DBRS: Amex 2Q14 Earnings Up on Joint Venture Gain, Growth in Card Member Spending and Loan Growth

Summary:
• Pre-tax income of $2.3 billion, up 16% year-on-year (YoY),reflecting the gain from the closing of the business travel joint venture partially offset by incremental investments in the franchise.
• Excluding the impact of the JV, Amex’s underlying results benefited from higher Card Member spending, loan growth and well-managed operating costs.
• DBRS, Inc. (DBRS) rates American Express Issuer and Long-Term Debt at A (high) with a Stable trend.

American Express Company’s (Amex or the Company) 2Q14 pre-tax earnings benefited from the pre-tax gain of $626 million resulting from the previously announced business travel joint venture (JV) partially offset by transaction related costs and a contribution to the American Express Foundation. Consistent with Amex’s philosophy of utilizing one-time gains to make investments supporting growth, Amex utilized a large portion of the JV gain to invest in improving operating efficiencies as well as invest in growth initiatives. Indeed, Amex incurred a $133 million restructuring charge related to future actions that will improve operating efficiency. More importantly, a substantial portion of the JV gain was used to make incremental investments in support of the launch of the Amex EveryDay Credit Card product, American Express Serve as well as new Card Member acquisition activities in the U.S. and overseas. DBRS sees these investments as diversifying Amex’s product suite, which should allow the Company to capitalize on growth opportunities in both the U.S. and internationally, ultimately driving Card Member spending and earnings.

On a foreign currency (FX) adjusted basis, worldwide billed business volumes were 9% higher YoY at $258.1 billion, reflecting improving U.S. consumer confidence and an improving U.S. economy. After a deceleration in 1Q14 due to abnormally adverse weather and a slowing economy, U.S. Card Member spending growth returned to levels consistent with 4Q13. Importantly, growth in U.S. billed business was up across consumer, small business and corporate. Outside the U.S., international billed business growth rates were modestly lower with some deceleration in Japan/Pacific (JAPA) region as growth in China slowed due to tougher year-on-year comps, reflecting new Global Network Services (GNS) partners and products that were introduced a year ago.

Higher billed business volumes and growth in lending balances underpinned revenue expansion of 5% YoY, on an FX adjusted-basis, to $8.7 billion. Discount revenue, the largest component of revenues, grew at a slower pace than billed business volumes due to a 4 basis point reduction in the discount rate. A shift in the mix of volume to more everyday spend items as well as the timing of certain items were the primary drivers of the lower quarterly discount rate. Once again, Amex outpaced the industry with worldwide Card Member loans growing 5% YoY on higher Card Member spending. Importantly, DBRS notes that the growth in the lending portfolio has been achieved without a loosening of Amex’s traditionally conservative underwriting standards but through higher volumes, evidencing Card Member loyalty. As a result of higher earning asset balances and a slight increase in net interest yield, net interest income increased 9% YoY to $1.3 billion.

Overall, total expenses were up 2% YoY at $5.86 billion. Marketing and promotion expense was notably higher YoY, reflecting the incremental spend on growth initiatives discussed above. Card Member rewards slightly outpaced billed business primarily due to an enhancement to the ultimate redemption rate (URR) estimation process in a number of international markets. Meanwhile, operating costs continue to be well-controlled. For the quarter, Amex reported an 8% YoY reduction in operating expenses to $2.9 billion, reflecting the business travel JV transaction and related items. On an adjusted basis, operating expenses were up 4% from 2Q13. However, year-to-date operating expense growth is flat YoY and well within the Company’s target of growing operating expenses at less than 3% in 2014.

DBRS rates American Express Company, and its related subsidiaries, Issuer and Long-Term Debt at A (high) with a Stable trend.

Note:
All figures are in U.S. dollars unless otherwise noted.