American Express Company - Special Call

American Express Company (AXP)

February 08, 2012 2:30 pm ET

Executives

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Previous Statements by AXP
» American Express Management Discusses Q4 2011 Results - Earnings Call Transcript
» American Express Management Discusses Q3 2011 Results - Earnings Call Transcript
» American Express Company Shareholder/Analyst Call

Kenneth I. Chenault - Chairman, Chief Executive Officer, Member of Operating Committee, Chairman of American Express Travel Related Services Company Inc and Chief Executive Officer of American Express Travel Related Services Company Inc

Stephen J. Squeri - Group President of Global Corporate Services and Member of Operating Committee

Edward P. Gilligan - Head of Global Consumer and Small Business Card Issuing Network and Merchant businesses, Vice Chairman and Member of Operating Committee

Louise M. Parent - Executive Vice President, General Counsel and Member of Operating Committee

Daniel T. Henry - Chief Financial officer, Executive Vice President and Member of Operating Committee

Ashwini Gupta - Chief Risk Officer, Member of Operating Committee and President of Risk Information Management & Banking Group

Analysts

Unknown Analyst

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Presentation

Kenneth I. Chenault

Good afternoon, and welcome to our first financial community meeting of 2012. Here's today's agenda. I'm going to begin by covering our 2011 financial performance, including our strong metrics and the aspects of our business model that made it such a successful year. I'll then spend some time reviewing some outcomes of our multiyear investment strategy. I'll cover the performance of some of our key 2011 investments, with a particular emphasis on how we're capitalizing on opportunities in the digital space.

One area of focus for us, and certainly an area of interest for many of you, is expense margins. Our P&L in 2012 will be marked by the reduction of 2 major benefits, the elimination of payments from Visa and MasterCard related to the 2007-2008 legal settlements and lower credit reserve releases.

Now we've known for some time that we'd face these reductions and we've been planning accordingly. We're proactively -- we've proactively reviewed all of our expense categories over the last several years and have implemented appropriate actions to make our expense base more efficient and improve our growth trajectory.

I'll start this topic off by addressing some of our overall margin and expense growth trends, and then Steve Squeri, Group President of Global Corporate Services, will provide a deeper drill into OpEx. Steve is directly responsible for several functions that represent a large portion of our expense base, including technology, customer service, credit and collections and shared services, as well as for our Global Corporate payments and business travel businesses. As you'll see, we've already taken a number of actions to reduce our expense growth and have credible plans in place to do even more. We'll then leave time as always for any questions you may have on these or any other topics.

So let me get right to our financial performance. For 2011, we generated $4.9 billion of net income, earnings per share growth of 22%, revenue growth of 9% and a return on equity of 28%. Given the continuing softness and uncertainty across the global economy during the year, I'm very proud of our performance. Our profitability was strong and well above the net income peak we hit in 2007. Our EPS growth far exceeded our on average and over time financial objectives of 12% to 15%. Revenue growth remained strong, driven by the strength of our cardmember base and the performance of our investments. And return on equity reflected our strong capital position and the inherent strength of our spend-based business model.

In 2011, the advantages of our model were quite clear. Billed business, cards-in-force and average cardmember spending all remained strong, and our billings growth clearly outperformed the pace of the economy overall. At $822 billion, billed business for the full year was our highest ever as was our average spend of almost $15,000. Cardmember Loan growth moved into positive territory for the year and was up 3% in the fourth quarter. Now this is not a huge number. But as you'll see in a few slides, one that bucks the trend of many card issuers. Our credit performance improved significantly, on both an absolute and relative basis over the course of the year, and remains best in class.

Now let me give you a bit more detail on our billings performance since this remains our key business driver. I'll start with our billings trend by region. As you can see, the growth rate of each region trended down somewhat over the last 2 quarters as we came up against relatively high comparables in the latter half of 2010.

Europe has particularly weakened, given debt and economic concerns, and we've seen slower growth in several markets such as Italy and France. Now while one month certainly doesn't make a trend, our European billings growth in January did not weaken further but was generally consistent with the fourth quarter on an FX-adjusted basis as were our January billings overall.

Within the U.S., billings growth has held up well against the charge and credit volumes of Visa and MasterCard, though at a somewhat decreasing rate. We continued to outpace MasterCard in the fourth quarter with 11% growth to their 6%. Although including faster-growing debit products, our growth rates were just about equal. Debit has been a good source of growth for the networks over the last decade, but its appeal for U.S. issuers and consumers will likely decrease as a result of recent regulation. Through the third quarter, these growth rates translated into an 80 basis point increase in our share of U.S. credit and charge purchase volume, which is on top of a 160 basis point gain last year. This outcome has been the result of a lot of hard work, along with our consistent investment in both cardmember and merchant value.

