美國運通 (AXP) 2003 Q4 法說會逐字稿

Good evening, ladies and gentlemen, and welcome to the American Express fourth quarter earnings release conference call.

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

I would now like to turn the call over to Mr. Ron Stovall, Senior Vice President of Investor Relations.

Mr. Stovall, you may begin.

Thank you, Marisella, and welcome to all of you.

I appreciate all of you joining us for today's discussion.

Before we get started it's my job to remind you that the discussion today contains certain forward-looking statements about the company's future financial performance and business prospects which are subject to risks and uncertainties and speak only as of today.

The words believe, expect, anticipate, optimistic, intend, plan, aim, will, should, could, likely and similar expressions are intended to identify forward-looking statements.

Factors that could cause actual results to differ materially from these forward-looking statements including the company's financial and other goals are set forth within today's earnings press release which was filed in an 8-K report and in the company's 2002 10-K report and third quarter 2003 10-Q report already on file with the Securities and Exchange Commission.

In the fourth quarter 2003 earnings release and supplement which are now posted on our website at ir.americanexpress.com and on file with the SEC in an 8-K report, we have provided information that compares and reconciles the managed basis financial measures to be discussed today with the TRS GAAP financial information as well as AEFA's GAAP and net revenues.

And explains why these presentations are useful to management and to investors.

We urge you to review that information in conjunction with today's discussion.

Gary Crittenden, 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 queue for the Q & A period.

Up until then, no one has actually registered to ask questions.

While we will attempt to respond to as many of your questions as possible before we end the call, we do have a limited amount of time.

Based on this, we ask that you limit yourself to one question at a time during the Q & A. With that, let me turn the discussion over to Gary.

Welcome, everyone, and thanks for joining with us today.

As usual, the majority of my opening remarks will focus on the results for the fourth quarter, as you are already familiar with our results for the three prior quarters of the year.

However, during the Q & A period, Ron and I will be happy to respond to any questions you may have on our full year results in addition to your fourth quarter earnings questions.

As you no doubt have already seen our fourth quarter diluted earnings share before the accounting change of 60 cents increased 15% versus 52 cents last year.

Fourth quarter diluted EPS on a net income basis of 59 cents per share increased 13%.

For the full year EPS before the accounting change of $2.31 also increased 15% verses last year and was better than our previous forecast that it was not likely to exceed $2.29.

As both PRS and AEFA performed strongly in the fourth quarter.

Overall, the fourth quarter reflected strong business momentum.

In addition to demonstrating the success of our efforts to create a more flexible business model and a better balanced risk profile.

The results continue to reinforce the positive aspects of our performance against the five sign posts Ken identified in February of 2002, which we used to help us assess the performance of the company and make decisions to implement spending for growth.

For instance, while total expense growth has not lead to operating margin improvement during the year due to the particularly high level of investment spending and the impact of our decision to expend stock options, our underlying operating expense growth has been well-controlled.

For example, excluding the Threadneedle and Rosenbluth acquisitions, our employee count is actually down 2% versus year end 2002, despite business volume increases.

Additionally, the benefit of our investment spending is evident within the strong momentum of our card related metrics which have performed well versus the competition and demonstrate the additional competitive strengths we built during the year.

In particular, our build business is strong on an absolute basis and when compared to the competition.

Everyday spend comparisons remain strong during the quarter while corporate T&E spending growth improved as the quarter progressed.

In fact, based on our analysis of publicly released holiday spending data from Visa and MasterCard, it appears our December retail-related spending in the U.S. outpaced the associations nicely.

Credit trends have been improving and outperformed our key competitors over recent quarters.

And at AEFA, we have generated good traction against many aspects of our strategy.

And the improved market environment coupled with our actions to better position AEFA for growth generated solid metrics on a number of fronts.

In addition, our balance sheet remains strong.

Card reserve coverage and past due accounts remained at the high ends of historical ranges.

The continuing reposition of AEFA's investment portfolio in AEP's loan portfolio has yielded a better balance and a more diversified risk profile.

All of this allowed us to generate record fourth quarter and full year results and deliver on all of our long term financial targets for the quarter and the full year while investing in our future competitive strength at a level well above even recent historical highs.

The results continue to underscore the fact that our future growth will primarily be driven by the substantial organic growth opportunities that we have historically relied upon.

