American Express Company (AXP) Earnings Call Transcript & Summary

Got it. That's helpful. Maybe just to switch gears, American Express has focused on building a suite of differentiated member services, which has been the key to its leading position in the premium space. Can you just talk about how you expect to continue to expand those suite of services and offering over time?

Yes. So membership is the starting point of our -- all our strategic thinking. And if you think about American Express's investors, not think of us as a payment company as a financial institution, the heart of American Express is in that membership. There's a reason why we call our card members members because from the very beginning, we view ourselves as a membership company. And so what I mean by that is that all the series of benefits and assets that we have in the dining space, in the travel space, in their entertainment space, in their banking space now with more and more products. And what we want to do is just like combine all these experiences to be able to deliver unique experiences and value to our card members that is going to differentiate ourselves from our competitors. What we do not want to do is compete on points -- but to give you an example, we refreshed the Platinum card, and we haven't changed the value proposition when it comes to point. All the energy, all the efforts that we put in this product refresh were in that membership benefit. And these are critical assets that we have built over the years that are very different from what our competitors can offer. The claim, of course, that they have lounges, they claim they have trial benefit. But when you really analyze it, it is a very different scale. To give you an idea on the lounges, we have 32, 33 depending on the day. I think we have 33 now proprietary lounges, plus we have the partnership with Delta. They have like 50, 60 lounges. When I read what our competitors are saying, they have this, they have lounges, but like they have like single-digit number of proprietary lounges. So it's a very different experience. In the either travel space, hotels, we have this Eichiner program, Fine Hotels and resorts, when you get, as you know, as a card member, as a platinum and gold card member, you get benefits such as early check-in, late checkout, free breakfast. We have now 3,400 properties and hotels in this program, right? So a lot of card members can enjoy those benefits. Our competitors offer similar programs, but they have a few hundreds in them. So it's a very different experience. And the point that I want to make here because I think it's a critical point is that this is meant to work for our card members, but also for the members -- for the partners to get an idea because I was talking about the Fine Hotel and Resort program. This year alone, we received 1,400 requests from hotels and resorts to be part of this program to have access to our card member base and to have the pleasure of offering early check-in, late check-out, upgrade if it's available and a free breakfast, right? So -- and in this 1,400 requests, we approved 300. So we're very selective about who we get into the program. The point here is that I want to bring to life for you this circle, this virtual circle, where given the attractiveness of our card member base, more and more partners want to be partner with us. And that, of course, has a big advantage in terms of differentiated value proposition and also economics for American Express and the shareholders. The last thing that I'm going to say is this, we have extended this concept, if you want, to the sponsorships. We do a lot of sponsorships. I was talking about Formula One a minute ago. As you know, we're also 1 of the main sponsors for the U.S. Open. We do that not really to put our logo in this -- on these properties, although we do that. but more importantly, to create experiences for our card members. To give you an idea, during the first week of the U.S. Open, we actually touched 500,000 card members who went to their to the U.S. Open and could have access to the lounge we prepare for them to have a drink or ref. So this is very much what we're trying to do here with this membership concept. Bring either unique experiences that are going to be like key differentiators and that money cannot buy to our card members and scale it, not only in the U.S. but globally for our premium card members. And we think that -- this is the secret sauce of American Express, and we can compete much more effectively than multiplying the number of points every time you spend in a given industry.

Got it. That's very detailed helpful color.

Sorry, maybe too long.

No, that was good. Good. More is better. So we just talk about product refreshes, and they do involve a meaningful amount of investment the VCE outwork for 2026 was recently raised from around 44% to between 44% and 45%. It doesn't sound like large food as American Express continues to grow its premium and fee paying portfolio. How do we think about the trajectory of VCE moving forward and also, how do you balance enhancing customer value with maintaining attractive returns?

