美國運通 (AXP) 2002 Q1 法說會逐字稿

Good Evening ladies and gentlemen and welcome to the American Express first quarter earnings conference call. At this time our participants are in the listen only mode. Later we will conduct the question and answer session. I would now like to turn the call over to Ron

, Sr.Vice President of Investor Relations. Mr.Silver, you may begin.

Okay. Thank you Jordie and welcome to everyone. I really appreciate all of you joining us for today's discussion. As usual before we get started, I need to remind you of the some of the legal aspects here and tell you that the discussion today contains certain forward-looking statements about the company's future financial performance and its prospects which is subjected to risk and uncertainties and speak only as of today. the words believe, expect, anticipate, optimistic and tend, plan, aim, will, should, could, and similar expressions are intended to identify these forward-looking statements. Factors that could cause actual results to differ materially from the forward-looking statements including the company's financial and other goals are set froth within today's release which is being fixed with the FAC and 8K report and in company's 2001 10K report already on file with the Securities and Exchange Commission. As with reaching conference calls, this call is being webcast live on our website. Our Executive vice President and Chief Financial Officer of American Express will provide some introductory remarks highlighting the key points related to today's announcement. Once he completes his remarks, we will turn to the moderator who will announce your opportunity to get into the Q&A period. Up until that point in time, no one is actually registered to ask questions and while we will attempt to respond to as many your questions as possible, before we end the call we do have a limited amount of time and so we would have to ask you limit yourself to one question at a time and then go back into the queue. with that let me turn the discussion over to Gary.

Thank you Ron and welcome everyone, thank you for joining us today. As you have already seen from press release earlier toady our first quarter-diluted EPS was $0.46 versus. $0.40 last year.

Overall results in the quarter tracked where we had anticipated it to be at this point in the year. As you know we previously indicated that our expectation was that we would have difficult comparisons early in the year with improvement as the year progresses, and that is still what we anticipate.

Companywide our restructuring activities are on plan and we continue to feel good about the progress. The headcount reduction during the quarter over 7000 or 8 percent including 1500 from the partial implementation of our technology partnership with IBM is tracking with the detail plans underlying last year's third quarter and fourth quarter restructuring charges. Because of the timing of these reductions, the full benefit will not be realized until the second quarter and thereafter. Let me give you some headlines on each of the businesses. At TRS business volume comparisons did improve versus fourth quarter 2001 but we were company is generally on par with Dec. comparison and we are still below last year's level.

Generally this trend is in line with the Persian Gulf War situation which we have discussed with you before and that it took a number of months for spending to get back to a more normalized pattern after the original shock. Lending spread continue to be a strong positive factor. While the provision expenses are up substantially versus last year, it was in line with our expectations and so far the credit environment is showing signs of improvement sooner than we would have thought. Importantly the TRS results also reflect additional investing activities as we aims to increase revenue momentum as we exits the year we are in now. At AEFA, volumes remain weak but the execution of our business plan is on track with a substantial re-engineering benefit that is funding the cost of upgrading our asset management capabilities and various other initiatives. Generally American Express Bank continues to perform well in light of the difficult global economic environment, though we did see an increase in consumer loan write offs in Hong Kong.

Overall consistent with recent quarters our underlying business results including lending AR growth, build business volumes; credit trends as well as AEFA assets and earnings trends continue to compare well with the relevant industry peers. Before I move into the details, let me highlight some of the unusual items we were noting within the year over year comparison. During the first quarter 200202, we have a $13 million pre-tax or an $8 million after-tax benefit reflecting adjustments to last year's aggregate restructuring reserve, which have a minimal impact on EPS. Despite these minor adjustments, we continue to expect fully realize the expense save originally reported in connection with restructuring charges.

During last year's first quarter, pre-tax losses of $182 million or $132 million after-tax from the write down in sale of high yield securities that AEFA recorded.

Also we had a $67 million expense increase at AEFA due to the adjustment of deferred acquisition costs for variable insurance and annuity products. And then finally, due to the adoption of FAS 142, no goodwill amortization occurred in the first quarter that we just come through. Last year in the same quarter, we had $25 million pre-tax or $19 million after tax or $0.01 per share of goodwill amortization. Excluding these items, EPS for the quarter would be down double digits versus the 15 percent reported growth. by either measure we came in somewhat better than we had expected at the beginning of the year. Also given recent news regarding the situation in Argentina, let me reiterate what we have previously indicated. Obviously the situation remains fluid and our business there is suffering from the difficult economy. However, the company does not expect any material effects from this situation. With that let me now review the details in each one of our major business segments.

At TRS, we continue to make good progress on the strategic agenda in the first quarter as new features and re-branding of small business products sign significant partnerships with CIBC and AOL Time Warner.

