American Express Company (AXP) Earnings Call Transcript & Summary

Yes. So the performance remains really good on the co-brand. And that is not surprising to us. I think sometimes people forget a few things. They forget that co-brand cards are generally used about 90% for just other daily spend to build the loyalty points of whoever that co-brand partner is. And I go back to my earlier comments about the fact that, boy, that human urge to save up to do the travel they want to do as soon as they're able to do it, it's still there. And you see that with the spend on the co-brands. I'd also just remind people that our largest co-brand by far is Delta, most important partner. We have a great relationship with Delta. We have worked with them to evolve some aspects of the Delta co-brands as well, and we are a big partner with them together and working through how do we position our mutual customers for what we both believe is the inevitable travel rebound. I'd also remind you, we've made some good progress on continuing to extend out our co-brand. So during the pandemic period, we did extend our British Airways co-brand for the long term. That's not huge in the context of the overall company. It is important to our U.K. business, and the U.K. is one of our key markets outside the U.S. So we feel good about the co-brand. The one co-brand I perhaps might also mention and that I think, Mark, wouldn't surprise you is that on the small business side, we do have an Amazon co-brand. And as you might expect, that co-brand, if you look at new accounts coming in, is probably the one card where we will continue to see a very strong stream. Even though we're being very thoughtful from a risk management standpoint, we have a very strong stream of new card members coming in. Outside that card, we both, consumer and small business, very consciously scaled back new card member acquisition until we have a little bit more visibility from a risk management perspective into the environment, but the Amazon card has been very strong.

Okay. Great. Shifting to another question to the audience. Next question is current reserve levels are adequate, over-reserved or under-reserved? So moving back to you, Jeff. Switching gears and moving on to credit. It's now been about 6 months since the pandemic really began to affect the real economy and several weeks since the supplemental employment insurance lapsed. Are you seeing any signs yet that credit could be weakening? And do you have a sense of the timing and level of credit deterioration you expect [ going forward ]?

Yes. So once again, having had the benefit, Mark, of 2 prior days of your conference and reading through some of the other discussions you've had. Look, this is a unique and unprecedented, medically driven economic dislocation. So it's very difficult or I think very challenging to draw analogies to prior situations. Certainly, just like volume is going to trough in mid-April, so did uncertainty amongst our customer base. And that's why if you go all the way back, we talked about in terms of what we will call -- we kind of manage in terms of the receivables we want to keep a close eye on. It's a mixture of people who have gone delinquent or people who have signed up for one of our varied financial relief programs. And that hit a peak back in the April time frame of a little over $11 billion. Now that number was down to about $5 billion as of mid-July, it's now about $4.3 billion. Today, there's no new inflow into our shorter-term pandemic relief programs. And as any of you can see, if you have the chance to look at some of the 8-K filings we do of our monthly stats, our -- the rest of our portfolio that is not in one of those programs has actually continued to strengthen. And as you see delinquencies, generally market rates below where they were in the prior year. So we feel really good about the way we, as a company, have made many changes over the last few years to set ourselves up much better than we were in the great financial crisis or in an inevitable downturn. We feel really good about the speed with which we were able to pivot, create some incremental, new, very targeted financial relief programs for our customers. We feel really good about the way we pivoted literally several thousand salespeople out of being salespeople into being people who really know how to work with customers, to help them think about how to manage through a short-term challenge. And internally, Doug Buckminster, who many of you know, at times has said, boy, when you look at the current results, it's almost shocking how good credit looks. Now all that said, Mark, we don't pretend to know the course of the virus over the coming months as we get into the fall and the winter. And we, therefore, don't pretend to know with certainty what that might mean for the economy. And you've heard me say, you've heard Steve say, one of our concerns is when we think about the situation, we say, boy, as government aid in the U.S. and some of the European countries, where there has been [indiscernible] out, runs out, do you have another wave of economic weakness that causes more unemployment and/or more small business for us? And even -- we've talked about a third wave, even as you get into the end of this year, early next year, do you have larger organizations, which have the financial strength to carry things in the near term, start to say, boy, as we look at the future, we're going to have to do a little bit of rightsizing here. And do you have a kind of third wave of layoffs and economic stress? So we feel great and, in fact, I'll go back to Doug's words, are almost shocked by how strong credit looks today. As you know, though, in a CECL world, it's not about when you think about the accounting we're going to do at the end of the third quarter, it's not necessarily about what we see today. It's about a lifetime estimate in this incredibly uncertain environment, a lifetime estimate about what you think is going to happen. And as we make that estimate, I will tell you, we will weigh in for that estimate this lingering uncertainty of do we really have enough visibility today, Mark, to know that there not going to be a second or third wave? I hope there's none. I'm not forecasting that there will be, but could there be? There could. And given the reality of what we're trying to do with reserves in a CECL world, that will weigh heavily on us as we think about our third quarter. So I probably -- it's only September 16, so we'll have to see as we close the books on September 30 exactly what the world looks like and where we end up, and that is what the rules call for us to do. If I had to make an estimate today, Mark, I wouldn't expect a lot of change in our credit reserves, one way or the other as we close the books for the third quarter. We'll have to see in the coming months how the world evolves.

