American Express Company (AXP) Earnings Call Transcript & Summary

Let's get started. Thanks as everyone filters in here. We're delighted to have Steve Squeri, Chairman and Chief Executive Officer of American Express, a role he's held since February of 2018. We'll talk about it through the session, but Steve's tenure has been notable for a customer and partner-focused approach, a steady diet of product refreshes and innovations and ultimately leading to a step change in sustainable long-term growth for the company. I hope anyway, if you're going to preannounce, stop me now. Steve has been with American Express for almost 40 years and has worked and led many areas of the company, including creating the global commercial services group, leading the infrastructure of the company, including servicing technology and business support, spearheading business travel and even started and travelers' checks. We've had Amex as an attendee at autonomous conferences really since the inception of our company over 10 years now. Always, really appreciated your support and your colleagues support over the years and delighted to have you again at this year's SDC. So thank you for coming.

My pleasure. I'm going to actually talk to Tom Baltimore, who's on our Board, who owns this hotel. He needs new chairs. I am sinking into this chair, either I need to lose weight, one or the other two.

So you've had great success growing the top line, 25% revenue growth in '22 guidance for '15 to '17 and '23 and an aspiration of in excess of 10% in '24 and beyond. Maybe to start, when you look at the strategies you have in place, the business segments you're investing in, what are the top 2 or 3 growth areas you're most excited about right now?

Yes. I mean I think it really hasn't changed over the last sort of 5 years. And I think one of the things that we've done over the last 5 or 6 years now is -- it's all about focus, right? And so we really haven't taken our eye off the ball. And when you look at that, you call this top 2, 3, you told us 5, however you want to think about it. But in the U.S., we're really focused on premium consumer and small business. International is the exact same thing. We're focused on that and large corporate. And while large corporate is not as sort of broad and big as it used to be back in a day. I mean most people thought of us as a T&E card, it's an important constituent -- constituency for us. But when you look at these individual segments, we've been able to grow them. And just from a consumer perspective, we've done a great job, we're growing millennials. We've done a really good job of diversifying our overall product set. It's been -- the refreshes have been so important and really starting to expanding organic footprint of our products in terms of expanding their viability to a larger segments. I mean a lot of people used to think about the American Express card and would our customer base die. And that's not the first thing from the truth right now, right? Because when you look at our acquisition of Gen Z and millennial, it's been very exciting for us. So I think when you think about the product refreshes, when you think about the partnerships that we've entered into and you think about our membership model and the virtuous cycle, those are all things that get me really, really excited about our growth prospects. But again, we've got the company and we've got our investment really focused on those things.

Maybe I could dig in a little bit. I had it later on my list, but this younger customer idea, I think the numbers as of 1Q were millennial and Gen Z up 28% year-on-year on spend; Gen X plus 14 and baby boomers plus 8. When you think through what's changed, what you're getting right what is the difference? How is Amex resonating with younger customers in a way that it didn't maybe historically?

Yes. I mean if you go back to 2019, I think the percent of our volume was about 19% was millennial in the first quarter of '19. And then you look now, it's about 30%, and we're growing that base. I think the biggest change was we never went after them. I think from an industry perspective, at least from an American Express perspective, it was what you do is you start millennials off on fee-free products. And what we've really learned is that -- that's not the best way to engage customers, right? And when you think about the success that we've had over the years with engaging our platinum base, our gold base and our green base and our Centurion base, and our high-end co-brand cards, we have a lot more success when people are paying fees. We have a lot more success from a credit perspective. We have a lot more success from an engagement perspective. And so it just made sense for us to go after the millennial segment and then the Gen Z segment. Number one, if you think about a funnel, we're replenishing that funnel on an ongoing basis now because as Gen Z'ers graduate from college, those are all prospects for us. Millennials as they move along. But what you find is that like 70%, 75% of the cards that we acquired from the U.S. consumer perspective were -- were head fee or fee free -- fee cards. When you look at the engagement that Millennials have, 60% engaged at least in 1 or 2 products -- 2 benefits that we have. And restaurant reservations are huge. Our fine hotels and dining is huge for them. They tend to make more travel reservations with us. They take advantage of the Uber credits and so forth. And so I think what we did is we expanded the product and communicated that expansion of the product because it resonates with their lives. And I've said this in many investor conferences, I have 3 millennials at home and on Gen Z-er. And I don't -- I paid pretty much everything, but I refused to pay their platinum card fees. It just doesn't seem right that if they can't justify, then they should divorce me as their father. But -- and they do justify it, and they use it. I mean they really do use it, and they use those products and services. And so we've seen that happen. And so what you'll see is we continue to invest in the product. The other thing I think that's really important is what I mentioned earlier was the refreshing into product. You can't put a product in the marketplace, no matter what business you're in and just leave it. And we did that with the green card. I mean we had the green card out there for almost 30 years before we refreshed it. And what you see now from a platinum perspective, we refresh it every 3 to 4 years. But in addition, what we do is we add value along the way without a full refresh much like we did with the Walmart plus that we added. And so you listen to your customers, you see where they're spending and you do those kinds of things. And the product really resonates with that age group. We get a higher share of their wallet. They don't spend as much, but we get to grow with them over their lifetime. And usually, we keep somebody the first 2 years, we're going to keep them for a long time because that means they've engaged and they bought into that product. And so, as they grow into whatever co-relationship they may have with a significant other, they may or may not have children, they'll make more money and they'll move on into retirement. I think the lifetime value of our millennial acquisition is going to be even greater than we think it is now.