Revenue at TRS declined slightly with net income decreasing by 15 percent excluding the benefit of the elimination of the goodwill amortization and the restructuring reserve write back. On the revenue side, consumer build business continued to perform in a relatively strong manner as US consumer spending grew at 4 percent on 10 percent transaction volume growth offset by declines in corporate and small business spending. Worldwide, cards in

was up 4.5 percent and average spend declined by 6 percent.

The discount rate remained steady with fourth quarter 2001 and decreased by only two basis points versus last year on a full year basis despite the continued strong growth in everyday spending. Lending spread revenue grew 29 percent on an 11 percent growth in average lending balances.

The yield on the portfolio increased to 9.6 percent from 8.3 percent in the first 2001 but was even with fourth quarter 2001.

Travel and PC sales were down on continued weakness and travel activity. Provisions for losses grew 17 percent increasing by $134 million or approximately $0.07 per share versus last year as reserve coverage of both total loans and receivables and passed to accounts increased during the quarter. Our lending write offs continued to trend as expected and reflects the seasoning of the loan portfolio, which grew rapidly in early 2000, as well as the generally more difficult industry environment.

Our charge card loss rate, which declined versus fourth quarter 2001, is at a level that compares well with the historical loss range, especially in light of the economic environment. The other provision increase mostly reflects increases in reserves related to credit exposures to travel industry services establishment.

Marketing expenses increased reversing the decline in this line in prior quarters reflecting the launch of both open and the brand campaign in addition to selective card acquisition initiatives. this acquisition spending should enhance cards and force momentum in second half of the year. As forecasted interest expenses were sharply lower in the quarter on a significantly lower average funding rate. HR expense also declined versus the first quarter 200101 as total head count was down by more 10,000 or 13 percent.

Versus fourth quarter 2001, the absolute level of HR spending was down less than the 6500 head count reduction in the quarter would suggest because fourth quarter 2001 included lower incentive compensation accruals in light of the weak performance in second half of last year. In addition to timing of these employee reductions will not yield full-expense benefit until the second quarter of this year. Other operating expenses grew versus last year on high participation in our rewards program and because the prior year number was favorably impacted by investment gains. These expenses, however, declined from the fourth quarter of 2001 level. With regards to increasing rewards cost, we have discussed before how our business model has been strengthened by the focus we have placed on these programs, particularly membership rewards. The benefit of these programs go through a number of P&L line items in the form of higher spend, lower attrition and lower credit

. We are fortunate to have a business model that facilitates further penetration of card member base with these economically beneficial and

factor for our franchise. There has been much commentary in the press and by investors regarding the commercial paper market and the difficulties some issuers have had in accessing that market. Our commercial paper continues to trade very well. Let me update you on where we stand. Proceeds from the sale of medium term note and a charge card securitization have contributed toward an overall reduction in total commercial paper outstanding from $18 billion at the end of last year to $14 billion at quarter end and an increase in committed bank line coverage of net short-term debt from 58 percent to 78 percent. As you know, we have on file a self-registration statement for additional medium term note. Assuming market conditions persist, we would likely use these proceeds to pay down additional short-term debt. At AEFA, we continue to execute on the three priorities we have previously announced, re-engineering, capability enhancement and new growth programs. We are particularly pleased with the progress in building our asset management capabilities as we began offering (indiscernible) funds and two new proprietary funds and hired a number of new fund managers. We also continue to role out a platinum select, our program to gather additional assets from our current customers. Revenues on a reported basis were up strongly.

Improving costs and spreads provide the opportunity

to invest in future revenue growth and increase profitability on a full year basis.

Fortunately, the company continued to be in the positive situation of having more good opportunities for investment than we can

.

Based on trends in the quarter, the company plans to restart the share repurchase program at the end of the second quarter.

Thank you. We will now begin the question and answer session. If you have a question, you now need to press the one on your touchtone phone. Remember if anyone presses the one at the beginning of the call, your request has not been recognized by the system. You will hear an acknowledgement that you have been placed in queue. If your question has been answered and you wished to be removed from the queue, please press the star sign. Your question will be queued in the order that they are received. If you are using a speakerphone, please pick up the hand set before pressing the numbers. Once again, if there are any questions please press the one on your touchtone phone.

Thanks very much for listening. Ronn and we are ready now to take your questions.

We will now begin the question and answer session. I f you have a question you will need to press the '1' on your touch-tone phone. Remember if anyone

press the '1' at the beginning of the call the request will not be recognized by the system. You will hear an announcement that you have been placed in queue. I f your question has been answered and you wish to be removed from the queue please press '*'. Your questions will be queued in the order that they are received. If you are using the speakerphone please pick up the handset before pressing the numbers.

Our first question comes from Michael J. Freudenstein of J.P. Morgan. Please state your question.

Hi. Good afternoon.

Hi Michael.

