American Express Company (AXP) Earnings Call Transcript & Summary

Good morning, everybody. My name is Jeff Adelson, Morgan Stanley, Consumer Finance Research Analyst. Before we get started, I'm just going to quickly read some disclosures, get them out of the way. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com research disclosures. The taking of photographs and use of recording devices also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. So today, we're very excited to welcome Christophe Le Caillec, CFO of Amex to our conference. This is your first time joining us.

Great. Thank you for the invite.

Very, very happy you're here.

Why don't we get right into it. So it seems like we can't really go a week without hearing about some news on slowing discretionary spend from the consumer. I think Amex, their consumer, the high-income consumers continue to hold up here. What's your take on the consumer today, especially the Amex versus the broader consumer? And maybe you could just give us a quick update on what you're seeing so far this quarter on trends?

So good morning, everybody. It's a pleasure for me to be here today. And again, thank you for inviting American Express. So I read the same news and I see the same things. So it's a very slow growth economy, and what we're seeing in the second quarter is very much the continuity -- continuation of what we saw in the previous quarter. So you might remember in Q1, we were at about 7% billing growth. That included an extra day of shopping, and so the numbers were a little bit inflated by that. But we are very much seeing the same thing in the second quarter. And you heard Steve earlier last week talked about a 6% for the quarter. So quarter-to-date, we're very much in that zone. If you step back a little bit, the makeup, I think, is a useful -- the makeup of that number is useful to talk a little bit about. We see relative strength in the consumer space, whether it's in the United States or in international. You remember our numbers in Q1, the U.S. billing for U.S. consumer was up 8%. And in international 13%. And of course, this was offset by low single-digit growth rate in the SME space, which for us is the place where we see the most softness. But Q2 looks very much like this.

And you've had great success in the fee paying U.S. premium card segment. At your Investor Day recently, you did highlight that you're now 25% of the segment versus 20% a couple of years ago. So for me outside of the view in, it seems like the strategy to double down on premium card here is working even as you do face competition from some of the other banks out there. I guess a couple of questions there. In the near term, as we think about the path to kind of reaccelerate card fees in the back half of the year, how is that playing out so far? And then longer term, how do you think about the growth runway? Is there a point where this competition actually becomes a bad thing instead of a rising tide lifts all boats situation?

So if -- card fee is a super important indicator for us, and I'm glad you're raising it. It's a super important indicator because the way you move this metric is like you need to do like 3 things. One is acquire more fee-paying card members, which is what we're doing, premium card members. The second thing you need to do is make sure that those card members renew their membership. It's the single most important assumption we make when we try to predict where this number is going to go, right? We have an installed base of premium card members. If you're a platinum card member, you pay $695 a year. And once a year, you have to renew that commitment. And so it's a super important driver as well of driving the card fee number up. And of course, what we need to do from time to time to support those 2 things is actually to refresh the product, right? And the way we do it is we inject value into the product and we price for that value, which means that we are raising the fee. And it's the combination of these 3 things that move that metric. And I just need to remind all of you that we've been growing that metric in double digit for the past 6 years. And actually, if you even look at it in more detail, for 20 of the 23 quarters, it was north of 13%. Even during COVID, we grew that metric. So it speaks a lot about the nature of the franchise, the premiumness of the franchise. It speaks a lot as well about the relationship that we have with our customers and our card members, and we are delighted to see that. So I pay a lot of attention to that card fee growth rate because I think it's representative of the strategy, it's representative of where we want to take this business forward. To the first part of your question, yes, we're still expecting, as we exit the year, to accelerate the growth rate, and we're very much on track to delivering on that expectation.

I think part of that is also before you, card refresh you had this year.

Exactly. So part of their -- either things that Steve introduced when he took the role of CEO was to increase the pace of the company. And one way to increase the pace was the cadence of the product refreshes. And it's definitely creating momentum in the company, and it's creating momentum as well in terms of our communication externally and how we acquire and how many card members we bring to the franchise. So we're very much on track to deliver on these 40 refreshes. And if you take a step back, I think we talked at Investor Day that we refresh something in the range of 150 products over the last, was it like 5 years, right? So it's very much part of the machinery of American Express. And it's working well, and it's just part of creating momentum and supporting and sustaining the momentum going forward.

And have you ever thought about any kind of natural ceiling on where your annual card fees could go? I mean, I know you pointed to some of the international markets. Is there some sort of analysis you're doing on the friction of raising versus injecting value and retaining that customer. And as part of that, the question we always get, I know you're probably not going to answer, when are you going to refresh the platinum card?

