumer cards, we acquire how do you adjudicate what customer should get a small business in or a consumer card I think this will allow us not only to get products to market faster, but to also make sure that we're putting the right investment in the right channels as.
As we move across as far as extra money being invested in international we have an enterprise investment strategy and we will put the money where the best returns are so if we can get more returns out of investing in a market where market b versus the U S or vice versa, we will do that and any other thing.
I would say look I've been around for a long long time and organizational construct change with the times that you are in and so the technology. That's available for the value propositions that are available I mean, this is in some ways a little bit back to the future.
We did globalize all these things, but now we feel it's better to to take these global capabilities that we have and and deploy them on a much more.
Local level with more local decision making.
Sure adjudication between sort of the various business units and we just think that will be a more effective and faster way and coming out of the pandemic.
I think speed of decision, making and agility will be really important.
Thank you. Our next question comes from the line of Bill car Cochin with Wolfe Research. Please proceed with your question.
Thanks, Good morning, Steve and Jeff.
Your PPA.
P P and our beat and the strengths of the underlying trends certainly highlight the.
Earnings power in the model, but.
Was hoping that you could address.
Investor concerns that.
Thinking back to the 2007 timeframe. Your models back then we're saying that customers with multiple mortgages were good credits and you guys essentially grew into that.
Into that recession, and while today's environment is very different some investors.
Sure.
Looking somewhat by analogy to that timeframe end of express concern that you may once again be growing it to the next recession.
The strong spending trends that youre seeing are a reflection of the inflation problem that.
Just trying to fight would love to hear your thoughts around that dynamic.
So I'll give you my thoughts and Jeff can kind of jump in.
We've learned a lot since 2007.
And we've changed quite a bit and to think that.
2007 is.
Is indicative of how we handled 2022 I think it would be.
It would be foolish of 2023, and again I'll just point you to the pandemic, where I think.
One of the things that went unnoticed during this pandemic was.
How we handled people in distress.
And I think we handled them very.
Very well from a.
From both a short term perspective, and a long term perspective, and if you remember when Jeff used to present these slides.
We talked about are in distress at times and.
We manage that quite carefully I can also say that our ability to collect.
Is is completely different than it was back then our models are different back then but.
Yeah, I think people can can think what what they want but we'd be foolish to think that.
We haven't changed or learned a lot in terms of growing into the recession, what I would say is this.
80% of our growth is driven by transactions right now. So if you look at that spending number. This is not inflation. This is transactions. This is higher levels of engagement.
And so the notion of us were growing because we have some tailwind of inflation is also a silly notion because.
We're engaging our card members more we have more transactions, we have more card members.
And the last point just going back to your first question. So is our card base is so much different than it was in in 2007 from an economic perspective.
It's a much more robust resilient card based than it was back in 2007.
And also the way we grew our balances was not necessarily just through spending back then there's a lot of balance transfer activity.
And so I think this company has a very different company than it was in 2007.
Going into the recession. The card base is different the way we were growing as different we've really become much more of our spend growth company. We have a lot more premium cardholders, we have a lot more fee paying cardholders and then we did our growth is coming from very different sources, so but at the end of the day.
When when and if you have a big <unk>.
Downturn, well, we'll see what happens, but we feel pretty good about the abilities and we feel pretty good about our models and we feel really good about our spending is being acquired right now.
So we're not just riding a tailwind here we.
We're riding real growth.
Through customer acquisition and increased spending from existing customers because the value propositions are driving that growth.
And the only thing I would add is that just like that spend is coming from existing customers. The loan growth is predominantly coming from existing customers.
That we know well, we'll have a better average credit profile.
And we feel good about our winning through this cycle models that tell us. These are customers, who we should have in any environment.
And I think I'll come back to my earlier comments about our credit reserve levels.
Are still below everyone else in the industry.
They're below relative to day, one seasonal where others are and thats appropriate given our strong credit file.
So we feel good about where we are.
Thank you. Our next question comes from the line of Lisa Ellis with Moffett Nathanson. Please proceed with your question.