However as evidenced by the Threadneedle and Rosenbluth acquisitions's combined 2% contribution to our consolidated revenue, there are additional avenues to further supplement and strengthen those organic opportunities.

With that summary, now let me go into the details of each of our two business lines.

At TRS, managed net revenues increased 11% and net income rose 10%.

On the revenue side, our ongoing expansion into everyday spend categories and our investment in growth initiatives over the past year and a half contributed to drive strong card member spending, cards in force, and lending balance growth.

Build business volumes improved versus last year as strong growth in consumer and small business sectors continued and corporate services volumes improved still further.

Worldwide build business increased 17% on a reported basis and 13% on a foreign exchange adjusted basis.

In the U.S., consumer spending grew 15% and small business spending rose 20%, while corporate volumes improved 10%.

In total, U.S. non T&E related volumes grew 18% while T&E related spending rose 9%.

Outside the U.S., reported build business was up 24% which equated to 9% growth on a foreign exchange adjusted basis.

Within our proprietary business, foreign exchange adjusted consumer and small business volumes grew 10%, and corporate services spending increased 7%.

The discount rate declined 4 basis points from the third quarter of 2003, and 6 basis points from the fourth quarter of last year.

These declines reflect the ongoing shift in the mix of spending towards everyday spend categories which continued to generate stronger than average growth.

Worldwide cards in force rose 6% versus last year as a result of more proactive acquisition efforts within our consumer and small business segments and improved customer retention levels and a return to growth within the corporate services group during the quarter.

Managed net finance charge revenue grew 5% on 14% growth in average worldwide lending balances.

Quarter end balanced were up 15% worldwide, reflected 12% growth in the U.S. and 33% growth outside the U.S.

Spreads in the U.S. declined verses last year and last quarter as paydown rates increased and credit improved, resulting in fewer customers at higher interest rates.

Additionally, the proportion of our portfolio on introductory rates was higher and the mix of products reflected more lower-rate product offerings.

However, it is important to note that both the net interest yield and the intro rate percent of our portfolio are well within the historical range over the past five years.

Total revenues rose 21% -- I'm sorry.

Travel revenues rose 21% on the benefits of the Rosenbluth acquisition and improving sales environment.

TC revenues remained relatively weak.

Marketing, promotions, rewards, and card member services expenses rose 43% on top of last year's already increased levels as we maintained our more aggressive stance towards card acquisitions and rewards costs rose reflecting a continued increase in card member loyalty program participations and penetration.

As you all know, three years ago, Ken outlined our strategy to maximize the rewards penetration within the card member base.

This strategy reflects the competitive advantage that our business model provides to us with regards to our provision of rewards capability and the economic benefits related to the higher spend, better loyalty and credit, and faster speed of pay that accompany of reward program participation.

Since then, we've had great success with this penetration initiative and has substantially increased our participation levels.

Our metrics in recent quarters reflect that success.

Based on the current higher level of participation and our belief that marketing spending growth can be moderated somewhat in 2004 as we further harvest the benefits of 2003 spending we expect the marketing, rewards and card member services quarterly expense growth rate in 2004 to be substantially lower than the fourth quarter's rate.

The managed provisions for loss declined 12% as overall credit quality remained strong during the quarter.

Within both our charge card and lending divisions, the loss rate and the past due rate improved versus last quarter and last year.

In light of the strong credit indicators the combined reserves grew modestly.

However, coverage of past due receivables was maintained at the high end of historical levels.

As expected, interest expense declined on a lower cost of funds, that was partially offset by higher receivables.

Human resources expenses rose 18% as merit increase, higher employee benefits costs, greater management incentives costs and the impact of the 2700 employees added with the Rosenbluth acquisition and service volume-related costs in the Rosenbluth acquisition.

The effective tax rate in the quarter was 31% and it was flat versus last year.

Let me now move from TRS and I'll go into a little bit of the detail at AEFA.

Net income before the accounting change increased 28%, and net revenues rose 31%, reflecting improvement in the equity market environment and the continuation of relatively strong insurance-related contributions.

The Threadneedle acquisition contributed approximately 8% to revenue growth, but as expected, provided a relatively modest net income growth during the quarter.

Net income benefit during the quarter.