Are you a platinum card member?

I am...

So -- and you know my story, right? I spent most of my time at American Express outside of the United States in any given year we would have like 20, 30 product refreshes, and we tried every single combination many, many times. And every time the lesson learned is the same is, that there is hardly any attrition. When there is, what people do is just that they typically downgrade as opposed to leave the franchise. And many times, the lesson learned is we could have raised the fee higher. And so we're clearly not talking about a ceiling. And you're right at Investor Day, we gave a couple of examples of the card fee price point in various markets. In Mexico, in Japan, it's like north of $1,000. In the United States, it's $695. So there's still a lot of room here for us. I need to say this, though, the way we think about it and the way we start and the way we -- where we start and the way we model those decisions, we don't start by saying how much I can increase and what's the level of either tolerance for the card members. The way we think about this is like how much value can I put in this card? How can I innovate? How can I make the card more attractive? And once we solve for that and once we found the right partners, the right value proposition, then we try to answer the question around how much is it worth and where should the price point be, and then we work on how are we going to communicate this to the card members and explain it. To make it like a rational decision for card members, and last time we refreshed the platinum card, that's exactly what we did. And you've seen that number. But if you add up all the benefits, it's like probably like twice the price of the card fees. So it's a rational decision. That's very much how we think about it. We price for value.

And part of the strategy here in premium card, it's clear that your focus on Millennials and Gen Z has been a clear driver of success here. About 60% of your -- that cohort is fee paying for you. I guess one question we always get, though, is where are these customers -- where do they keep coming from? And is there also a natural ceiling on that maybe as these folks start to settle down and stop traveling as much? Or does the next generation step in for you?

Yes. So before I go -- I answer your question, just take a step back a bit. For those of you who have been following American Express for a long time, 10, 15 years ago, one of the most complicated question we were getting is, you have a beautiful franchise, you have beautiful products. It's perfect for my dad. But it's not good for younger card members. We solved that problem. We have a brand. We have a value proposition. We have products that resonate with younger card members now. And those younger card members come with a lot of things, a lot of good things, including they typically give us a much higher share of their wallet. Second, we know that we're going to be in a relationship with them for a much longer period of time. We talked about 20 years. So the embedded value, the lifetime value, the embedded revenue growth that is included in creating and building those relationships with the younger card member is super attractive to us. And so we feel good about where we are from that standpoint. I'm very optimistic about -- there are always going to be young people, and we're always going to have to win them. I'm pretty sure that a generation from now, we're going to have to innovate around the products to win them again. But right now, the products that we put in front of them resonate extremely well with them. Remember that it's a generation that is used to paying fees for many things, including how -- experiences, how they consume music through a membership or subscription fee, how they consume entertainment. And so we're just playing in that space as well. And as you said, it's resonating like very, very well with our younger card members. And to your point, like almost 60% of them enter the franchise and the first thing they do is pay us a fee.

And there's been some reporting out there, I think, from the New York Fed pointing to maybe some rising stress in the younger cohort. Are you seeing that? Or what are you seeing?

And I'm sure that's the case, but I need to say as well that the card members that we're talking about for the Gen Zs and the younger Millennials are not the average Gen Z or younger Millennials that are impacted by this. We are very disciplined about who we bring to the franchise. As a matter of fact, our underwriting models do not have age as an input. So we do not differentiate between underwriting, Gen X or Gen Z. It's a function of what their credit profile looks like. So the people we're talking about, the card members we're talking about are typically young professionals who have jobs and who are starting in life. Like many of you, many of us, a long time ago for me. But these are typically the card members that we bring to franchise. We are very disciplined about their credit profile. And at Investor Day, Howard Grosfield, shared some metrics around that. You might remember that the average FICO of our Gen Z and Millennials when they joined the franchise is north of 750. It's a very good FICO. It's actually as good as what many of our competitors have for their Gen Xers. So we are very disciplined about who we bring to the franchise. And it's inevitable that this population is going to be more exposed if there is a downturn, but we feel that our card members are just going to navigate that very, very well. And again, I'm very optimistic about our ability to retain these card members and bring to bear the embedded lifetime value that is included in those relationships.