And maybe sticking with that, and I think you referred to it a few times is the flywheel for growth. People will pay $6.95 if they can get $1,000 of value or whatever the exact number is?

$1,400.

$1,400, sorry. As you think about the success it's had, it's spread some invitation in the market. So how do you think about continuing to drive that strategy forward? What's the next iteration to keep that flywheel a step ahead of the company?

When you think about the flywheel, right? The flywheel is a differentiated membership model. So that's what you focus on. You focus on continuing to differentiate that membership model. So -- and look, there's a lot of -- I mean you'll have them at this conference, whether it's JPMorgan Chase or whether it's Citi or whether it's BofA or Capital One and so forth. I mean these are all really terrific companies with really smart people that do a really good job, and they see what we're doing and they attempt to replicate that and then they intent to add their own spin on it. And so what we need to do is we need to continue to innovate, which is why you just can't put a product in the marketplace, let it sit for 3 years and then hope you have success with it until you do it again. Again, Platinum Card adding a little extra. Centurion lounges, adding a little bit more to Centurion Club we just put in New York. So you really have to continue to add. But getting back to the virtuous cycle, it takes a long time to get it as big as we have it right now, right? And so -- but it all starts with that differentiated membership model. And so what you're seeing is our competitors are catching up to where we are. We're trying to continue to move ahead of where we are. And then what you do is you engage your card members. And so it's one thing to have a differentiated model, it's another thing to then engage those card members and making sure that those card members are using the products. Years ago, we used to put products and benefits out into the marketplace and hope people didn't use them because it would reduce our cost, right? But the reality is, it also reduces your retention, it also reduces your acquisition, and it makes it not a great customer experience. And so we want our customers to actually use our products and services. As you get more and more of these high spending customers in because we have an integrated model, you can then go to our merchants and our partners and get them to put more value in. That's what I think when people looked at our closed loop system, everybody talked about it as sort of a data advantage for fraud, a data advantage for credit and maybe a data advantage for marketing. And that's all true. But the reality is, is that one of the biggest advantages we have, we have these relationships with these merchants, these one-to-one relationships, we're able to talk to them, understand what their needs are and then try and fulfill those needs by putting value into our products to reach our customers. And that is huge. And that's where the integrated model really pays off big time for us.

So we talked about the opportunities, the growth we're kind of in a weird part of the cycle where things are going pretty well, but we're all kind of scared of our shadow with the risk. The ever-present risk of recession, reregulation of the banks, competition in cards, fintech and disruption risk. When I talk to investors, there's no shortage of boogeyman to worry about around the corner.

It's horrifying, just end it now.

What actually is on your list of risks, what are you watching most closely and how are you managing that?

I mean we watch all those things, right? But here's the reality, right? We've been around 173 years. We've gone through many, many, many things. And let's just go back to what we just went through. We just went through a pandemic, right? And for us, as we put our growth plan together, we put that growth plan together, knowing that we would have cycles, knowing that there would be -- at some point, there would be a recession; at some point, there would be a strong recovery. And for the 3-year period, we just assumed that things would be going along more stable. And I would consider the environment we're in right now stable, which is kind of crazy for what you just described, but I would consider it stable. If it got worse than that, well, then, yes, you probably have to pull off some of your guidance. But the reality is, is we stay focused on what we can control. And what we can control is adding tremendous value for our cardholders, tremendous value to the brand. And the reality is we just went through this pandemic. And we could have easily sort of gone into a shell. But what we did is we decided to invest. We invested by buying cabbage. We invested in our customers with more value -- more value that we put out there in the marketplace. We continue to acquire customers, not as many as we did. And so as we came out of sort of the throws of the pandemic, it enabled us to put this growth plan together. If we didn't -- if we were to put our heads in the sand during the pandemic, we would not have been able to come out with the growth plan that said 25%, 15% to 17% and 10% plus going from -- on a long tail. And the reality is we were talking -- but what we're talking about now, we were talking about last year, and we had 25% revenue growth. And what we were talking about, we were talking about in the first quarter, we had 22% revenue growth. So we watch all of those things. And some of those things you learn, right? I mean, you learn from fintechs that are out there. We've learned a lot from some of the fintechs that have been out there in terms of how we can run our business a little bit better. I wish I'd like to say we'd learned more from regulation, but we really haven't other than to how to adapt to that regulation. And look, a recession is inevitable at some particular point in time, how big it will be, I don't know. But what I know is that after a recession, there is a recovery.