Hey, good morning, guys. Thanks for squeezing me in.
Just have a follow up on hi, hi on that point given the continued strength in your business and the fact that you're still benefiting from a lot of these sort of lagging.
Recovery tailwind from the pandemic can you just update us on your thoughts on taking advantage of the current valuation environment pursued some tuck in M&A or other more like chunky or organic investment for example, things that you're.
Perhaps going looking at are leaning in on in terms of.
Accelerating areas of your business.
I mean chunky organic investments I mean, you've seen how we've how we've driven our marketing spending and.
To acquire card members, while as Jeff said, making it harder and harder to get a card. So I think that I think we've leaned in on on our marketing investments, we feel really good about.
Our technology investments and.
Look we're always looking at opportunities to tuck things in net debt that makes that makes sense for us I mean, whether it was cabbage or or or <unk> or lounge body or E comm pay and so forth. We're always looking at those things that will.
It will be adjacent and add to our mechanic or what we're not looking for things that are sort of outside of our universe.
I think we've proven that we can expand.
With our customer base, we can expand the.
The services that we're offering and looking at additional services that lead them to more spending or lead to.
Two more.
Acquisition opportunities, which when.
When you look at Ramsey people look at resi as a restaurant reservation system, we look at that as a way to engage our card members that as a way to engage with our with our restaurants and when we look at it as a way to acquire new card members and so.
And <unk> is another one where it's an ability to pick up more more b to b <unk> spending so we're always on the lookout for capabilities.
And if the right valuation comes along with the right.
With the right set of capabilities, yet, we'll take advantage of it but as far as leaning in sort of on organic investments I think we've leaned in I think we've invested in marketing we've invested in card member services, we've invested in our value proposition and we are investing in our colleagues and continued to keep our investment levels up in technology.
Okay.
Thank you our final question will come from the line of from Mihir Bhatia with Bank of America. Please proceed with your question.
Good morning, and thank you for squeezing me in here I, just wanted to really quickly touch on the regulatory backdrop.
Anything worth highlighting there from your perspective, specifically I'm thinking of suburban proposal.
That's interesting to you.
But is there anything else also.
Negative.
Thank you.
Alright.
Sorry, I'm here it was really hard I don't know if you're on a speaker phone or it was really hard to hear Ya Durbin was that the question.
So yes, I was just asking about the Bill then proposal and the regulatory backdrop.
Okay.
That's very clear now.
So look.
In terms of the Durbin proposal, it's a proposal.
Can't speculate how this is going to come out and whether it obviously is not going to impact us because we're we're a three party system. So we don't really see that impacting us negatively will it impact us positively or will it actually happen we continue to look at it.
And we'll see we'll see what happens there as far as look as far as the regulatory environment.
It's a tougher regulatory environment and I think.
In a lot of ways.
The objective is to protect consumers and to be transparent with consumers and we applaud all of that and so I think the CFPB is.
Talking about late fees and things like that in and these are not material parts of our of our revenue streams, but.
Transparency with consumers is really really important and.
We obviously want to see all of that but I don't think the regulatory environment is any tougher than it has been over the last over the last few years and we will continue to operate in that environment.
Obviously, it adds sometimes it adds a little bit of cost to comply with certain things whether that means technological changes or what have you but.
It's just like competition it really it's always there.
And you have to make sure that you're investing to meet the regulatory guidelines and we will continue to do that but I don't see it as a big a big headwind for us or a headwind at all for us.
As we move forward.
Okay with that we will bring the call to an end. Thank you again for joining today's call and for your continued interest in American Express the IR team will be available for any follow up questions operator back to you.
Ladies and gentlemen, the webcast replay will be available on our Investor Relations website at IR Dot American Express Dot com shortly after the call.
You can also access a digital replay of the call at 877.
<unk> 606853.
Or 201.
Six <unk>.
7415.
Access code 137.
323.
Zero nine after one PM Eastern standard time on October 21 through October 28.
That will conclude our conference call for today. Thank you for your participation you may now disconnect.