I wonder of I could just sort of throw something out here and have you comment on it. As I think about the story of American Express this year, I think you sort of said that first and foremost, it is an expense driven story and then you know if you think back to the share repurchase opportunity now sort of coming back into play as well and then revenue is picking up in the second half of the year as the economy continues to improve and you a little bit about talked about investing more if the revenue environment sort of allowed for and I think, it sounded like from your comments there at the end, Gary, that that is where you think we are. So I am just trying to get a better sense of what you are trying to say there from the standpoint of, you know you are seeing the opportunities and you are investing in them, but should we still expect this year that bottom line will be driven first and foremost by expenses and now second half little bit of share repurchase and revenues to follow or are the revenues really picking up sooner and faster than you thought?

you are going in a right direction. Clearly we did see an improvement in some aspects of the economy that were a little better than what we had anticipated at the start of the year. That has resulted in a few things like provision coming in relative to our plan in an attractive way and as that opportunity happens, we are in the position now where we are flexible enough that we can make decisions as we long about new revenue investment programs and we are really doing that basically on a month to month basis and committing funds. Now as we commit those funds, there is obviously a bit of a lean time for spending that and spending it in a thoughtful way and so it takes a while for the additional revenue decisions to have an impact on the top line of the business and begin to grow our revenues beyond what we might have anticipated as we came into the year. I think, essentially what I wanted to portray is certainly as we have those opportunities making those decisions to continue to invest in revenue growth, so that we have more attractive metrics at the end of the year than we would have had otherwise. So we are clearly still focused on managing our expenses well making sure that we achieve the benefits at the re-engineering program. We are starting our share purchase program, but we do have an awful lot of very attractive growth opportunities in front of us and as quickly as we can take advantage of them we are investing on those as well.

Okay. I was wondering if I could just follow up. Can you give us a sense of, you know, in the fourth quarter, you gave us a sense of monthly-build business trends

it was 10, 6, 2. Can you give us some sense here in first quarter and try to get a sense of the recovery, what the monthly trends look like?

It was pretty consistent throughout the three months. So I think you might remember in December, we said we were up about 2 percent and I said that that might over state the month of December a little bit because of the mix of retail spending vs. airline spending. As we went through January, February, and March, we were about consistent at that 2 percent level and so it was pretty consistent through the quarter.

Okay great. Just my last question is just with respect to credit quality. Some of the other issuers that have reported earnings so far have given some sense they thought the peak

might be coming here sooner than we thought in part as you spoke to because unemployment isn't quite as bad as we thought it was going to be and so maybe credit quality peaking some time in the second quarter. I was just wondering your thoughts there. I look at your charge card, charge was improving a little bit this quarter and you have sometimes suggested the charge card for your own risk

a sort of leading indicator. So I was wondering if you could comment on that?

We do think that the charge card in many ways does form a leading indicator for us. It gives us a kind of early warning when we are going to have difficulties and hopefully we will see that as an early indicator of improvement here for the next few months as well from a lending point of view. But as you know, we don't provide any kind of specific forecast for what we think is going to happen with our charge off

and I think that is true in this particular case. Certainly, we have our own internal forecast of how we think that is going to behave. As I said, unemployment is doing a little bit better than what our original plan called for it to be at this juncture. So our provision forecast are looking a bit better as a result of that, but I don't think we want to provide a forecast for what we think the peak levels of provision will be or when that will happen.

Our next question comes from

of Thomas Weisel Partners. Please state your question.

Good afternoon Gary. I just wanted to get some more detail on the sales versus the assets level on the reconciliation on AEFA. I think you a little bit about institutional side having an outflow and retail side having an inflow. If you could provide a little bit more detail on sales,

seemed okay?

If you take the top 25 asset-management companies and you look at the inflow and outflow of the group, we came out in aggregative kind of in the middle of the pack for the quarter. I am talking now about equity and fixed income funds only. If you dissect our number, our number was slightly positive on the retail side and negative on the institutional side as we had some institutional customers who pulled out of our funds. Obviously, at the end of the day a big piece of this institutional moment is driven by performance and we are very focused on having an impact on our performance as quickly as we can by the steps that we have taken up at AEFA and so essentially what you see is an ongoing benefit that we achieve because of having the financial planning model of having our retail customer stay with us in difficult times and institutional money being more fluid and moving more rapidly. That being said, we have got some real good plans in place we believe for improving the performance of the overall mutual fund

and our expectation is that overtime that will result obviously in an improvement in our fund flow, but at this point, we perform right about in the middle of the pack.

Okay, thank you.

Your next question comes from Mike

of Merrill Lynch. Please state your question.

Thank you. It is sort of

to Mike's question. You said that you went through the whole

of line items and then you said that the quarter actually at the bottom is a little better than you thought but you stated credit as one reason for that. Was there any other reason? Were there any line items or significant areas that were better than you expected them to be?