So maybe digging in a little bit more on this idea of the high-end consumer, white-collar layoff cycle, T&E is going to peak out, they'll pull back. And there's been mixed data points, right? I mean a lot of people have looked at some data BofA is put out on their customer base, showing that, but then -- it doesn't seem like it's happening in some of the other books. American Airlines was just here yesterday, it's the best Memorial Day weekend ever. Maybe talk about the cross currents you're seeing and what you're watching for? Will this white-collar layoff, high-end consumer pullback emerge? Or are you more optimistic they're resilient?

Yes. Look, I don't know if it's going to -- right now, it's not there. You're still under 4% unemployment, and it would take -- I think it would take hundreds of basis points more of unemployment for really for anything to impact -- to impact us or to impact the broader economy. The other thing you see with a lot of these white-collar layoffs is there's still a lot of jobs there. If there's many layoffs as there are, there's still a lot of jobs out there, people are hiring. And most of the white-collar people are going to get laid off, they wind up with severance. By the time severance runs out, you're off to losing a job, which is very different than what happens in the service industry, where there's no severance. You go on unemployment, but we don't have a lot of -- that's not really our customer base. But let me -- let me see if I can contextualize what's going on, I believe, the first 6 months of the year. If you look at our -- look at what we reported in the first quarter, in the first quarter, we reported 16% billings growth. I think it was like 39% T&E growth within that, about 9% goods and services growth on a global basis. And I think that's a little bit of an anomaly, because you had the Omicron last year, where people weren't -- people weren't going out. So you're not going to have -- that's why you have such a big growover in T&E. Having said that, when you start to look at sort of where we were at the end of the first quarter, and then as I'll give you a little bit of insight into April, T&E is still strong. T&E is still strong. And I think T&E is going to be strong for the rest of the year, because our travel bookings that we see out are higher than they've ever been. I don't think the airlines have full capacity yet. I mean, there -- it is hard still to get airline flights in the summertime, and I think it's going to be hard going into the holiday season as well. Goods and services you started to see a little bit of a slowdown in the -- at the end of the first quarter. From a consumer perspective, I think that has stabilized for us. From a small business perspective, it's probably a little bit more -- a little bit more to go, and I'll talk about small business in a second. But even at those levels, that's good enough for us to meet the plan, because as we look at it, this was a -- I say this to all, this is an unusual year. I just feel like I've been saying that for the last 3 years, it's been an unusual year. But I think this was particularly unusual because we're sort of looking at it from a 6-month perspective versus a quarter-to-quarter perspective. It's just -- it's easy. When we get to -- I think once we get to July, it will be a little bit more even keel. But let's talk about small businesses for a minute. Small business slowdown, you've seen a small business slowdown in goods and services. You are not seeing a small business slowdown in T&E. That is continuing to move forward. But you have to realize what small businesses went through. Well, first of all, you have to realize small businesses, by definition, are small. So what they get to is they get to a level of overall spending in their business that is they're not going to go past in terms of goods for resale, supplies, what have you. They also ran into a situation, where a lot of them were restocking. They -- you look at the beginning of the pandemic, they couldn't get anything. They run a little bit scared and then they buy a little bit more. But if you look at where small businesses are now, if you say, take Q1 of 2023 and you go back to Q1 of 2019. It's 20% higher than it was. So I think you just see a leveling off of goods and services. And I think that makes sense. I think T&E will continue to go, and we'll continue to acquire more and more small businesses. I think the other thing that you'll see in industries, where recession and inflation sort of scared them off a little bit, homebuilders, I think mortgage brokers, things like that, you'll see them go get a little bit softer. But the nice part about our small business base, it really is diversified. I mean it goes the gamut of anything you can think about as a small business. And when people think about small businesses, they think about the small retailer in their town or they think about the restaurant, but it's the lawyer, it's the doctor, it's the dentist, it's the architect. It goes on and on and on of how many people are small businesses and how many are in our portfolio.

And not to jump the gun to the credit discussion, but I do get a lot of investor angst about small business loan growth in particular. It's a spot that's been tricky historically for some of your competitors, small business is arguably a little bit more sensitive to a recession. When you look through your book, what gives you confidence that the growth you're producing is good growth, resilient through a downturn?