As far as investment performance go, we continue to make good progress towards our goal of improving results within both our equity and our fixed income activities.

Investment income was up 4%, reflecting higher invested assets resulting from client demand for the underlying fixed rate products after the past two years which more than offset the lower average yield.

The portfolio yield declined versus last year as a result of cash inflows being invested at relatively lower rates and the impact of our portfolio repositioning activities.

The yield was up when compared with the third quarter.

The overall credit quality of the portfolio continued to improve as default.

On a net basis we took an investment gain of $5 million this year, versus a net of $17 million gain in last year's quarter.

As of the end of the quarter, the overall portfolio had $900 million of net unrealized depreciation.

Management and distribution fees rose 42% on a 46% increase in management fees and a 37% growth in distribution fees.

The 76% increase in the managed asset base versus last year reflected the inclusion of $84 billion of Threadneedle assets acquired and market appreciation.

Institutional outflows during the year were offset by Threadneedle inflows during the fourth quarter and retail inflows for the year.

Excluding the Threadneedle assets acquired, managed assets grew 19%.

For the third consecutive quarter, the retail channel had net inflows.

Distribution fees rose 37% on particularly strong mutual fund fee growth, increased brokerage-related activities and greater limited partnership product sales.

Total cash sales were up 22% on strong growth in retail-related mutual fund sales, partially due to Threadneedle.

Adviser generated sales increased 19% on a cash basis and 22% as measured on the internally used gross feeder concession basis, which weighs the sales of various products to reflect their individual profitability dynamics.

While we will have to wait and see how trends develop going forward, we continue to see improving retail sales comparisons during the quarter, as investor confidence strengthens further.

Institutional sales levels which have suffered somewhat as a result of our historical investment performance improved during the quarter.

Third party sales last year were particularly strong but actions to improve product pricing and structures have reduced sales this year.

Other revenues rose on strong property casualty and higher life insurance revenue.

Planning and advice services fees fell 23% reflecting the negative impact of a change in the timing of fee recognition, which deferred revenues and a comparable amount of human resource expense in the fourth quarter.

Excluding this change, fees would have increased approximately 22%, reflecting the strong underlying planned volume growth.

The provision for losses and benefits increased 3% reflecting higher enforced levels of insurance annuities and certificates.

These were partially offset by lower crediting rates.

In addition the impact of greater appreciation in the S&P 500 on equity indexed annuities and the stock market certificate product added to the provision.

Human resource expenses increased 32% on higher field course compensation-related costs, the effect of the Threadneedle acquisition, merit increases, higher employee benefits costs and greater management incentive costs.

The adviser base rose a solid 4% versus last year and 3% versus last quarter.

The home office employee count continued to be well-controlled as the number of employees was down 1%, excluding Threadneedle.

Other operating expenses rose 38% versus last year, due in part to the Threadneedle acquisition.

Professional fees were related to various industry regulatory matters and higher legal costs.

The effective tax rate declined to 21% from 26% last year, on a $12 million reduction in tax expense, due to the continuation of adjustments discussed last quarter related to the finalization of our 2002 return filed in the third quarter and the publication of favorable technical guidance related to the taxation of dividend income.

As we have discussed previously, we have been reviewing our mutual fund business in light of the heightened regulatory focus in this area.

While our efforts are ongoing, we have shared information with the regulators throughout the process; however I have nothing new to report on this for you today.

At American Express Bank, the bank continued to make progress on its strategy shift, and delivered solid earnings growth of 22% on 9% growth in revenues, a lower provision and a reduced tax rate.

The bank's results reflect the positive impact of growth within private banking and its financial institutions group, partially offset by loan and other activity reductions within corporate banking and within its personal financial services lending business, particularly in Hong Kong.

Results benefited from higher fee levels within private banking in the financial institution's group and a provision decline of 33% versus last year, due to the continued stabilization of write-offs in Hong Kong and reduced activity within the PFS lending portfolio.

Private banking client holdings and loans increased 16% and 37% respectively.

Loans within the financial institutions group grew 33%.

Personal financial services loans declined 14%, and corporate banking loans continued to decrease and now represent 3% of the total loan portfolio or approximately 170 million.

That's a quick review of our results for the quarter.

I'd like to now make just a couple of comments on the accounting changes.