If we go across the various elements, the re-engineering numbers were essentially right where we expected them to be. From a build-business point of view, I think we went into the year with a pretty realistic sense of how the year is going to perform based on modeling that we had done off of the Persian Gulf crises and so it performed pretty much as we had anticipated in the quarter still being down on the corporate side but showing some improvement on the consumer side. So the primary benefit that we have seen so far really has been in our provision line and that obviously being driven by what appears to be a somewhat better unemployment rate. So overall, I think things are tracking about as we had expected them slightly better and as a result of that, we have been able to make some decisions to increase our investment in the quarter a bit.

In personnel we have basically one more quarter, where we have significant benefit. That's pretty much it, right?

We will actually have headcount reduction that goes through the fourth quarter, but if you just look at the percentages, I think when we made announcement, we said we have about 16 percent reduction in headcount overall and we are obviously getting closer and closer to that percentage and you won't ever see the full 16 percent reduction in headcount because obviously we do have growth in the business and so we have growth in our operating centers and adding headcount to service customer requirement and so obviously we are getting a larger amount of those headcount reductions completed and behind us, but you will still see some reductions as we go through the year.

Thank you

Our next question comes from Bradly G. Ball of Prudential Securities. Please state your question.

Thanks. Hi Gary.

Hi Brad.

Could you talk to us a little bit about the impact of the airlines' decision to stocking travel commissions, travel agents, and how you sort of plan for that if there is an impact for this quarter or for this year?

The major portion of our business is corporate travel and that's where this impact is the most. We have been in a gradual process over the last three years of shifting from having commission-base payments to having the people that we provide to travel services for pay us a fee directly for our services. What this has done really is just expedite the completion of that process and so we are clearly aggressively making that switch over for the remaining percentage of our business that had not converted. Frankly it was not a very significant amount for us, certainly not in this quarter and on a full year basis, it is not a very significant amount. Outside the US, this has not taken place yet. This change has not taken place and we are also not as fully evolved outside the US as we are in the US with that same kind of program, but we are certainly working to make the same transition happen outside the US as we have domestically and we are going to continue to do that hopefully moving as many as those customers to an internet-based platform as we possibly can so that we can serve them cost effectively and with attractive margins and so we are very focused on doing that. So, I think the short answer to your question was virtually no impact in this quarter. Not a material impact on the total company on a full year basis and focused entirely on the domestic side right now.

Do they change the timing or the amount of headcount reduction that you planed?

No. Not really it doesn't. As you know we have tried to push as much of our volume towards the Internet as we possibly can and we continue to make a real effort in doing that and our hope is frankly to be able to service our customers here, more effectively with better quality using that platform so that our employment is just not going to be quite as sensitive to swings and travel spending as it had been historically.

Our next question comes from Robert G. Hottensen of Goldman Sachs. Please state your question.

Hi Gary. My question is about investing in the business and I think the press has picked up on this a little bit but it seems to be that you had increasing success recently in segmenting and driving growth at the high end of the market you know in the Platinum card

about the possibility of establishing relationships with financial institutions for mortgage lending and driving a number of nonconventional charging activities through the network. My question really is that is this really driven through a combination of or through membership miles and more leverage? Are you able to take information and leverage your merchants to a greater extent and how significant are some of these new opportunities as well as just doing more segmentation at the very very high end of the market? (Robert G. Hottensen - Goldman Sachs)

I think what we are seeing Bob to be very direct is that membership rewards increasingly and the testing that we do is showing to be a very very effective vehicle to retain and grow our customer base and I think we are becoming more and more convince to that as each month goes by and we are constantly testing combinations of new products and the specific way that we offer membership rewards in conjunction with those products in trying and optimize the offering that we have and we think that based on the quality of the membership rewards program, that it really is a competitive advantage for us. There is virtually nobody out there that has the breath of offering that we have through our rewards program both for frequent fliers as well as for people who want a retail offering. So although I don't want to get into specific programs that are testing in the market and how we think that is all going to evolve over the next year or so, we are encouraged and obviously the reason why you see the MR expense line growing or the other expense line growing is that we are encouraged by the results we are seeing from the membership rewards program and we intend to keep pushing on that peddle very hard. So I can't specifically comment on, like I said, our intentions in various product categories but I think the one thing you can count on is that rewards are going to continue to play an ever larger role in our evolving strategy.

That helps in terms of on the merchant side and then you are really able to develop better understanding of where the value is created and unique opportunities either from financial institutions or service providers and so forth. That seems to me to be another key component as well.

Okay great. Thanks a lot Bob.

Our next question comes from

of Salomon Smith Barney. Please say your question.

Hai. Good afternoon.