Yes. So if you look at -- let's just look at our overall growth from a lending perspective, we're probably about 15% higher than we were pre-pandemic. I mean we had 25% growth year-over-year. I don't really like to look at it year-over-year. I'd like to look at it sequentially. But I think the most important thing to realize is -- when you look at the 15% growth -- we're 15% higher, when we were pre-pandemic from a loan growth, we're 35% higher from a billings growth perspective. So that ratio of billings to loans or loans to billings, is actually smaller. So we actually have less money out there from a lending perspective than we did pre-pandemic. And so that makes me feel pretty good. The other thing that makes me feel pretty good is 70% of our lending growth is with customers that we already have. So people that we've had in our portfolio. This is not balanced transfers. This is not all new customers. This is people that we've loaned money to historically. And when you look at our credit quality, our credit quality is still really, really good. I mean we're not even at -- we're well below 2019 levels and 2019 levels were like almost at all-time lows, unless you look at like the first couple of months coming out of the great financial crisis. So we're running 2.2% write-offs at the end of the fourth quarter of 2019. And we're not close to that. And our projection is we're not going to get there in 2023. Having said that, the reason is, is that we have a higher percentage of fee-based cards, both from a co-brand perspective and from our own premium cards than we've had, if you go back historically, and those tend not to go bad as quickly as some of the others go bad because the ramifications are going bad on a platinum card or a Delta Reserve SkyMiles card or a high-end Marriott or Hilton Card. As you lose your status, you lose your points. It's a big hit. It's a big hit. So I feel really good about the book. And that doesn't mean we're not constantly looking at or -- looking at the contingent liability that's out there that people that have lines that aren't using them, that we're not reducing those lines because we do that on an ongoing basis. It's good hygiene. It's good to clear it up. And we're also continuing to raise the bar on the cards that we acquire out there in the marketplace as well.

So it's easy to kind of have it to be a U.S. exclusive discussion because that is the biggest part of your business. But you mentioned international on your top list of things you're excited about. I think it's about 1/5 of the business now. It's growing almost 30% year-over-year, so much faster than the total. What are the drivers and strategies of that growth right now? And how do you think about a sustainable growth rate over the medium term?

Yes. What a lot of people forget is that pre-pandemic, International, both small business and consumer was the fastest-growing part of our business. And first quarter, we were 29% overall billings growth and 58% T&E growth. So why so much high T&E. Well, international really closed down, right? When you think about international markets and how they closed their borders and didn't let people out. We didn't let people in. So it wasn't a lot. So there's a lot of pent-up demand. I think international for us, what we're really excited about is our brand plays really, really well. I think we've got a really good focus strategy. We focus on a number of our key markets, and we focus a lot on the U.K. and Japan and Canada and Mexico and Australia. And we're seeing good growth in those markets from both a premium customer perspective and an SME perspective. We're starting to grow our lending business in the U.K. And we're also offering other products and services from a business perspective. I think the other thing that we did as we came out of the pandemic, I reorganized our international business to even become even more efficient. So what we did was we took our international small business and we took our international consumer business and we pushed it together. And the reason we did that is we wanted to put more decision-making in the hands of our country managers to be even more agile to take advantage of opportunities. But the other reason is that -- is this overlap between small business and consumer at the margin, where some of your premium consumer cards are actually small businesses. And so by using one acquisition funnel, by using 1 client management funnel, what we're able to do is to make sure we get the right card in everybody's hands, and if we weren't marketing jointly to the same customer. So you get efficiencies and you get this right product, then you have a better customer journey. And I think that's worked out really, really well for us. And I think we got ahead of this because as international was sort of closed for business, if you will. It wasn't really growing all that much. We took this organization, really retooled it, streamlined it, and I think it's made it better. And even during the pandemic, our international coverage continued to grow. And it -- we continue to invest. You've heard me talk about a focus on cities, where our card members are and where we want to get that coverage with our card members and what particular industries we're going after. And I think that has played out really, really well for us. And we use a combination of proprietary and partner channels to do that.

So maybe let's touch on rewards, always a topic of interest. What are you seeing in terms of competition? Where does it feel controlled and rational anywhere, where rewards is getting over at skis?