Maybe switching to the last piece of revenue growth here. So your loan growth has been really robust for a decade now, if we ignore the pandemic. How much of that growth today or even over that history is coming from existing versus new customers? And maybe some of the more pay over time, play in it versus the normal revolving credit card piece? And then as we think about the forward look, maybe absent any [indiscernible] of macro, is this double-digit type additive to the overall revenue growth here to stay on the loan growth?

So the first thing I want to say this is that we have innovated quite a lot in that space with this pay over time value proposition, which is different, right? And for that reason -- and that it's typically attached to charge cards. So for that reason, when I look at asset growth, combined receivables and loans together, and if you look at altogether combined, our growth rate is actually not that much different from most of our peers or at least the big banks we compete against. So maybe we are 100, 200 basis points stronger, but not that much more. So that's the first thing. The second thing is the type of asset that we put on the balance sheet is different from what we used to do like before the Great Financial Crisis. And I had a page at Investor Day, which I hope you saw, but we're not growing loans by issuing balance transfers. Balance transfers today are a little tiny part of our acquisition strategy. It's less than 1%. And most of the growth, the single biggest contributor to asset growth is coming from this Pay Over Time facility that is attached to premium products. So what it is, is the flexibility we give to card members to revolve for typically your short duration, some big ticket items. And we see it, right, when we analyze what's the revolve behavior of this premium card members. What we see is typically a spike in the spend the month before they enter into that revolve status. Because they purchased a big ticket item, because they purchase the vacation for the family like 2 or 3 months ahead of time. And half of those actually -- would actually pay down the entire balance within 2 months. So what they need is some flexibility to actually amortize over a shorter period of time, some big ticket items. And so this is shorter revolve that is attached to premium card members, very low risk. And there was another interesting stat that we shared at Investor Day, which I thought caught your attention under -- there was a slide that showed that most of the asset growth was attached to fee-paying products, the write-off rate on these fee-paying products was 1.3%. So very, very small. So it's super attractive business. So in terms of the second part of your question, where is that going, there's been a big discontinuity here due to COVID. So there was a lot of normalization of balances that created very strong growth. This growth rate is moderating and has been moderating for a few quarters now, and it's going to keep moderating in the coming quarters. Long term, it's hard for me to say exactly where we're going to go. But I'm going to say this, we're going to stay true to what I just said, which is premium customer, and we're not going to offer a revolver balance transfer at acquisition. As a matter of fact, there's another stat that I like quoting, which is that 70% of the balance growth comes from tenured card members. So people join the franchise, they spend, we get to know each other is a lot better. We extend credit to them, and we extend credit when we know them better, so we can better underwrite them and monitor the balances.

It sounds like it's a bit of proactive approach on your part where you noticed those big ticket purchases and you make them an offer on the financing. I imagine. I mean, is a lot of the growth coming from more of that? Or do you finding more of the card members are just coming to you and say, "Hey, I need to borrow?"

So statistics -- so we know a lot, and we have those, what we call trigger marketing, where specific type of transactions, smart trigger and marketing message for us to upgrade the card to take some loans. So definitely, these are the things that we do. But card members know as well when they take the platinum card, the gold card that we give them that facility, and it's for them to use when they need it, right?

And so maybe just round there the discussion on revenue growth. We've gone through all the key components here. Let's take a step back and talk about what that means for the 9% to 11% growth guidance for the year? And then how you're thinking about maybe the quarterly trajectory over the rest of the year?

So we issued guidance at the beginning of the year 9% to 11% for the full year. I'm still very comfortable with that guide. Talking more specifically about the quarter, as I said, billing is trending in the same direction as what we saw in Q1, especially once you control for the leap year. As I said, NII is just moderating in terms of growth. And we talked about card fee, and the point here is that card fee is going to tick up as we exit the year, but not in Q2. So when you put all of this together, you're going to get the revenue growth that is not as strong as Q1 was. The other thing that I'd say that is impacting the quarter is the strength of the U.S. dollar. So the number we're going to print, it's going to be impacted by that. We have, as you know, a fast-growing business outside of the United States, especially in Japan, and I was recently in Japan and definitely feels cheap to be in Japan these days versus what it was a decade ago or even a few years ago with the yen at 160. So there will be probably a bigger gap between FX adjusted and FX reported when it comes to revenue growth this quarter. But as I said, the guide for the full year is still very much the 9% to 11%.