A couple of questions on the card business. One, it seems like you picked some

here, now that you may be looking to raise fees both sort of late fees and annual fees. I was wondering if that's true and if so how probative or what kind of impact that might have? And then secondly, you talked about increased investment in marketing and there you might see an acceleration of cards

I was just looking at that line out and you have seen slow in growth there over the last few quarters. I am wondering if you might be looking at some sort of inflection point in the growth in

force in the back half of the year and what that might look like?

Yeah, from a fee point of view, as you might guess that it is a complex question, because we have many different products at many different markets at any one point of time and so we are constantly evaluating our position with fees on all of our products, in all of our markets, to make sure that we are both competitive and the

we are offering our customers is more than

with the fees that we are getting. So at any one point of time, it is certainly possible that we are raising or changing the fee level, but, I can tell you that there is virtually never circumstance where we do something like across the board. Every market all products kind of fee change and so really no news there in the report frankly. From a marketing point of view, as you saw in the quarter, for the first time, really in some quarters, we actually have marketing expense above what it had been in the prior year and certainly on a serial basis it was above where we were in the fourth quarter and, you know, obviously our hope is that, translates itself into cards, but there is some lying time associated with that and the stiff reduction that you are seeing right now comes as a result of the reduced marketing expenditures that we did in the back half of last year, which happened, because the environment, simply was not

to going out and having a lot of new cards brought on to the books. We see that environment now improving somewhat and feel like this is right and appropriate time for us to reverse that pattern in turn

pick it up a bit. So you will continue to focus on trying to increase our marketing expenditures and as I mentioned in the notes, that should result in an improved growth rate in

as we go through the end of this year. I feel that recognizing that we do look at our expenditures on a month-to-month basis and make decisions based on the performance of the business and the ongoing economic condition. This doesn't mean we have decided once and for all, but for the rest of the year each month to increase our marketing expense, we are still very cognoscente that we are in the environment that is not universally strong and that there are many uncertainties out there and we are going to try and manage it as carefully as we can.

Is that viewed through both in the US and outside the US?

You mean the approach that we take?

Yeah.

The approach we take, we do for the whole company and so we look at where we have the best investment opportunities regardless of geography and we invest to the get highest possible net present value, the best metric outcome that we can possibly achieve for the dollars that we are spending.

Great. Thanks.

Yeah.

Our next question comes from David

from Bernstein. Please say your question.

Could you give us the idea on the mix on

between transactors and revolvers and how much that might contribute to loss rate change?

I am afraid, you are beyond the date that I have available to me here David. What I can do is obviously split charge from lending and you saw the pattern on charge and lending, but we don't split the lending base into transactors versus revolvers in providing any kind of disclosure.

Yeah. I think it's generally fair to say, specifically if you looked at

versus the industry, within our lending portfolio we would generally tend to be a little more revolve oriented than the industry because of the existence of the charge product and the multiple product strategy that we have had overtime.

So even with the things like

have the

?

Well with

would be one product line that would clearly have more transactors than other aspect of lending portfolio consistent with of the airline related

, but if you look at other products, the overlap with charge card and so it tends to be a little steep versus the industry.

So could that explain why your loss rate might be a little higher than some other prime other prime issuers in

?

You know, I tell you David, I think it's more an impact of just the seasoning of our portfolio. You might guessed, we have modeled this extremely carefully and our view is that what you are seeing the very natural seasoning that you are seeing in 18 to 30 month time period from a very high growth rates back in early 2000. From our point of view it is very predictable on a

from that growth rate.

And I think the other thing is remember that when you take our

compared to others in the industry, we include accrued interest and accrued fees in the write off competition. So there is an automatic penalty that will be there from a comparative point of view, because the industry generally is not including those items in the competition.

Did you do anything in terms of recovery?

No, these would be net of recovery, but the added cost of including those items within the write off number clearly puts us to

, I think, we said historically 30-40 basis point kind of differential.

Ok. Thanks, and then the other thing I just want to ask quickly was, do you just remind us about of

earning the bank and in what point might see the returns reach whatever you have targeted risk, adjusted rate or return, because you have been in the kind of transition mode for a number of years now and is progressing, but is progressing slowly ........... (

You didn't ask me this question last quarter, did you David?

No. I don't think. I think last quarter was hedging and I asked you that.

Alright. You know we obviously have got a very clear strategy with the bank and we are doing with the bank what we think obviously represents the best outcome for our shareholders and we are making the transition to be a consumer enterprise as quickly and as prudently as we think possibly we can and although it clearly has been a time period. Even over the course of last year, if you look at where we ended 2001 from the total dollars invested in corporate

where we are today, it has been a little over 1 billion dollars of reduction in a 12-month time period, which is a pretty extraordinary rate, I believe, exiting the part of the business that we don't have intensions to be over the long haul. So it is clearly where we had strategically we would like to make that move happen and we are also cognitive to the need to make sure happens it in a very ordinary way and that's what we are trying to do.