I want to quickly address our December 31st, adoption of FAS Interpretation No. 46 consolidation of variable interest entities.

We began discussing the FIN 46 implications with you during our second-quarter earnings discussion and updated that view last quarter.

Revisions to the FIN 46 in the fourth quarter in addition to market factors as of year-end resulted in a lower than previously estimated below the line non-cash charge of $20 million pre-tax or $13 million after tax, as we consolidated an incremental $500 million in related assets.

Going forward, the ongoing impact of FIN 46 will be reported above the line within investment income, due to its likely volatile but non-economic nature, we will identify any meaningful impact within investment income in future quarters.

In addition in July of 2003, the AICPA issued statement of position 03-1 accounting and reporting by insurance enterprises for certain non-traditional long duration contracts and for separate accounts.

This statement is required to be adopted as of January 1st, 2004, and its impact will also be recognized as a cumulative change of an accounting -- cumulative change in accounting principle.

The company is awaiting further industry guidance regarding applicability of aspects of the rule and therefore is still evaluating its impact which among other provisions, requires reserves related to guaranteed minimum debt, and interest benefits recorded.

With that, now let me conclude with a few comments on our outlook.

Our results for the quarter and the full year illustrate the benefits of the fundamental changes we have made to our business model and the strong momentum resulting from the business building investments over the last year and a half.

Our payments business continues to deliver strong results with business metrics and credit indicators that compare very well to key industry participants.

The quality of our customer base, the breadth of our product portfolio, the benefits of our rewards-based spend oriented business model, our everyday spend initiatives and our improved revolving credit capabilities combine to create a competitive advantage which is being leveraged effectively to deliver strong results at TRS.

As a result, TRS's volume growth is currently running well above the high end of the 6% to 10% industry growth we have indicated underlies our ability to meet our financial targets.

In addition, we are engaged in a number of conversations with potential bank partners about network-related opportunities in the U.S.

And as we have said before, we are confident that we will do a deal this year.

At AEFA, the foundations put in place through new products and enhanced investment management capabilities enabled us to generate stronger results as market conditions have improved.

We've indicated that an 8% equity market appreciation level is needed to achieve our targeted growth.

As you know, the market delivered appreciation well in excess of that level by the end of 2003.

And its more positive tone in recent quarters appears to be strengthening retail investor confidence and activity.

We met all three of our long-term financial targets during the quarter and the full year while significantly increasing business building expenditures.

In fact, the third and the fourth quarter showed a significant acceleration of revenue growth from earlier in the year.

Over the last few years, when the environment required, we demonstrated the ability to cut costs.

The last few quarters underscore that we can use the flexibility built into our business model to grow revenue strongly when we see the opportunity to do so.

Our re-engineering activities delivered in excess of $1 billion of benefits for 2003, and we are on track to deliver significant new benefits during 2004.

As we entered 2003, we identified a number of industry and economic-related challenges we needed to navigate through.

And the results for the year showed that we dealt with them successively.

In contrast, as we enter 2004, there appear to be a number of environmental opportunities in front of us.

First of all, equity markets are showing signs of continued strength and retail investors are gaining confidence in investing once again.

Corporations are increasing their T&E Related expenditures after three years of working to contain them.

And the U.S. economy and many other global economies are forecasted to grow at healthy rates this year.

These opportunities, the strong competitive position, the both our payments business and our retail financial service business, and the excellent business momentum that we have as we enter 2004, which was generated by our investment spending, give us confidence that we are in a strong position today to capitalize on these trends.

Thanks very much for listening, I think we're now in a position to take your questions.

Thank you, sir.

We will now begin the question-and-answer session.

If you have a question, you will now press the star one on your touch-tone phone.

Remember, anyone press star one in the beginning of the call, the 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 wish to be removed from the queue, please press the pound sign.

Your questions will be queued in the order that they are received.

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Once again, if there are any questions please press star one on your touch-tone phone.

And our first question comes from Brad Ball from Prudential Securities.

Please go ahead.

I wonder -- you mentioned the strength -- monthly strength in build business and you also hinted that the corporate T&E was picking up toward the end of the quarter.

I wonder if you could give a little more color around that and also talk about what you're seeing so far here in January on the build business front.

I could do the former Brad but not the latter.