On a global basis, relative to Visa and MasterCard, we were all at the same approximate growth level in the third quarter, though MasterCard did outpace us in the fourth. This was driven by their international growth, largely in Europe, where our growth decline exceeded theirs, likely because of the greater proportion of discretionary spending within our base.

While volume growth is an important metric for all of us, the strength of our business model really comes through when you look at profitability. As pure processors, the goal of both Visa and MasterCard is to keep putting volume through their pipes, which they do. Our model is focused on volume growth but also on expanding our customer and merchant value, which, in turn, expands our revenue base. This is why our profitability per dollar of volume is 6x greater than either Visa or MasterCard.

Relative to major U.S. issuers, the strength of our performance is also quite clear. Our total billings were almost 2.5x the level of our nearest competitor, and our growth rate of 15% significantly outpaced all major issuers, except for Capital One.

On the lending side, all of these competitors saw declines in average balances while we reported 1% positive growth driven by our continued focus on premium lending. These metrics are important on their own. But when they're correlated against revenue, they show a key point relative to future growth potential.

On our 15% billings growth, we posted a 9% increase in revenues, strong growth for each category. When compared to other issuers, however, you can see a disconnect. Even with positive billings growth, everyone, except Discover, is reporting negative revenue growth. As you can see in some cases, the gap between the 2 metrics is quite substantial, with both BofA and Capital One reporting a difference that's greater than 20 percentage points.

So what does their revenue growth correlate to? What's their key driver. As you can see here, it's loan balances. Despite positive growth in billings, most of these bank card issuers are still reporting negative revenue growth in their card business because they're still reporting negative growth in their balances. Their lend-centric card models pretty much dictate that material revenue growth can only come about by growing AR. Their dependency on spread revenues continues despite their stated efforts over the last several years to put greater focus on transactors and premium customers. Given the sheer size of spread revenues relative to the rest of their base, the challenge for these lend-centric issuers is like turning an oil tanker at sea. It will take time and significant investment dollars before they can begin to make a turn in the mix, and current trends are not moving in their favor.

Card AR across the industry has fallen substantially since the crisis. As of November 2011, total U.S. card balances were down 18% from peak levels in 2008, and there was no growth in industry AR from 2010 to 2011. Consumers have clearly deleveraged, and the growth of small business lending has also been soft. While there have been some signs that these trends may have bottomed out, I don't believe we'll be returning to precrisis lending growth rates anytime soon. This will put substantial pressure on bank card revenue growth going forward, on their profitability once industry-wide credit benefits turn and also on their ability to invest.

I much prefer our position in spend-centric model. As you've heard me say before, our spend-based model has major economic advantages. As we continue to add merchants and consumers to our franchise by providing them with premium value and as we continue to incent existing cardmembers to put more spend on our network, our base of billings will grow, driving both revenues and income. As demand comes back in the small business and large corporate sectors for everything from travel and supplies to capital investments, we would also expect to benefit from this spend.

At the same time, we'll continue to focus on profitable premium lending for consumers, largely through our major co-brand partnerships and also on lending to specific segments of small businesses. These categories of lending remained very attractive to us and provide value for our customers. I believe our spend-centric model is a competitive advantage. It puts us in a far better position relative to our lend-based issuing peers, particularly when it comes to generating sustainable, profitable growth.

This leads me to our next agenda topic, an update on some of the growth drivers and investment priorities we've shared at previous meetings. As we've discussed before, our investment approach is a balanced one. We're focused on investments that generate short- to moderate-term growth, as well as those with a longer-time horizon to sustain growth over the moderate to long term. Overlaying this balance, we also have the objective of transforming all of our businesses for the digital marketplace, which is rapidly taking shape as off-line and online commerce converge. We gave you a -- we covered the digital strategy at our August meeting, and I'll give you an update on some of our progress in a moment.

So let me start with the outcome from 2 of our ongoing areas of investment, customer and merchant acquisition. We continue to see excellent results from our investments in new cardmembers. These investments tend to have short- to moderate-term payback, and we have pretty high confidence in their performance.

For 2011, new cards acquired across all of our proprietary products and markets increased by 6%. We continue to see strong steady growth in our core charge products. Co-brand acquisition has flattened out somewhat now that we have the full benefit of several major product launches in 2010. And after significant reductions in proprietary lending acquisition during the financial crisis, we're now seeing an appropriate planned rebound in this category.

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