Can you expect to get the

higher rate of return in the capital

the opportunity to look at every month, now?

I guess there are really two issues. One is that

corporate bank not to exist. I think it is a very different appearance of return on capital in the bank, but you can't magically make the corporate book go away. That's not something that you can just wish would be gone and have it be gone and so that is the fact of life that we are dealing it and we are bring down, but the return on capital on consumer line is attractive and certainly well above our hurdle rates and something that we are comfortable with. Also, I think, as you know, we have been in a position of generating excess capital historically and expect to be back in that position by the second quarter of this year, which should enable us to begin returning capital back to the shareholders and so the bank

as a result of consumer capital is not limiting our ability to grow other business lines, because we are not capital constrained in that regard.

Ok. Thanks.

The next question comes from (Unidentified). Please say your question.

Hai. I just look at the interest line a year over year. The net interest expenses in the credit charge, the numbers are so significantly lower. I know you are getting benefit from the fact that last year, you didn't have this benefit, but could you be put a little color on why these numbers are so significantly lower?

As you know there was a significant drop last year in terms of interest rates. No surprise about that. So as we went through last year and hedges from prior year rolled off, we were obviously locking in money at the rates that you are seeing today. So it literally a reflection of the dramatic interest rate reductions that took place during the course of last year and I think that fell through in our income statement. Important to realize about that is our lending portfolio is for the most part matched from a funding point of view. What you will see is an improvement in spreads as you saw in this quarter versus the first quarter of last year. But our spreads basically stabilized versus the fourth quarter of last year and I don't think you are going to see much percentage improvement on the lending side of our portfolio for the remainder of the year. What you will see is year over year improvement, just as you have noted and will obviously see a very large improvement on the interest expense line, which is matched up against our charge card business. In aggregate, I think we said in the annual report, that we anticipate seeing well over 400 million dollars of interest expense benefit on a full year basis and that is still our expectation.

Again, if you look year over year, I am just wondering if there any other items that are thrown in there, for example interest expense, finance charge, because interest expense was down 200 million dollars in the quarter, so charge card interest expense

150 million dollars, that's almost all the money right there or may be I am missing something?

I don't think you are missing anything. It is real improvement and very substantial.

But that would be much more than 400 million on an annualized basis?

As you go through the year that benefit may not be as larger that. It depends on what happens obviously to the interest cost as we go through the remainder of the year.

Ok. So the big bang is probably what we just saw. If I could say that. Is that fair?

Well. It obviously depends on what happens with future interest rates for the remaining three quarters. But, I think, if you took the forward curve today, you would probably arrive at that conclusion.

Thank you very much.

The next question comes from Phil

of

. Please say your question.

Good afternoon. I have three at this point and the first one I jumped off briefly so you may explain it during your remarks, but AEFA, could you talk about why HR expense was up sequentially?

The only factor that has had an impact on HR expense that is the year over year bonus accrual rate. So, obviously in the back half of last year, our expectation was that we were going to have a not particularly good financial year and so our bonus accruals were lower. As we go into this year, we are accruing our bonuses at where our planned levels are. So that artificially makes the comparison look different year over year and that is the primary factor.

Okay and then. You talked about goodwill. Is goodwill solely incorporate or was that spread out throughout the different business units?

It is both mostly in TRS.

And is that in other operating expense?

Yes.

Could you describe what was going on there a little more detail in terms of the growth and other operating expense? I know you talked a little bit about rewards, but the last time I heard, you all talked about the rewards. One thing that struck me was the concept that the new programs, the new offerings sounded like lower cost offerings on a dollar per point basis from your perspective.

I think there are two or three factors. Let me go through each one of them. The first factor is, we did have some investment gains that were offsets to other operating expense line in prior year, as I mentioned in my opening remarks. So that made the year over year comparison a little more difficult. Second, although our cost per point for rewards continues to improve from year to year, the rate at which rewards are penetrating our overall portfolio was increasing pretty substantially and we have given some information on that in prior analyst meetings, but we do see increased penetration of rewards. And that's our intention, it is our strategy to do that. The benefits of that don't show up in other expense line but they do show up in better provision performance, better attrition and higher

business for the customers who participated in the membership awards program. Finally from an AEFA point of view particularly, we have made selective investments that we have described as a part of our strategy this year. Some of the expenses associated with those investments are showing up in the other expense line. So, when you take all those factors together, that is what you see in the other operating expense line. We are monitoring that very closely with a very clear eye towards improving our overall margin performance on a full year basis, while we at the same time maximize the impact, we think we can have on our revenue growth rate and our metrics performance by the end of the year. The growth you see there is very

, it is very carefully controlled and is something that we monitor on a monthly basis.

Ok. Fair enough. Last question is just related to the Lehman dividend. Could you give us sense on how much that was and when does that go away?