We did see, as you know over the last several quarters we've seen some pickup in -- in corporate spending.

It was essentially flat during the first half of this year.

And then last quarter it had gone up to 7% and then we reported 10% in the fourth quarter.

But as we went through the quarter, the month of December was stronger, you know, than the first two months of the quarter.

So it does appear that, you know, there is some return to corporate spending.

And if you look at the consumer numbers, the consumer numbers have been relatively consistent, at least more consistent than those set of numbers during this year.

Small business has been very strong for the last couple of quarters, so the real difference in the quarter here was the pickup in corporate spending.

Okay.

And real quickly on your review of the late trading and market timing and information that you passed on to the regs, have you completed that review?

And it's now in the hands of the regulators, is that what you're telling us today.

We haven't completed the review yet.

It's still an ongoing process, but as I mentioned, as we have gone through the review, we have provided information to the regulators on an ongoing basis.

Can you give us any sense of the timing of when that'll be completed.

You know, I can't.

Okay.

Thanks.

Thank you.

Our next question comes from Chris Brendler from Legg Mason.

Please go ahead?

Mr. Brendler if you're on a speaker phone, please pick up your handset.

Hi, can you hear me.

Yes, we can hear you, Chris.

Sorry about that, Ron and Gary.

Quick question or maybe not so quick.

If you could characterize your marketing investment this quarter.

It seemed, you know, obviously a lot of positive on the revenue side, a lot of investment this year has declined next year.

Just give us a little bit of detail, if you could, on how much membership rewards is contributing and then also, um, there is some pretty significant increases in your mail volume.

What are you seeing on a response rate side, how do you characterize the competition.

I was thinking you may have added a few more cards than you did domestically, can you give me some information on that.

Sure.

The -- let me try and split it up here into a couple of different pieces.

Obviously MR growth has been very strong this year and what -- what has happened with MR, basically, is when Ken -- you know, kind of put a challenge out to the company to really try and drive MR penetration three years ago, there's a whole series of programs that we have put in place and the penetration of MR as a result has increased in a number of different card categories.

And we've also worked hard to make the MR programs outside the United States more relevant to consumers there.

And so in some categories we've seen very significant shift upwards in terms of the penetration.

You're seeing the result of that expense today.

But we still have opportunity for additional penetration in many places.

The net of that spending, however, is seen on many different lines of the income statement.

So if you look at the credit numbers, these credit numbers obviously are driven by, you know, just a terrific job on the part of our risk management team but also are significantly helped by the fact that people on membership rewards do tend to have lower, you know, risk than those who are -- who don't participate.

And so those trends really -- you have to look, you know, at -- at both of them to truly understand the impact of this program.

So our expectation is that as we go into next year, because the -- both the participation rate and the program has increased and the penetration of those who participate has increased.

We're likely to see a moderation in that growth rate next year, that's kind of our expectation as we go through the year.

On the marketing side, as you all know, we had really cut back our marketing in 2001 as a result of the -- you know, just having to respond to the difficulties that we had in the economy.

And had we been ratcheting this up, we went through the same pattern last year that helped our metrics going into early this year.

We've now ratcheted up another whole level going into next year.

And this has durability associated with it.

We don't see the profit impact of these cards for, you know, 18, 24 months down the road is when you see the real financial impact of adding these cards.

And so -- and that profit impact adds to our capability to spend still more.

That being said, we feel really quite comfortable with where we are from a marketing perspective and we anticipate being able to moderate that, as I said in my opening comments as we go into next year and benefit from a lot of the aggressive spending that we did in the first half of this year.

So we are -- to kind of more specifically address your question.

We're up on virtually every component of our marketing spending.

So we have a stronger effort behind broadcast advertising, which hopefully you have seen over the course of this last quarter.

You certainly have seen over the impacts of our blue-cash backcard in the marketplace and the impact that that product has had and the marketing to support that.

Our mail volumes are up substantially and like the rest of the industry, the effectiveness of those have been less this year than they have been in prior years.

Although our capability I think as a company in that area continues to increase and has somewhat offset the normal industry trends that have been seen there.

I also want to focus on our average spend.

You know, we've talked now for some time that one of the key measures of our business is if our average spend is growing.

And the reason why our SIC numbers are growing somewhat less is that we are consistently focusing on trying to raise of average spend and focus on higher spending card members and that's true all around the world.