Yes. So VCE Variable Customer Engagement expenses, there's like 3 broad categories. The biggest 1 is the point that I talked about, those benefits, which we built on the cost of card member services line that they spend a long time giving you the details here. And the third component is partner payments to partner. The biggest component here is the co-brand partners that we have and how we share the economics of the covering cards with our partners. We express so it's a very large expense base, something in the neighborhood when you do like 44% to 45% of revenue, something in the neighborhood of of $35 billion. And as you said, we expressed it as a ratio to revenue. And this has been going up, and there was a step-up in that ratio and you can track it back very much to the product refresh that we did, the Platinum product refresh, which we did exactly a year ago. And that created like a step up. And it creates a step-up because the way we refresh products is we make those benefits, the new value proposition available to our card members before we raise the card fee. We're going to wait until the card member reached their renewal anniversary to raise the card fee and before actually they themselves kind of like consolidate their spend with us. So if you want, we from that, and that's what created the step-up. One of the big driver -- probably the biggest driver in terms of why we actually adjusted up a little bit that VCE ratio is because of the strength of the spend. And that was your first question. It drives the cost of points. And given the fact that billing was strong, especially in the T&E industry where there are some accelerators that drove a little bit of an increase there. Now it's super important when you think about this, to take a step back and look at what is the role of this VCE in the American Express economy. It plays a critical role beyond the value proposition that is returned to -- that is given to card members. The first thing is that it creates a very powerful effect in terms of selecting card members who have applicants with a very good credit profile. The positive selection that either Amex relies on to maintain stellar credit performance can be traced back to the richness of the value proposition that we put out there. So VCE is expensive, but you get a lot of your money back in terms of the quality of the applicants, the very low credit cost, the stability of this credit performance under stress. The other thing that it does is that the quality of the product generates demand, which make our marketing dollars work much, much better. And so -- so the way to think about it is complete kind of like P&L as opposed to just looking at the VCE to revenue ratio. And if you take like a giant step back and think about what is that doing to our margins, I will go back to what I was saying earlier on. If you look at the return on equity of American Express, it has drifted up over the years, right, which is a function of very strong credit quality, the very strong growth that this rich products can generate, which creates economy of scale when it comes to operating expenses, for instance. As I said, the stability of the credit performance. So all of that is compounding and adding up in this very strong return on equity, which is like 33%, 34%, even 35%, right? And so that's the role of VCE. That's the way we think about it. I will say this as well. There's a lot of people at American Express will work on innovating within this $35 billion expense base to create redemption opportunities such as amount-based redemption. We just announced that you can now redeem your MR points as well with Apple Pay. And all these initiatives are helping us in terms of controlling that cost, if you want. So it's a very sophisticated kind of like machine behind that VCE ratio.

That's helpful. You touched on credit performance a little bit. American Express' credit performance remains best-in-class with millennials and Gen Z cohorts accounting for 65% of new accounts. What gives you confidence in the resilience of those customers and the broader strength of the portfolio?

Yes. So first, those younger card members expanded our TAM, right? And either cracking that nut and having American Express being relevant to this very large and growing population was a major breakthrough for us to keep on that double-digit revenue growth. Those Gen Z customers today, they represent about 30% of the global new accounts acquired in the consumer space. So it's a very meaningful numbers. I understand the question about the credit profile of this. And at a previous conference, we shared a more detailed set of numbers around this credit profile. And I invite you to go back. You'll find it on the Investor Relations website, and it was the delinquency rate by age cohort, right? And there were a few things that were remarkable in those numbers. The first thing is that we are doing like our Gen Z have a delinquency rate that is a lot lower than the rest of the Gen Z industry. I mean the spread between the 2 delinquency rate is like something 2.5% worse for the industry versus us. But for me, the biggest insight, the 1 that I think is the most relevant to you is the fact that our Gen Z customers and millennial customers combine have a delinquency rate that is 40% below the industry Gen X and baby boomer combined. So our young card members are 40% better than the best of the rest of the industry. And that speaks about how selective we are with who we are issuing cards to as well as that positive selection process that I was talking about a few minutes ago. And what I like about these younger card members because we are a momentum business, and we are also like a very new term business. The P&L that you see this quarter was billed with card members who join American Express last year, 5 years, 10 years, 25 years ago, right? So it takes a long time to just to get into the P&L. And so when I look at how this Gen Z customers are behaving, I love what I'm saying. They're typically giving us a bigger share of their wallet. They're very engaged with the products, the value proposition most of them join us on a fee paying product. The Gold Card is like the favorite product for this generation. And their loyalty, their retention rate over time now that we have visibility is better than the older generations. So if you think about us like if you would model American Express looking at vintages and project that Gen Z vintage over time, besides the credit strength, you would see a lot of revenue growth that is embedded in their behavior. And we know we're going to get it because if there's 1 thing that is either very stable at American Express, it's the renewal rate, the loyalty rate, as we call it, over time, when we have card members. They stay with us for decades. And I'm sure that many of you in the room had an American Express card for 10, 15, 20 years. It's going to be the same thing here.