This year there actually extra half of the dividend. Our agreement with them comes to a conclusion this year. So you we get a second dividend payment, I believe in July of this year, assuming they reach certain financial targets. Although, they have disclosed, I think in their own financial statements that they anticipate that they will hit those financial targets and so we get a payment of 23 million dollars in July, which will be then the last payment that we receive from Lehman. So in the first quarter, we got a payment of 46 million dollars, which was the same as the 46 million dollars in the prior year quarter. And there will be an incremental 23 million dollars that we will see in July.

Ok. Thanks very much. Good quarter.

The next question comes from Mark Alpert from Deutsche Banc

Hi Garry.

Hi Mark.

Conceptually, you talk about reinvesting the cost saves depending upon the level of revenue and as the economy improves you can reinvest more. How do you decide conceptually the trade off between the bottom line, the cost saves, and the revenue? Is it if you are above 12-15 percent on average and overtime growth rate that you start ticking in. It clearly is just consensus earnings, or I guess you would have reinvested more this quarter, or is it the

, which looks to me like 19.5 percent this quarter compared to the minimum target of 18 percent. What are the trade offs? What makes you decide how much you are going to show on the bottom line and how much you are going to reinvest?

That is a very good question. As you might guess, what we are trying to do is meet our financial targets on average and overtime, the 8 percent revenue growth, the 12-15 percent income growth, and the return on equity parameter that you mentioned. We obviously could have a negative impact on our matrix performance this year and over deliver on our income when we decide to do that. But our belief is that by balancing these things, so that we invest to get an appropriate level of revenue growth matched with what are our long-term objectives for income growth will overtime result in the best result for our shareholders. As we make these investment decisions, we have an eye towards achieving a long-term growth rate in both revenues and net income. We look forward over a 2-3 year time period and obviously we want to exit this year with momentum in our business where our metrics are improving so that we can start into next year with an attractive growth rate. So that is what we are trying to do. We are trying to balance those at all times. As we see the business change from month to month, we make different decisions. At some, we may choose to invest at a slightly higher rate and at other points we might throttle back just a little bit, but we are trying to consistently make sure that we over a longer period of time achieve our overall financial target. So I wish I could be more specific about it, but our intention clearly is to achieve these financial targets over a reasonable period of time and this all ties to make that happen.

Deutsche Banc: I did think you did more specific, but thank you.

The next question comes from Moshe Orenbuch of Credit Suisse First Boston, Inc. Please state your question.

Thanks.

I was just wondering if you could amplify a little bit on the discussion about the expense particularly related to the loyalty program? I guess, if the main issue is the penetration within the base, how much do you anticipate that increasing over the coming year? Because if it is a big driver of a $200 million increase in expenses when total volume was down, I think it will help us try get a sense of how that expense line will grow during 2002.

Looking at that line item in isolation, I don't think it gives you a true picture of the economics of what the program does for us over time. If you look at the performance of an individual card member, he really does have on an all in basis a very attractive impact on it. Historically if you go back over the last few years, that line item has consistently grown more rapidly than the revenue growth rate of the company. I think that is a fair assumption to make. That line

is going to continue to outgrow the revenue growth rate. So if you say that on average and overtime we are trying to hit at least an 8 percent revenue growth rate, it is likely that this measure is going to grow more rapidly than that as a component of the income statement. What I think you should expect to see though as a result of that is that items like our provision should then sequentially improve. If you go back over the last very long period of time where you see there is an improvement in our charge card write off rates, you have seen an improvement in our lending rates from the levels that they were at earlier in 2000 and in the decades of 1990s. That is what we are really trying to do, continue to use this as a leverage to improve the overall systems economics of our business.

What I was trying to get at is for a number that isn't to have an affect on a base of 1.2

. It has to be pretty sizable number to drive an increase of 18 percent when you are talking about other factors actually reducing that growth rate? So I guess I am trying to get some, you know triangulate a little bit into the size of that?

I think the other factors actually increase the apparent look of the growth rate. Because in the prior year, we had some benefit from the sale of investments that took place in the quarter. That would have artificially depressed the number in the prior year and so the grow over impact appears to be higher than it would have actually have been otherwise. Additionally beyond the spending that we have done on membership awards only, and I am not talking about AEFA, if you look in the expense category for AEFA and the other expense category, you see the same kind of impact there which has come from spending on the specific strategic programs that we have outlined before.

The next question comes from

from

. Please state your question.

Hey! Good Afternoon Garry. I guess someone beat me to it, but 'good quarter'.

I was just wondering you

color on the economic picture, but that is seen mostly from the consumer perspective. The way I think about it is that it seems like any turnaround on the corporate side would actually be more dramatic for you, despite the fact that

volume related is 60 percent kind of focus on the consumer. What are you looking for from the economic perspective on just how the corporate confidence and some up trend in those numbers especially?