And those card members are more difficult to come by.

They're more expensive to acquire but they're substantially more profitable than those who spend less and they reinforce our value proposition.

So I wouldn't really focus on cards in force as being a metric of particular consequence for us.

Obviously we want to have a growth in that number going forward.

But the real measure here is, are we growing the franchises, is the average spend increasing and the whole marketing rewards program acts together to help us achieve these strategic goals.

That's helpful.

One quick follow-up if I could.

Does that sort of play into the margin pressure as well, you're looking for more customers, even on the lending side, who are -- are big spenders and may not revolve a business every month, um, and that could have an impact, parallel to what you're saying on attracting those kind of customers.

Well as you think about it, Chris, we're really focused on spending more than we are lending and lending for us is more of a bi-product than it is a primary focus of our activities.

And so, you know, whether they happen to be a Delta SkyMiles customer that spends a lot on the card or a charge card customer, we don't discriminate that much.

We are really looking for people that will spend a lot of money on the card and reinforce our basic value proposition.

And we think we've been very successful in getting that, if you look at the average spend numbers, they're terrific.

Thanks a lot.

Thank you.

Our next question comes from Robert Hotenson from Goldman Sachs.

It's actually Mike Hodes from Goldman Sachs.

Just really a clarification on the -- on the net interest spread in the card business.

Gary, you indicated that, you know, it's a function of a number of different things.

I was hoping maybe you could give us a sense as we look forward whether that -- that's likely to stabilize or continue to tick down?

I'd be happy to kind of give you a little bit more color around it.

The biggest single factor in the quarter was the fact that our paydown rates have increased and that's a good thing.

I mean, it means our credit quality is improving and, uh, it has other knock-on benefits for us.

Because of that, we obviously have fewer people who incur penalties and so the interest rates on those cards are lower and that contributes to the decline.

And those two factors taken together have the biggest impact in the quarter.

We also have, you know, a higher percentage of the portfolio than we did a year ago on introductory rates.

So at the end of this quarter we were at about 22% of our lending portfolio on introductory rates.

That's pretty much within the pattern of the last five years.

The high of the last five years was at about 25%, the low was at 16.2%.

When we're doing well, obviously the intro rates tend to become a higher proportion of the total because we have more customers accepting the card.

So I don't want to get into forecasting this, I do think if you look at this pattern over the last five years, it gives you some pretty good guardrails on what we try and target.

So you're going to see this move move up and down but not up and down out of the pattern that we've established over the last five years.

Great.

Thanks.

Thank you.

Our next question comes from John Baldi from J.P.

Morgan, please go ahead.

Yes, good evening.

I was wandering if you could just comment a little bit on whether there are plans to open up the demographic net on the charge card in 2004 given that your loss rates there are running at all-time lows.

And second if you could just comment on the middle market versus let's say the Fortune 500 in the corporate services business growth thanks.

You bet, John.

On the demographics, if Ash were here I think what he would tell you all is that his charter is to maximize net present value.

His job is not to give us the absolute lowest credit results or, you know, the lowest chargeoffs.

His job is to maximize net present value so we are constantly trying to push the perimeters of where we can be aggressive and still come out with a result that we're comfortable with.

And so I think the answer is yes, we're always looking for pocket segments that we haven't penetrated yet where we can take advantage of profitability opportunities and will continue to do that.

And I think we're just getting better and better at our underwriting capabilities and it allows us to expand the franchise in that way.

A middle market, about the only thing I can say is that it has grown this entire year at a rate faster than our corporate growth rate, you know, has been, that's true for the fourth quarter as well.

We're very pleased with our success there, I think as you know we -- we added a sales force to the United States about 24 months ago, we added one in Europe last year, we've now supplemented that sales force with additional sales people in the U.S.

And we're bullish.

We signed this program this year with American Airlines that we think is an absolutely block buster product that really is very attractive.

And they're just many aspects of that business that we are pleased about.

And so it's growing nicely.

Thank you.

Thank you.

Our next question comes from Ed Groshans from Moors & Cabot.

Good evening.

I just want to talk -- in the past you talked about efficiency gains and lowering it down, and in this quarter I guess there's a lot of noise it rose pretty healthy but year-over-year it looks like about 65.5%.

