American Express Company (AXP) Earnings Call Transcript & Summary

Good morning. This is Craig Maurer with Autonomous. Thanks for joining us this morning for our Fifth Annual Future of Commerce Symposium. Sorry for the brief delay in getting started. I just wanted to mention a few housekeeping items before we get started. [Operator Instructions] So with no further ado, let's get started. We're lucky to have with us this morning, American Express. Doug Buckminster, Group Head, Global Consumer Services. It's great to see you again, Doug. I wish it was in person. I wish it was in Carnegie Hall, but maybe next year.

Exactly. It's great to see you, too, Craig. Thanks for having me.

Yes, you bet. So love the background, love the image.

But let me -- why don't we get started with just a broad question, which is, can you update us on the state of consumer and overall spending at this point in the recovery?

Yes, I mean, I think, as we've talked about before, we saw the trough in April, and we've seen a rebound since then. I would characterize the trends since mid-July as relatively stable on the non-T&E side. So outside of T&E, relatively stable, a little bouncing around due to days mix, timing of holidays like Labor Day, in particular, and slow, very steady growth, but slow growth on the T&E side, right? So I would say stable would be the adjective that captures it best.

Okay. At this point, I assume, could we perhaps characterize this a little -- go a little deeper on this, ex T&E, if you were to characterize the overall volumes you're seeing, ex T&E, ex corporate card, really, are consumers getting back toward positive territory within credit card portfolios at this point?

Yes, I mean, I think consumers consume, right? They're going to figure out a way to live their life and enrich their lives. And I would say, while there's a lot of substitution in the non-T&E space, especially physical for online and e-comm, I would say we feel good about healthy levels of consumer volumes there. I think what's going to define the trajectory of volume rebound from here on out is the direction of T&E, which you know is a category we over index on.

So maybe some thoughts there. Amex has a deeper understanding of T&E than I think any other card issuers, especially considering the network and the insights you get off of that on a global basis. So maybe your thoughts on how we recover from this, are there any green shoots you're seeing in T&E at all at this point?

I think my position is consumer travel will come back. I think that's our enterprise position is that we expect consumer travel to come back. It's an essential part of the consumer experience, especially in our demographic. I think what we've seen to date in terms of the rebound is an effect of substitutions. So people substituting driving vacations, homestay, rentals for air-based travel. And in some categories, we've seen innovation as well, right? I'm saying the dining space, in particular, expansion of outdoor dining, pickup, takeaway, delivery at-home meal prep. That level of innovation has bounced the restaurant category more than you would expect just from dine-in volumes alone, right? So I think when we get back to historic levels, I think, is largely a question of confidence in medical solutions, right? I think the establishment of a vaccine, the approval of the vaccine, I expect, will unleash a lot of anticipatory and pent-up demand on consumers. They will start travel planning. Again, the interest in travel-based payment products and travel-based loyalty currencies, I think, will spike as all that pent-up demand for travel. People start to see the end in sight there. They start to build confidence that in a 6-, 12-month time period, they'll be able to travel again. But I think getting back to historic volumes is going to require that.

And in terms of how that affects the discount rate at American Express, especially without the long-haul travel. Maybe a discussion there, just briefly remind investors how that dynamic is playing out.

Yes. Well, there's no question that T&E volumes taking a disproportionate hit like this does have a mix-related impact on our discount rate, right? So I think the discount rate -- and we've been on record for a few years now saying we grind down less on absolute discount rate and are focused on driving discount revenue and utility through programs like OptBlue, certain B2B categories. But there's no question that historic discount rate has taken a mix-related impact as a result of really a disproportionate fall in T&E spend.

Okay. We'll move off of that topic that isn't helpful right now in terms of the dynamic. But maybe on to something that is, which is, can you discuss how spending habits have changed? And to what degree you're seeing these habits coalesce into long-term repeatable behavior, especially around e-comm, contactless? And if it's different between consumer segments?

Yes. I think my take on the effects of this crisis are that it didn't create any new trends, but it changed sort of the slope of pre-existing trends, right? E-commerce was taking share from offline. Digital payments were taking share from cash at POS, right? And we have seen an inflection or a kink in those curves as most issuers have over the last 6 months whether we've seen those trends accelerated by a year, 2 years. It's anybody's guess, but I don't think -- I don't -- we're going backwards from those trends as the crisis relaxes. I think on the contactless side, there's a lot of noise around that. There are markets outside the U.S., as you know, Southeast Asia, Australia, the U.K., where there's very deep contactless penetration. And that has continued to gain share during this crisis. In the U.S., the contactless volumes are much more modest. They are increasing at a rapid rate. But I do expect that the move away from cash and the comfort with using credit products even for micro-level transactions at POS will be an enduring outcome of this. And I think -- while I don't think it does a lot, per se, to drive dollar volumes of billings, I think it does a lot to build habit and wallet position of credit products. And in some markets, outside the U.S., where e-comm is less established, it's had a more profound effect, like Italy is a face-to-face retail market. We've seen phenomenal growth in e-commerce. What's interesting is well over 50% of the participants in e-commerce in any month during the first few months of the crisis had never have an e-commerce transaction on Amex before. So there, we've seen some real -- again, I think it's a trend that would have played out, but it was a very large acceleration under that trend.