Okay. That was clear. Maybe shifting topics to something that was -- that came out more recently. Last week, we learned about eBay's decision to stop accepting Amex beginning in August. You put out your response, it's not overly material. I think less than 20 basis points of your network volumes. And it seems like if you do a high level back of the envelope, maybe it was only 5% of eBay's volumes at that point. So not overly material to either side here. But we've been getting asked the question, is there a risk of other merchants or retailers doing something similar? And is this maybe just more of a negotiation tactic on their part? Or do you think this is it?

Yes. So you're right. It's a small part of our business, less than 20 basis points. And it's a reminder as well that unlike other networks, we negotiated one-on-one with every -- with the merchants, right? And we have thousands and thousands of merchants that we negotiate with every year. And it's -- I mean what's surprising is that it only happens once in a while, and it's quite a rare event that we cannot find, we cannot settle with a merchant. In this case, we -- our research says that our price and our offer was very competitive to competitive networks. It also says that our card members have much higher transaction size to the magnitude of 2x than our competitors. And therefore, we feel good about the value that we bring. And it's important for us to stay true as well to our pricing discipline. It's very disappointing that we couldn't find an agreement with eBay, but we are where we are, and we're going to keep talking to them as we keep talking to all the merchants we deal with, and explain the value that we bring and why we price that value that way. So I don't have a lot more to say on that situation.

So we touched on credit a little bit earlier. Obviously, very strong performance from that fee paying customer. As we think about the outlook from here, you have other peers who dabble more in the near prime or primary or that are looking for peak losses in the first half of this year. It seems like maybe you're looking for a slow, gradual continued normalization higher. Can you talk a little bit about some other drivers other than what you already talked about of that strong performance? And maybe why there's a little bit of a divergence in the forward look there?

Yes. So it's very hard for me to comment on what our -- on some of our competitors because not all competitors have made to your point, have made that comment about write-off reaching some kind of plateau a few quarters from now. The first thing to remember, as you look at our credit situation is the fact that last quarter we reported a write-off rate of 2.1%. Very strong, very strong relative to our peers. Very strong in absolute, given where the APRs are. So I feel really good about the credit situation, delinquency rate, we're also best-in-class. And there is a metric that I like monitoring every quarter, which is the spread between our credit metrics and our peers. And that spread is increasing. So you're right that I've been making comments about you should expect this write-off rate and delinquency rate to tick up a little bit over time. But we're starting from such a low number of 2.1% debt, we're still going to be like best-in-class. We'll see where our peers are. I've heard as well many of our large competitors making comments about next year's write-off rates being a bit higher. So we're clearly in that camp, but from an incredibly low base. And I do think as well because I want to make a comment on this is that, the portfolio is especially resilient to a credit event, and we'll see a few weeks from now the reports from the Fed on the CCAR exercise. And I'm sure you will see that American Express is performing well in that exercise as we have done always in the past exercise. So we have really a very pristine and premium franchise, very low write-off rate. It's going to tick up a little bit, but boy, it's still an extremely attractive business.

And maybe while we're on that subject of capital, what are you hearing on the new capital proposals out there, and do you think they'll ease that operational risk element or some of the proposed changes out there on the charge card proxy for line of credit dynamics?

So this the Basel III endgame question.

Correct.

Listen, I don't know what the Fed is going to decide here. If you know, please share with me your insights. What I can tell you is that we spend time with the Fed at all levels. We took them through our thoughts. I can tell you that they listen very carefully. I also can say that they understand that the draft rules were generating some unattended sequences that were not their objectives and their goals. I know they're working on it as we speak. I don't know where this is going to go, but I'm optimistic that they're going to make changes and it's going to be better, not in terms of lower but something that will address exactly what they wanted to do, which makes the system more resilient and put more capital where the risks are. And I don't know the risks are in the premium franchise such as American Express. So we'll see where it's going to go. Now it's possible as well that they don't change much the rules as they were drafted. And I think as a CFO, I need to be ready for that scenario as well. I think it's worth reminding ourselves that the ROE of this business is 30% -- north of 30%. We generate a ton of capital. We distribute dividends, of course, we share -- we buy back shares. So for us, we have flexibility in our capital management to be able to deal with that. And if there is a bit of a reset, there will be a bit of a reset, but there is no need for us to change anything to our strategy, to our pricing, to exit products. I feel really good about what we're doing, and it's not going to impact what we're doing, and the optimistic in me says that our -- the new rules are going to be different and for that matter, better.

And does planning for that bear scenario, I mean you did raise the dividend already. But does planning for that bear scenario maybe change how you're thinking in the near term about capital return? Or do you...