Others talk about bringing it down do 62, 63% number.

Could you address that.

Specifically, in light of the billion dollars that were done this year and how that falls into those numbers, thanks.

Sure.

We had a unique situation happen this year.

At least somewhat unique situation.

With the -- with the provision performance that we had this year, that -- we had a pretty good handle on it in the middle of the year how we thought it would perform and with the continued interest benefit we got, we really did know that we had a competitive window here where we could go to the mat on some of these items.

And we clearly have done that.

We took advantage of what we saw to be a window of opportunity to push very hard on both the marketing side and the -- and the rewards side.

And I think it underlines the flexible approach that we try to take to the business.

So when we recognize that there are opportunities created by the environment, we can now very rapidly spend money to drive the franchise to higher levels of performance.

And that's exactly the way we have thought about it.

This capability was really developed as a defensive measure back in the '01 time period where we had to respond in a negative way and cut back spending so that we could preserve our income growth.

But we really have tried to make this both an offensive and a defensive weapon.

And so, you know, what happens with this number in some measure will be a function of what goes on in the environment next year.

We have I think the ability as an organization to both increase expenses and decrease them relatively rapidly to changes in the environment and I think that's the way you'll see us behave.

If you assume kind of a steady-state environment next year you'll get the outcome that I talked about.

Probably moderate marketing spending, growth certainly, and MR growth rates will moderate next year because we're reaching higher levels of penetration and higher levels of participation.

But those things could change.

If the economy's a lot tougher than we think, we could cut back further than that or alternatively if we catch another break in some way that we don't currently envision, uh, you know, we might be pressing harder on those things.

But it really does tie back into what -- you know, we try to think of as a more flexible spending model.

So when you see a burst of spend like this in a quarter we think of that as a positive in the sense that it -- you know, builds us future business income, uh, but, you know, as I say, we could use this defensively as well if the situation required it.

Thank you.

Thank you.

Our next question comes from David Hochstim from Bear Stearns & Company.

Please go ahead.

Could you give us what the tax rate should be going forward?

I guess you had another benefit in the fourth.

This is a bit -- this was a bit of a cumulative catch-up here, David, so I don't want to give you the exact tax rate for next year, it's not going to be as low as it has been.

You you should go back and look at history.

There was a favorable ruling that we got that obviously has impacted us in the third and fourth quarter and in our conversation with Ian we did need to amortize it so we took a full year's benefit and amortized it for the two quarters.

So it won't be this beneficial next year but I hate to pin myself down to a specific number.

Okay.

Back to the 25 or 26%.

I'm going to have to let you do the forecast.

Thanks.

And then my question also was, how should we think about your growth of -- your goal generating earnings growth of 12 to 15% on average over time, is that something we should think about from 2003 to 2004, or back to your '93 start point or -- or are you thinking about that now given your flexibility in the expenses.

We always do think about it in the context of the '93 start point.

We think of that as a long-term commitment that even though we've had ups and downs that it's something that we really have to honor.

You know, it depends on the environment.

There's certainly going to be times when we're below that range and there are times when if the environment is strong and we are meeting all of the parameters -- the financial parameters for our business that it could be exceeded.

But I think that's still clearly where we are in terms of thinking about the future.

Would you want to get back there in 2004 given that you have the capability of getting back within that range or could we expect that could take another few years.

Our math shows that we're right back in that range so we've obviously we had a big drop off related to what happened in 2001, but I think we're very much back in the hunt.

Okay.

Thanks.

Thank you.

Our next question comes from Michael Cohen from CIBC World Markets.

Please go ahead.

Hi, Gary, hi Ron.

Just a question for you.

I noted that you guys had -- or you guys noted that you had increased regulatory and legal expense in AEFA obviously related to all the mutual fund noise.

You know, in talking to folks that cover asset managers, they say that that's fairly common.

How long do you think that elevated regulatory slash legal expense will be with you.

You know, we don't -- we don't know specifically.

Obviously, we talked about the break-point pricing enforcement action that took place during the quarter and we fully expensed the costs associated with that in the quarter.

We've had costs associated with complying with requests from the SEC during the course of this last quarter that haven't -- they haven't been trivial.