Okay. That's very helpful. I have some questions coming in from the audience. A couple of them are related, so I'll lump them into one question. Can you just remind us the estimate business T&E as a percentage of spend? And then do you plan to pull any expense levers in order to offset the weak T&E environment? And any kind of color around sizing of potential cuts?

Yes. So let me first talk about size and travel on the commercial side and then go to the expense question. So as I said earlier, I think probably most well known is the fact that when you look at our large corporate card business, about 5% of our overall volumes as a company come from that business. It is an important foundation for us. It is a lower-margin business and, boy, that 5% has gone down to a very, very small number. And our expectation is that's not coming back any soon. That, to us, is a manageable part because of its small size. That's manageable financially as we think about the inevitable recovery here. And it is an important foundational part of our business. When you look at the rest of the commercial business, I'd remind everyone that small business represents the great majority of our commercial segment. And small businesses use the card only sparingly for travel. I mean small businesses use the card to run their business, to buy the inventories, to buy the supplies. And that is why when you look at total spend, small businesses are the customer type where you have seen the strongest performance relative to consumers and relative to the larger businesses. And that's because they actually have the least amount of G&A spend. And we remain, in the long run, very bullish, both in the U.S. and outside the U.S. about small business as an engine of growth for us. I'd remind everyone that our non-U.S. small business segment was, over the last years, the highest growth part of the company. And our U.S. small business franchise has been an engine of growth for many, many years as well. Now when you turn to expenses, I'd remind everyone, if you go back to the April earnings call when we presented this, we talked about the fact that we dramatically scaled back spending. We talked at the time about calling about $1 billion out of OpEx in the last 3 -- versus the prior year, versus the last 3 quarters. We talked about taking several billion dollars out of marketing, and we also talked about reinvesting part of those marketing saves in what we have called value injection for our customers. And those are the things that I talked about earlier in terms of offering some different benefits for our card members to help bridge the time period prior to travel return. So we feel good about all those decisions. I will tell you, going back to the 3 phases that I opened up with, we do see ourselves right now kind of in the early stages of that second stage. We don't see ourselves worried about, oh, my gosh, there's so much uncertainty in the world, just let's make sure we're in that first phase of make sure you're safe and taking care of customers and taking care of colleagues, remain financially strong. We've all learned a lot about virus, about its impact on the economy, about its impact, therefore, on American Express. So we are selectively, from a spending perspective, putting a few things back. And that's true on the OpEx side, probably as well as the marketing side because we have a little bit more visibility now. But as we get into that second phase, I'm going to come back, Mark, to the way I described the second phase, which is the second phase is about rebuilding growth momentum, investing selectively to drive long-term growth, and it's not necessarily about maximizing EPS in the second phase. It's the third phase where we get back to pre-COVID levels of earnings, back to the financial growth algorithm. But in the second phase, we're using our tremendous financial strength. I'd remind you that we made money in the second quarter, and some of the more card-oriented companies have business models that don't give them that level of financial strength. And so we're using it to selectively be aggressive. Frankly, Mark, the modest-sized acquisition that we did of Kabbage in us -- to us is an example of using our tremendous financial strength at the time of some economic stress for others to, in that case, buy some capabilities that we think are going to be tremendously valuable to our small business franchise over the next couple of years.

Okay. Great. Turning back to a question to the audience. First, Jeff, I'm sure you'll be relieved to know the answer on the reserve adequacy was 70% think it's adequate, and equal amounts think it's over versus under. So next question on peak -- credit card charge-offs this cycle will be 3% to 4%, 4% to 5%, 5% to 6%, 6% to 7% or 7% plus? Let's see. I think we've addressed the reserve question. Let's just move to capital and how investors should think about capital adequacy here. You had a stress capital buffer of about 2.5% the most recent run of DFAST. And it shows your minimum capital levels remain well above required levels with that SCB. So kind of given that strong buffer, how should investors think about capital returns or priorities around deployment of capital going forward?