Got it. We have about 7 or 8 minutes left. I'll open it up to the audience for any questions. So the question was you manage the traffic code in younger people. There will be a time where the economy enters a recession, this time may be more white collar focused. How do you think about reserves?

Yes. So I'll put it like 2 different parts in your question. Maybe let me address the white collar theme first, right? First, the tone has changed a lot around that versus what people were saying a few months ago. We tend to think about the premium versus nonpremium when you call to white collar. And there's a lot of -- including recently, there was a great article in the economist about what might happen with AI. And it was very positive. And I invite you to read that article, I'm sure you'll find it in the economist easily, in that white collar unemployment, especially at the high end of white collar is just not only going to not be impacted by but if anything, it's just going to grow. When it comes specifically to CECL and credit reserve, we don't isolate them differently. We don't treat them differently. We look at their spend behavior if they lay delinquency rate, and that's what's going to drive our CECL reserve. It's not because you're like a 30- or a 28-year-old that which is going to book a higher reserve versus someone who is like 40-year-old. So there is no differentiation in the way we treat it from a CECL standpoint. But what we do in coordination with the Fed, and that's the CCAR process, right? We stress test the portfolio under pretty strict and need a pretty bad credit economic assumption, that are like 2008, 2009 kind of like credit stress. And I invite you to look at those results, right, because the Fed published them, right? And you're going to see that the credit losses that is projected for American Express is by far the lowest across the industry. So you have to think about those younger card members is like young urban professionals that are dining out, that are quite comfortable paying a card fee with us. That are employed, that are making -- like I would say, a younger version of many of us here, right? And so these are the people that are in our portfolio. And there -- I'm not concerned about their credit profile, and I like, as I said, I like everything that I see. We measure actually the lifetime value of those current members and it's about 2x the lifetime value of either 40 or 45 year old like a Gen X platinum card. So it is super attractive. I'm not concerned about the credit performance. And you've seen despite all the noise about AI recently, if anything, our credit numbers have been incredibly stable in not improving over the last quarters, right?

Great. One question over here. I think it's like -- so I'm looking at Kartik from IR because I don't want to say something wrong here, but I think it's like 1/3 of our of the balances are from card members, but they represent something like 50%, is that are. Yes. So 50% are from our existing card members.

Yes, some dollars, right, Kartik? Get in touch with IR. But it's a significant part. And -- and we still -- the other way to think about it, which is on the flip side is to look at how many of our card members have a high-yield savings account with us. And it's only like in the low double digits, like 10%, 8-ish percent, right? So the growth opportunity is like super high.

Great. So just a few minutes left, maybe just in closing, Christophe, looking ahead, where do you see American Express heading over the next 3 to 5 years? And what will be the outcome for shareholders?

Yes. So we have -- as I said, we are a momentum business. I like what I'm seeing in terms of product innovation, what I'm seeing in terms of demand for the products, what I'm seeing in terms of growing in the premium space, I love our TAM and how it's growing and evolving. And so what you should expect from us is more of the same, right, and the continuation of what we've done in the past years. And there's something incredibly powerful for the shareholders when you compound that. Double digit, like 10% revenue growth with mid-teens EPS growth. and a disciplined capital management, dividend increase, very strong capital share repo program. I was saying we buy back about an average 3% of the share count every year. The compounding effect of all of this creates a lot of value for shareholders, and that's what we're going to do, and that's what we're going to keep doing, right? And I feel confident every time I look at the growth we're having with the younger generation, when I look at the credit profile, when I look at the card fee trend, which captures the premiumness of the portfolio and the momentum that we have. And so you should expect more of the same going forward. And it's been a good run for us. And I hope -- and I think that it's going to be a good 1 going forward as well.

Great. I think we'll end there on a good note. Thank you.

Thank you.