And correct me if I'm wrong, but Amex has a better acceptance footprint outside the U.S. in e-comm than it does in brick-and-mortar.

Yes. I would say that's probably true, by and large, due to partnerships with various PSPs and aggregators and such. And we have a really strong footprint in e-comm.

Okay. So in terms of the health of the U.S. consumer -- the health of the consumer in general, especially considering higher unemployment furloughs, unemployment claims, as we saw this morning. It's been remarkable how well the industry is faring right now. I noticed that Amex's credit quality is at its best point over the last 12 months on consumer. And shockingly, its best point over the last 3 years in small business. And so maybe some context there? Discover's CEO did cause some concern the other day by saying they expect a material uplift in credit quality metrics later this year. So just your perspective.

Yes. I mean look, I think most issuers have seen a more modest impact than would have been implied by the end of Q1 qualitative reserves that they fill, right? I think looking at macro indicators around unemployment claims, changes in sequential GDP. If you were sitting back being an arm share credit manager, you would have expected much larger and negative impacts on delinquency and write-offs. And the fact of the matter is, as you say, we have not seen them as most issuers haven't play out by and large. Now there are a number of contributors to that, right? I would say the jobless claims, the geography of those, the demographics of those jobless claims weren't as concentrated in our customer base, our member base as the macro numbers would suggest. I would also say, as everyone knows, there's just a ton of liquidity in the system right now, whether it's through government programs, private sector forbearance programs. And so you're right, we have credit volume, delinquency and write-off side that are better year-on-year than they were. I think we have to -- while we're pleased with that, we also have a healthy level of paranoia about what the next 12 months will bring, right? The macro economy, some of these forbearance programs with 10% of residential mortgages being in forbearance. That kind of going away, government support moderating, perhaps private sector follow through in terms of what call our job losses. So we feel great about the early innings of this crisis, but we're mindful that it's not over.

Just are there any signs in the portfolio at all that would be concerning?

Look, I think in the commercial or small business portfolio, clearly, there are industries that are more affected by this. Fortunately, they tend to be industries where our concentration is lower. There are some things about this crisis that have actually improved visibility in a way. I mean we have really good visibility into our customers that have entered into forbearance programs with competitors, right, which allows us to kind of target and think about the precision of our underwriting and the existing customer management a little bit more crisply. But I would say there are no real hotspots within the portfolio right now. I would say back in April, May, all of us had these sort of short-term crisis relief programs, right, where payment holiday, no interest charge, and the type of thing you do after a natural disaster like a hurricane. And we made a judgment that we weren't going to kick the can down the road by continuing to extend those programs. We were going to move customers if they needed to move on to longer-term solutions for repayment confidence, right? So our 12-month financial relief program, which allows customers to reduce their minimum payment, maintain their membership. They don't get their membership canceled. And retain some level of spend utility as well, right? And we think that, that has allowed us transition the portfolio in a very customer-friendly way, in a way that has stabilized the receivables metrics as well.

Okay. I want to keep this -- try to keep this conversation with investors. So investors are funneling questions to us, and we just got one that I'll just read it for you. Basically, you've made it clear that T&E spend recovery is very linked to COVID resolution. As customers currently divert that spending toward non-T&E purchases, how is Amex able to increase their share of customer spending in non-T&E? And how meaningfully can that move the needle on billings growth?

Yes, I mean, I think it's a great question. I mean one of the things we did early in this crisis is decide that we were going to focus on existing customers. The visibility around large-scale prospect acquisition was challenged. Our value propositions tend to index on T&E, as we've noted. And so we said job 1 was taking care of existing customers, which caused us to make a long-term balance of year, large dollar value commitment to our customers in terms of injecting more relevant right for the times type of value, and that could be accelerators in grocery, in dining, food delivery, our wireless and streaming credits on our platinum product, promotions with Amazon and other merchant partners. And we're measuring success right now in terms of how effectively we retain our customers and especially the customers who drive 50% to 60% of our margin on an annual basis, and how well we compete within their wallets per share of wallet. And on both of those metrics, which we track very closely at a very granular level. We feel really good about how well we're competing for our customers' business. And I think we've built some confidence here that has certain natural hedges in our business take effect. So people aren't visiting lounges as much. It frees up resources for us to create new, more relevant value for our customers. That's what we did this year. It has worked for us so far. We're in the early innings. And we're confident that we can, and we'll do that going forward as well. We also just need to, I think, think about -- we think about our co-brand products as like travel products. Actually, like 90% of the spend on a number of our large co brands is in non-T&E categories, right? What they're doing is spending in every day categories to save up and create the opportunity for aspirational travel in the future. And so that billing base isn't as effective as long as consumers believe in the long-term value of those loyalty currencies and the travel that can gain access to.

So it sounds like you're implying that the co-brand portfolios are performing -- the travel-related co-brand portfolios are performing no different from other portfolios?