Yes. Look, the competition -- and when people talk about rewards and competition, they always focus on consumer, right? But for me, when I think about competition, I have to think about competition not only from consumer, I've got to think about it from small business. I've got to think about it from a network perspective. We do compete with Visa and Mastercard from a network perspective, predominantly on co-brand cards, right? I mean that's where we compete because the way the co-brand landscape has evolved over time is a co-brand partner will pick a network and then will pick an issuer. And so we compete with them there. And then obviously, we compete with JPMorgan and Bank of America, Citi and so forth. But we also compete in 29 different international markets, and we compete from a small business perspective. We compete network perspective, we compete from a consumer perspective. But what I think everybody focuses is in the U.S. And look, I mean, the competition is fierce. Chase is strong and going after that premium segment, you see what Capital One is doing with their Venture X card and trying to premiumize that space. And again, you got both of these companies run by top -- really top-notch executives and Jamie and Richard Fairbanks. And then you've got Citi, which is going to reenter the premium business as well. And so look, it's competitive. It's not as crazy and irrational as it was, I would say, probably 6 or 7 years ago, when some of the offerings just didn't make a lot of sense, but it is highly competitive. But I think one of the things I'd like to point -- you guys to think about are at least take into the calculus. When you look at rewards, you've got to look at value proposition. And so as you think about going after cards, it's not just about rewards, it's about value proposition as well. And so you've got to invest in both of those things. And so if you look at it, you'll see from a high-end perspective, we sort of deemphasized accelerators a lot. We're using a lot of partner-funded value out there. We're using some unique value creation. We're using that flywheel that we've talked about. We're using the virtuous cycle. And so when we look at competition, we look at not only the acquisition awards that are out there, but you have to look at the value propositions because the reality is tremendous amount of gamers that go out -- will go out, get $150,000 rewards -- get rewards for spending $3,000 in 6 months, and then you don't see them anymore. Well, the value proposition is strong, you will see them because they'll take advantage of that value proposition. And so I think you've got to look at both of those. And I think those are both where people are both investing and you see it -- you see it with Chase, you see it with Capital One, you see lounges going up and so forth. But I think, look, we have an advantage, and we're not resting on our laurels at this particular point in time. That's why we continue to invest.

Well, as you know, you did effectively weed out gamers because I was blocked out of the Delta Amex for 7 years. I just got reapproved for the first time, since 2015.

You are the guy -- you are the kind of guy we're looking to keep out.

For multiple reasons.

Oh, yes.

Turn me, it's like a softball, you just -- so on OpEx, a lot of economies of scale in your business model over time, but OpEx did come in a little higher than expected in 1Q for a lot of investors. You reiterated the full year outlook. So I guess in the near term, maybe talk to your confidence in the guide for the rest of the year, which implies a decel in the growth rate. And then further out, how do you think about the ultimate potential for OpEx leverage in the business?

Yes. So for those of you with longer memories, I was the OpEx guy at the company for many, many years, right? When I started to talk about revenue, people will be like, what happened to this guy. But where you sit is where you stand. But I'm still very focused on OpEx. And OpEx came in exactly where we wanted to come in without some of the craziness of mark-to-markets and things like that. But you have to realize this company has grown so much. You go back to 2019, I think we were like a $37 billion revenue company. And if you overlay this 15% to 17% and then another 10% that projects to a $60 billion revenue company this year and obviously, at 10%. It's higher in the following year. And so what we did last year is we really started to say to ourselves, okay, you get to these step functions. As you look at running an infrastructure, whether an infrastructure is from technological perspective, whether it's a people perspective, whether it's a real estate perspective, you take step functions over time. And so we started to add people. We started to add additional operating expense into our model. And it's not where we are right now, if you look at it, we started to do that sort of in the first quarter last year. That wound up playing out all the way through the end of the year, which is why we come up with that $14 billion number, because this was not where we ended the year [ 13 ] whatever it was, it was not a number to really grow from at the same level. It's a number to grow into. And so you look at it and you say, it was 3%, 4%, whatever it might be this year. You look at that number, which is really just has some inflation adjusted -- some inflation, some salaries in there, you look at that number and say, that's a number we can grow from. And so we've been known for creating operating leverage over time from our operating expenses, and that's what we'll continue to do going forward. I feel very comfortable with the amount of people that we have, you'll probably move people around from time to time. I feel very comfortable with the amount of technology we're investing in, our technology infrastructure right now. And it's one that we can grow into, not just grow from. And so I don't think you're going to see that level of -- and I know you're not going to see that level of operating expense growth that you're seeing year-on-year. And the fact that we were over analysts and investor expectations in the first quarter is, I think you got to go back and say, well, where were they? Well, where they begin a year? Where they wind up, right? And so you're seeing less employee growth and you'll see less operating expense growth over time. So I'm 100% comfortable we're going to actually hit -- we're going to hit our target for this year.

Maybe turning to lending. You touched on small business lending, why you're comfortable there. On the consumer side, I think, that you have 21% year-over-year right now. But a common investor question is, are you and some of your peers were late cycle. We got this mythical recession around the corner. Is it too much loan growth and levering up the consumer too much too late in the cycle. So maybe just talk through the puts and takes there and what [indiscernible] response?