No. In the near term, we are buying back shares, and we're feeling good and confident and comfortable about that. For the reason I just explained, right, is that if there is a bear scenario, to quote you, will leverage our 30% return on equity to quickly rebuild capital. I need to say as well that we operate with our CET1 target between 10% and 11%. That's 5 to 6 percentage north of the regulatory capital. We have the lower stressful buffer. We'll see what the Fed comes up with in a few weeks now. But the regulatory capital, including the SCB is 7%. So we have flexibility there as well in terms of adjusting our capital.

Something that's been very [ top ] over the past year. We just heard from Apple the other day on this. AI, you've done a lot of work in tech. You're doing some more in generative AI, we learned about that at the Investor Day. How much are you spending on tech? And where does this go from here? And how are you thinking about the longer-term opportunities for Amex relative to tech and maybe AI?

So I'm glad you are raising this because this is probably one of the most unappreciated part of our business. And maybe it's because we don't talk enough of it. So thank you for asking the question. Either, I'll answer your question about how much we're spending, but let me take a step back first. Technology, data, science is clearly part of the DNA of American Express. It has been not -- it's not a recent development on the back of Gen AI and the buzz around Gen AI. We always operated this franchise with our branches. We knew that the way for us to make this business successful would rely on data, on science, on technology, and we invest a lot in it. So by the time we end this year, we'll have spent something in the neighborhood of $2.1 billion in terms of technology development. I'm talking here about like improve the bank versus run the bank. So it's like -- it's north of $2 billion. And it increased by 40% over the last, is it about like 3 years? So we're clearly investing a lot. We're clearly investing a lot more in technology. I want to give you a couple of proof points as well for you just to evaluate this. The first thing is that you have to think about technology, not only as like a stand-alone activity, but combined with the very rich data that we have and the years and years of operating a very successful card business and building those powerful models. So the way it's translating into value is when you look at, for instance, that were fraud performance. It's like 2 to 3x better than competitive networks. It's not like a small difference. We are 2 to 3x better on the back of technology data and those algorithms that we build. Something also we're proud of is that recently, J.D. Power's issued their rankings of the best app in the credit card space, we were rating the best app in the credit card space on the back of that technology and the experience we have in that space. And there are many other examples, if you use your American Express card and tap and pay and use the Apple Pay features, you will notice that you get a notification that your card has been used. If you try to do this with -- I don't want to name anyone, but like competitive products, you will notice that you do not get that notification. It talks a little bit about the integration that we have in terms of our technology and Apple's technology. So definitely, it is something that is front and center. It's something that it's taking a bigger space, an American Express. You know that our current CEO used to run the technology department of the company as well. And so it's -- as I said, it's unappreciated. And part of my job is just going to be to share more with you and with investors about the strength and the power of our technology.

Yes, my personal experience, I found with other banks, you have to turn on the notification, somehow, if you can get through the app. But that's nice to see. And maybe just wrapping up with a few minutes we have left here, you're now approaching your 1-year anniversary, I think, with Amex at this point. Maybe highlight some of the biggest learnings and opportunities after your first year as CFO. And what do you say to investors who are impressed with your growth story and the credit quality you're putting forth, everything about the franchise, but maybe skeptical that the multiple can expand from here?

Yes. So as I said, I've been with the company for 27 years. And I spent most of my time at American Express operating in this company at a very granular level and either at an increasing level, just like many other leaders in American Express. And so where we are today, we are at a time where we have a clear strategy and we are very focused as a management team on executing on that strategy. We do not need a new strategy. We have won, and we've been operating in that strategy for a while, and it's delivering. And we laid out an ambition to grow revenue in excess of 10% and earnings per share in mid-teens. When you compound this, it's a super attractive value proposition for investors. And back to their time at American Express, for the most part, at American Express, when I was at a more junior level, we were trading at a premium to the S&P 500. The recent history, you're right, it's history, but it's the recent history, we are trading at a discount. The market will tell what's the right multiple is, of course. But I hope that if you believe in the strategy, if you believe in their credit profile of this franchise, if you believe in our ability to execute and the strength of this leadership team, then if you compound that EPS growth over time, you can rationalize a higher multiple, which is where we were I would say, a few years ago. So I hope that, that's what happens in the coming years and in the coming months.

Well, we're looking forward to it. And Christophe, thank you for joining us.

Thank you. Thanks for your questions. Bye.