As you can see from the supplement, corporate billings were down about 16 percent in the quarter. We continued to see weakness there. Obviously it is much better than it was right after 09/11/01, but we continue to see weakness there. If the Persian Gulf analogy continues to hold, it is likely that it is going to be still a quarter or so before we begin to see more favorable comparisons than the ones we have recently experienced. We also look at other economic factors that give us a sense of where this headed and try to model those things out. Those lead us to the same conclusion that the Persian Gulf model would lead us towards. So, everything that we can tell from our perspective now is that we should not expect a near term upturn in that particular number. But likely by year-end it is likely we will see a turnaround after the very low levels from the prior year. As you rightly stated, there is very attractive leverage for us in this business. So as the volumes improve there, that business has a fairly rigid fixed cost base because of the nature of the business. We have a sales force that goes out and calls on people. We have a certain infrastructure that we maintain our corporate card program and our corporate travel program. On the downside, that impacts us negatively when volumes are falling, but on the upside it also impacts us positively. We are consciously optimistic that assuming that the current conditions persist, that we will see some benefit from that in the back half of the year that might be more pronounced than we will see right now.

I just wanted to move to April for a second. It seems like your pre-tax margin has improved now three quarters in a row sequentially, roughly 200-300 basis points if my calculations are right. Despite what I describe as a kind of relatively modest revenue growth and despite December to March in an increase in the operating human recourse line. I mean, what is the operating leverage in this division and where should we expect operating margins to go if we see any kind of recovery either in capital markets or just more activity in your sales force in this business?

What you have seen obviously over the last little while has been the benefit of the cost reduction program. There is the three-stage program that we talked about pretty consistently. You are seeing obviously the benefit of that, and that has freed up some capacity for us to be able to invest and hopefully drive revenue on the upside. It has been a long time since we have been through a

turn at AEFA. That business performed at a very steady rate from the late 1980s all the way through to when we had the downturn a year or so ago. We are obviously trying to model that effect but we are quite comfortable that if we have a return to normalized markets without having to have the very attractive financial growth rates in equity markets that we had in 1999 and 2000. AEFA can still deliver 12-15 percent compounded earning growth rate on average and overtime just like the rest of the business can. I don't think we would think it would deliver over proportionally to the rest of the business, but we think at kind of normal levels of equity markets that there is no reason why it should perform any differently than the average targets we have for the rest of the company.

The final question that I had, I don't if it is contradiction. I thought when you started you said that the provision was $0.07 of EPS. Did you say that?

What I said was that we had an increase of $134 million in the quarter. If you translate that $134 million into EPS impact, it is a $0.07 impact.

Okay. So my question was, given that increase seemed a little bit in contradiction with your earlier comments on the consumer seeming more stable than you had expected at this point. Am I missing any inconsistency given that the

rise in the provision relative to some of your comments on the consumer?

I think there are probably a couple of things that you could take away. One is that we actually planned to have it go up more than that. So we have been able to have it less than what our original plan was and that resulted in freeing up some investment capacity. But also we continue to reserve very conservatively. We talked about going to the high end of our reserve range or the lending business in particular and we continue to operate at the high end of that range. So if you look at the coverage ratios in the supplement pretty much across what you will see is that we have increased our coverage ratios and that we are in a better position at least from that perspective than we have been for awhile.

Another thing I should just mention is about raising fees. What I said is absolutely true that we never have a policy across the board raising all of our fees. I think specifically I was asked about late fees and additional items like that. We are however, increasing our fees on the card. The increase on the platinum card is going from $300 to $395 effective 04/06/02. That is just our normal annual fees that we charge. As you know, we provide absolutely terrific value on that card and have not had any fee increase for a long period of time. Given the quality of the product offering that we have there, it is an appropriate time for us to raise that fee. I will also mention that for Centurion card customers that apply for a new card, we are increasing the fee for new applicants only from $1000 to $2500.

anyone else in the queue, we probably have time for one more question if there is anyone waiting.

Our next question will be from

from

Management. Please state your question.

Hi! Good work guys.

Just wondering, historically, your

business has managed 11 percent net margin with all the re-engineering. What can we anticipate going forward assuming that the economy picks back up and things turn around? Are we expecting higher sought of peak margins than historical?

What we said pretty consistently is that we liked the margins that we saw back in 1996, and directionally that is where we had hoped to steer things. So I wouldn't try give you a point estimate for a time specifically, but directional that is clearly where we are trying to head, back in that direction, which would be kind of a peak period in terms of margins.

Okay. I think that takes us up an hour on the call and I am sure that is enough for most people's perspectives. So we are going to sign off. Appreciate you joining us. Obviously we will be around for additional questions tomorrow.

Ladies and Gentlemen that concludes today's teleconferencing. Thank you for participating. You may now disconnect.