Yes. I mean, look, I've been at Amex for a long time, and I saw us -- and we were talking about this with the team just a couple of weeks ago, I saw us grow into the great financial crisis. I mean we're growing like a weed. And we did it with balance transfers. I think we're irresponsible on how we went into it. But I don't feel -- and we weren't growing billings. I mean, so we were growing -- lending 3 or 4x what we were growing billings. And a lot of the lending we grew were never going to drive billings. And so I'll go back to our model, right? Our model is 1 where we acquire a card member, 70% of them are going to pay fees on that card. We engage them to spend and then they lend. And we'll lend them money. We don't do it the other way, which is let's lend somebody money and hope they spend, all right? So we want you to be engaged with our products. We want you to spend and then we'll lend. And again, I'll go back to these ratios. I mean we're 15% up of where we were pre-pandemic from a loan perspective, but our billings are 35% up. And the 25% up was year-over-year, just got us from -- got us over the hump from a pandemic perspective, and I sort of look at this from a sequential basis. And if I look at sequentially, where we were in the fourth quarter and where we were in the first quarter, we're pretty much flat and some seasonality, right? I mean because people tend to lever up a little bit more around the holidays. But certainly, you didn't have 25% growth from a sequential perspective. It was really that year-over-year. And again, you got to take into account the pandemic and take into effect Omicron, where people weren't spending as much either.

Maybe sticking with credit, and I should have mentioned at the outset, we have this Pigeonhole system. So please feel free to submit a question, it will pop up on the little speed here.

I don't know about Pigeonhole, though.

I don't know much about it either, but hopefully, it works. Three people have submitted a question, and they have, in fact, popped up here, up 4. There we go, in real-time marketing. So I guess 1 question on credit is there's a debate in the industry right now. Are we just normalizing back to 2019 levels? Or do we go higher? Chase recently put out the guidance that they see '25 being, I don't know, 40, 50 bps higher than 2019. How do you think about that? I should say at the outset, I think it's often underappreciated. Your delinquencies are still about 20% below 2019. The industry as a whole is back to 2019 already. So you've outperformed so far. But when you look a little further out, set aside recession risk, is the new normal for card something like it was in the 5 years pre-pandemic? Or is it something higher than that because that was post GFC deleveraging unusual period?

Yes. I mean, look, we ran at like this, 2.2%, 2.4% to 2.2% for a lot -- for a long time. And my perspective is, I don't see why we're not going to get back to that normal at some point in time. I don't buy into the 40 basis points higher. I think we'll get back to the level with where we were at some particular point in time, and there may be some ups and downs, 10, 20 basis points here. But that's pretty much driven by the customer you're going after, right? So I mean if you look at -- and you could -- we'll use this FICO for example, it's not the only thing we use in our models to actually determine if we're going to give somebody a line of credit. But if you just look at it and look at how we make decisions, we have a much higher quality card base today than we did pre-pandemic. So the base is better quality. Now if we wanted to ratchet that down, yes, of course, it would go up. But on a like-for-like basis, I think we'll be right around that margin. But again, you got to realize when you're talking with JPMorgan or you're talking to Capital One or you're talking to Citi, their customer base doesn't look like our customer base. They want their customer base to look like our customer base, but their customer base does not look like our customer base today. So I don't think you're going to see that.

Maybe another one on credit here. Any significant differences in the mix of your loans and receivables portfolio relative to your build business, things like Millennial and Gen Z, small business, anywhere you would highlight a significant difference on the loan book?

No. I mean, again, the biggest thing for us, and we've been consistent for this for years, is we're mostly lending to our existing customers. So when you look at that loan growth, that's where we're lending. But there's really nothing different. And when you look at loan book [ potential ] -- when you look at millennials, you compare them to sort of boomers or you're comparing them to Gen X-ers, that's not what you see the difference. The difference you see on lending is tenure, right? So people have shorter tenure tend to potentially perform a little bit worse until they get to get over that hump. But there really is no, we have not seen any age or cohort difference at this particular point in time. And small businesses are performing for us just like they've always performed. And again, I think you have to look at sort of the individual businesses that you have and where we are in the economic cycle and how their business gets -- gets hurt or not. So if you look at the pandemic, restaurants and small retailers from a credit perspective, we're not terrific. We didn't have a lot of those though. But if you looked at plumbers, electricians, lawyers, doctors, they were doing fine. And so we didn't have a lot of problems there. Their problem was they couldn't buy the things they needed to buy, right? I mean that was the biggest problem that they had.

Maybe just rounding out the credit discussion, always your favorite topic, reserves. [indiscernible]. If it is yes, raise your hand, should get him a mic. No. I do get some pushback this year specifically, not that this year is really strategic as the conference is named. But on the $11 to $11.40 EPS range this year, the risk that you and others will have to build reserves, the focus on day 1 CECL versus current reserves and maybe being lower on that ratio than peers. How do you think about that reserve building risk? I think on the call, you deemed it modest builds through the course of this year. But for people, who are worried about reserve builds, derailing the EPS guide this year specifically, what would you say?