Well, we benefit, Mark, as you know, from a business model that produces capital at a rate nobody else in the financial sector does, right? We went into this with an ROE around 30%, 35%. And we just have a business that generates huge amounts of capital, and organic growth doesn't require that much capital. And so for some years, the constraint on our capital returns have really not been the Fed and the regulatory strings. It's really our desire to remain a really strong investment-grade company and the rating agency view of what that takes. And that's why we have talked for some years about the fact that we need to keep our Tier 1 common equity ratio in the 10% to 11% range. And that's, of course, well above what the Fed would actually require as a minimum. And I'm going to go back to the Kabbage acquisition. It is an example of the fact that our capital strength is allowing us in the current environment to do some things that we think will really benefit us in the long run. Now all that said, we are bank [indiscernible]. And so we will be participating in the CCAR process that the Fed will be kicking off presumably any day now, sometime this month. And we are subject to the Fed approving us as part of that process. But we have reported extremely high levels of excess capital in the second quarter. We will again in the third quarter. And I -- what I have said previously, which I would stick to, is it really resumption of -- beyond the continuation of the dividend. And I'd remind everyone in the great financial crisis even we were the only big bank that never stopped its dividend. Share repurchase is really a function of when is there enough visibility into the economic and medical trajectory to create certainty again and getting through whatever hoops the Fed may want to put up. But we have tremendous capital strength, and that will not be the constraint to when we resume capital returns. It will just be a function of how the Fed chooses to play processes out and when there is some clear visibility into the future.

Okay. Great. One last question for the audience. Over the next year, would you expect your position in AXP to increase, decrease, remain the same? Turning to that acquisition of Kabbage, recent announcement. Jeff, can you just talk about the rationale there and how it fits in the AXP's broader plan, kind of what you expect to gain from that acquisition?

Yes. So our small business franchise in the U.S., Mark, has been, if you were to take a multiyear view, probably the most consistent driver of growth for the company. As people know, it was a very strong sector for us where we're probably the largest than the next 5 or 6 competitors combined. And we've had a strategy that Anna Marrs has talked about now for a couple of years of saying, for those small businesses, we want to be a broader provider of financial services and short-term -- we're not trying to be a long-term in, short-term working capital needs because I'd remind people that a charge card is really just what small businesses use to manage their working capital. They're not using it for travel. It's a tool they use to provide working capital. So Kabbage has a really great suite of digital-oriented products to provide a broader range of financial services and to build the relationship. We've also demonstrated and shown in various forums, Mark, over the years that when we have multiple products with the customer, it creates a stickiness. It creates a primacy of the relationship, if you will, to drive more usage of all of those products. And that's really what Kabbage is about. Now importantly, I just want to remind people, we did not -- Kabbage, for us, is about capabilities, and it's about their tremendous, broad digital banking platform, if you will, that they will help us provide to our small business customers. We did not buy their loan book. We did not buy their PPP loans. Those stay with an entity, separate entity. It is about those capabilities. And I think it fits really nicely and just provides an acceleration of the path we were already on. I mean could we, over time, have built out the kind of product suite that we're buying here? Yes. Would it have taken us longer? Yes. And so given the reality of the pandemic and the opportunity that created from a purchase price perspective, we thought this was a better choice than doing the classic, like, do you build it yourself or do you buy now? Buying now generally going to accelerate your time to market. And I'll go back to my -- one of my opening comments that we do see ourselves right now at sort of the cusp of or in the early stages of that second phase of it's time to invest selectively for growth, and it's time to build growth momentum. We think Kabbage is going to be a tremendous asset for us to help rebuild growth momentum in that small business sector.

Okay. Great. We have time for one last question. Turning back to the reserves. I think the audience clearly agrees that you're at least adequately reserved. And I think you were clear that it sounds like the reserve doesn't move much in the third quarter. What will it take for you to be in a position where you feel like you can release reserves?

Well, I think releasing reserves to us in a CECL world is something that you should be doing when you have clear visibility and clear confidence that, oh, the world has changed so much from the way it looked when we put those reserves on, but it is clear to us and we are confident now that we're through that. In a pandemic world, Mark, where there is so much medical, scientific and economic debate about are we now just on a steady path forward where things are just going to make it slow but just steadily as they have the last few months keep getting better? Or are you going to see a second round of either medically driven closures or a second round of economic challenges due to government aid running out? You have to have, in our view, clarity on those kinds of uncertainties before you could in good conscience, in good faith and, frankly, in sending a clear signal to our shareholders, which ultimately what CECL should be all about, that we have certainty over all those things and we're [ through them ]. That's what I think it takes, and that's where -- I don't know, sitting here on September 16, that's not the way I view the world right now. I hope that, that steady improvement is where we are and the last x weeks or a couple of months, that's what you've seen, but I'm not ready to say that's the trajectory for sure for the future.

Okay. Great. Well, I think we'll have to end on that note. But really appreciate your time and insights today, Jeff. Thank you for joining us.

Well, thank you, Mark, for hosting the conference, and thanks to everybody for taking the time to listen this morning.