Yes. I mean, look, we -- if you just look at overall provision in the first quarter, which had a build in it, we're $1 billion higher than we were quarter-over-quarter provision, because we had a credit and provision in 2022, Q1, and we're about $1 billion of provision in Q1, 2023. And we beat our plan. So I feel pretty good about that. Now unfortunately, a lot of our analysts weren't quite as good planners as we were, and they missed the sort of the plan. But we feel really strong about the $11 to $11.40, which is why we reiterated our guidance. Yes, there'll probably be some other bills as we go along. And I think that's why we say as long as it's not a big -- with the CECL models driven by not only with the performance, but it's driven by these macro assumptions that you have to make. And if those macro assumptions change radically, and we use the blue chip economic forecast. But if those change radically, yes, we'll probably have to build, and we'll see how it goes. But we still feel good about -- we still feel really good about the $11 to $11.40 with what we know today, and that will include some modest reserve bills as we move along. But -- and look, if the reality is we have to build more. What we're not going to do is we're not going to take money out of marketing. We're not going to take money out of here. We're not going to starve the business to make a number for a given year or a quarter when we know strategically, we're doing the right things. It's not how I've run the company for the last 6 years. It's not how I'm going to run the company for ever long I'm here. I don't manage quarter-to-quarter, and I think you guys all know that. We do set a plan for the year, and we do our best to make that plan for the year, and we've done that the last 5 years. But look, if that happened at the end, we're not going to sort of run around and start cutting things so that we can say, "Hey, look, we made it $11.02." I mean that's just not how we run the business, and it's not how our investors want us to run the business. We're going to run the business for the right way. If we see existential threats, if we see things that aren't running the right way, then we'll do that. I mean I'll just point back to the pandemic. I mean it would have been really easy in the pandemic not to invest in our customers. But -- it just didn't make any sense not to invest in our customers. And what's happened as a result of that. That investment decision, which was made with the thought of we're going to lose money for the year and we decided to invest over $1 billion, when we thought we were going to lose money. That was made because it's the right thing to do for the franchise. And if you're an investor, you want an executive team that's running this company that's thinking about the right things to do over the medium to long term, not what the right thing is to do potentially to meet some number that we set out at the beginning of the year, when we had the best information possible. But having said all that, we feel pretty comfortable about $11 to $11.40.

Maybe turning to capital. You've got a very high capital ratio, almost 11%. You generate a ton of capital given your ROE profile. So it's an enviable position to be in. Against that, we've got the alphabet soup of potential regulatory changes, TLAC, Basel III ops risk, stress testing coming up. How do you think about capital return over the balance of this year? And when you look at that reregulation cycle, anything that stands out is worrisome or things that Amex would need to adapt to?

Yes. You started in the dark place and you're ending up in a dark place.

There was a little bit of light in the middle. This is what happen when you get the [indiscernible]. You should request the payments...

So look, I mean we keep between 10% and 11% capital, not -- because from a regulatory perspective, it's 7% for us, right? CET1, we keep between 10%, we usually spend 10.5%, 10.6%. That's from a rating agency perspective. So we got this 360 basis points, 400 basis points buffer. Yes, look, we've been looking at Basel III and the endgame on that and additional capital we'll have to hold for risk. And we've been having lots of conversations as it relates to that because it's actually crazy in terms of what you'd have to keep for operational risk, at least for our business anyway. But the reality is this is not going to impact much for us. And as far as everything else going on with liquidity, we feel really good. We feel great about our funding stack. And in the absolute worst-case scenario from a capital perspective that we have to hold even more, it's a quarter or 2, probably for us of not doing share buybacks in the absolute worst scenario, where we'd be required to hold 10x more than the actual operational risk that we've experienced for the last 12 years because that's what it potentially could look like. But we have some hope that it won't come out that way.

Okay. I was going to ask on funding, but you already touched on it. I just -- since I've written these questions, you've raised my...

We did that twice. We did that for you.

I'd like to -- you let me in the deposit side of it...

We let you in the deposit card side. We're taking your money at that point. We're not lending you our money first.

We've probably got time for 2 or 3 more here. One I wanted to touch on -- you've touched on the flywheel rewards card member services expense all separately. But if you kind of roll them together this concept, you've started presenting the variable customer engagement expense as a whole and as a percentage of revenue, I think it was about 37% pre-pandemic, 41% this year, on track to be 43%. I'd say at the outset, it's a good problem to have. It's customer engagement expenses. It's showing the flywheel is working. But how do you think about that 43% over time? Does it just go up as long as it's working? Is there any natural limit. How should we think about 5 years out?

No. I think it will probably tick up. I don't think it's going to tick up the 600 basis points as a percent that it's ticked up from pre-pandemic. I think we've -- but you also don't have -- you didn't have -- it really did generate that growth for us. And we think that was the -- I talked about step functions and I talked about scale. That was a step function that we needed to do to get to where we wanted to get to. But I don't think you're going to see, it's not in any of our plans to raise it at that level. But I think going back to the operating expenses, which is $14 billion, we do believe, when you think about the ratio of revenue to operating expenses, that's where we're going to continue to get leverage over time.

Maybe touch a little bit back to card fees. It's been a great growth story for you, 20% year-over-year. Obviously, you'd mentioned $1,400 or value for $6.95 on the platinum card. There's always been this question of what is the kind of profit margin associated with the card fee growth. Can that improve over time? Any thoughts on how we should think about that?

Yes. So we don't think about that actually. The way we think about it is we think about the overall profitability of the cardholder, right? So if there are sometimes, where we raise the fee where you might raise at $100, it might cost to $105, might cost us $50. It all depends, right? But the way we look at it is we look at, when we put value into the product, as we do our analysis, it's how many more cardholders you're going to reach? Of existing cardholders? How many are you going to engage more? What kind of spend will it drive? And then what kind of lend will it drive as well? And so you take that all together, and just take the Platinum card for an example, if you go back, I mean, go back 5 years or so, maybe 6 years, would double our platinum base at this particular point in time. And we've raised the fees twice already, but our spending has gone up, the lending in that book has gone up. We continue to engage more of these cardholders. And that cardholder cohort is -- helps drive that flywheel because everybody wants those Platinum card holders, right? They're a very, very profitable high-spending group. So we don't look at it and say, okay, it's 6.95%. We have to make 10% on this. It's not how we do the calculus. We look at the overall economic model of raising it to 6.95%, who might you lose, who might you now get, what kind of engagement you're going to get, what extra spends you're going to get and so forth. So that's how we look at it.

So from the audience, what are you seeing in fraud trends, the whole concept of friendly fraud, is that becoming a meaningful issue?

No. I mean our fraud is the lowest in the industry and continues to be the lowest in the industry. The thing that we do see out there, which is really a sad thing is this preying on the elderly of having them go buy gift cards, right? And what you wind up seeing is people calling frantically and trying to buy gift cards and we try and shut them down as much as we can. Like your computer is locked or what have you. And if you don't buy a gift card and give me a number over the phone, that's one of the biggest fraud scams that are out there right now is this whole sending people to various stores. So have you ever try to buy a gift card in sort of a Walmart or a Walgreens or something, they only let you buy a certain amount now. They won't let you buy more than 250 because you've had people that have gone in, have been told to go buy gift cards, read the numbers over the phone. And so we really -- we're putting a lot of time and effort into sort of stopping that, right? I mean it's just -- it's really a bad -- it's really awful. I mean, how people can sort of do that. But in terms of regular physical fraud that you see at the point of sale that we'd see for years, we're at the same level, same thing with online fraud as well. I mean I think the bad guys keep getting better, but we try and continue to get better than the bad guys. And it's a constant fight. But I think here's where the closed loop system really does help as well because you do have insight into, is that really a legitimate transaction? I'm giving you an example. Somebody spending $1,500 at a Bodega, probably not happening, right? I mean it's just -- it's not happening at a Deli Bodega, what have you. Well, for us, we have all that history on what's happened at that merchant. They've never had a $1,500 sale before. So we have an ability to go after that. Our competitors don't have the ability to go after that because they have no idea. And what they're doing is they're just basing these -- they're basing these decisions on what their overall line of credit. So $1,500 fits in, fine, let's do it. But that's why you'll see, for those of you -- and I'm pretty much I'm looking at this audience. This is a very fine audience. I'm sure you all have American Express cards. You will get terrific -- give yourselves a hands, but you will get situations where you get a text or you'll get something like that. So was that you and then we try and resolve it. And so -- and I think we do a much better job than our competitors do in that area. And that is going to be almost impossible for them to catch up with because you'd have to really replicate the closed-loop system.

So maybe 1 last 1 here. How do you think about the pros and cons of being in the lending business. The market is putting an all-time spread between the higher value on your network peers versus the lower PE value on your issuing peers.

Yes, it'd be nice to have 40 PE non-GAAP earnings, that would be good.

Reserved bills don't count.

No. Reserve bills -- actually, expenses don't count, I don't think, but the reality is we're a payments company, and you can't be a payments company without lending people money. I think for a number of years, we would sort of betwixt to between what we want it to be. But reality is all of our customers borrow, and I'd rather have them borrow from us than borrow from our competitors because they expand their relationships with our competitors, that gives us 1 less sort of foothold into them. So that's how we think about it.

That's great. Well, I think we're just on time here. So I want to thank you for joining us today

My pleasure.

And thank everyone in the audience.

Thank you everybody for questions.