As you might guess, just going back through all these records and documents and providing and preparing that information, in a way that is usable by the SEC has cost a lot of money and that -- that is ongoing right now.

And so that's what you're seeing on that other expense category line at AEFA.

I don't really know exactly when this process is going to be finished and I don't know exactly the outcome either and so as a result it's just really hard for me to be specific about it.

But we're doing everything we can to be as straightforward and compliant with the requests that we've gotten and -- and it has cost us some money this quarter.

Okay.

Thank you very much.

Thank you, our next question comes from Eric Wasserstrom from UBS Warburg.

Please go ahead.

Thanks.

Can you give me a sense looking at the current state of conditions in the -- in the asset management business, does that possibly prevent -- not prevent, rather, but present any attractive acquisition opportunities for you and more broadly does your -- does your -- you know, your current review of your operations, would that be a barrier to an acquisition occurring.

You know, we've talked about this somewhat in the past.

Threadneedle was a very unique transaction for us in some ways.

It had, you know -- it really did fill a hole that we had in our product line, we were able to buy those assets relatively inexpensively because, you know, there's a provision to have those assets revert back after an eight-year time period to Zurich and so there was a lot of things about that transaction that made it very attractive to us.

I think that if similar kinds of opportunities arose in the future that we're very specific and selective and filled a need that we had and also could be done economically, which were all the criteria that we put Threadneedle through, I wouldn't be surprised to see us do it.

And there's nothing about our current situation that would prevent us from doing that, it's just finding an opportunity that kind of fits those criteria.

So I think you're going to see us continue to be very selective about what we do, try and be, you know, economic in terms of our approach to these things but where we see something that can supplement our business, whether it's in AEFA or elsewhere, take advantage of those opportunities when they come up.

Thank you.

Thank you.

Our next question comes from Matthew Vetto from Smith Barney.

Please go ahead.

Hi, good afternoon.

Hi, Matt.

A question for you, you talked about the discount rate and how the shift of the mix in spending is impacting that and you've talked about that over the last several quarters.

Just wondering -- we don't have the same kind of guardrail that we do on the margin, I guess two questions: One, could you talk about what you're seeing vertical by vertical?

I know in the past you've said that the pricing had stayed pretty firm in the vertical and it was all a mixture and is that still the case?

And secondly, even an accounting for mixed shift is there a range you're comfortable seeing the blended rate go to or at some point do you moderate the mix shift?

The -- what you just said is accurate.

The majority of what has impacted the reduction in discount rate is mix shift from every day.

You saw it no doubt in the supplement that we now have reached I think 69% everyday spend as a percentage of the total and these categories have lower discount rates than others.

The expansion of the business, though, just swamps these reductions in the discount rates, it really does.

And so we're really not troubled with the trend in the discount rates.

There has been some selective repricing and as we think about pricing, I mentioned that I think in last quarter's call, it's a very complex topic because it's -- each of the vertical markets in all of the countries that we participate in and we are constantly evaluating each of those opportunities to either raise prices or reduce prices as the opportunity or competitive situation evolves.

And so there are some selective repricing that takes place, there is clearly an impact from mix shift that takes place and all of that impacts the trend in this number.

So, you know, I think what we have talked about in the past here, a gradual future reduction in this rate is likely to be what we're going to continue to see.

And we frankly think it's just a manifestation of the strategy that we're embarked on.

And we feel, you know, very confident in the strategy.

We feel good about our strategy here.

So I think you're likely to continue to see that downward trend here.

Okay.

Thanks.

Thank you.

Our next question comes from Michael Liber from Wiber Advisory Service please go ahead.

Good afternoon.

I'm trying to think about the combination of the institutional net redemptions and the acquisition of Threadneedle.

A series of thoughts or questions.

First, were any of the institutional redemptions coming from Threadneedle?

Second, did the acquisition of Threadneedle improve your chances to attract U.S. money investing in -- internationally?

Third, will you put enough marketing money behind Threadneedle to sell U.S. portfolios into the UK and the continent.

I'll take them one at a time here.

I think on an aggregate basis -- I'm not specifically sure, but I'd be -- I don't think there was any institutional outflows at Threadneedle at all during the quarter.

Threadneedle had an excellent quarter overall.

Timing obviously is helpful in these things, but we -- given the time that this asset was consolidated with us, there was very nice performance at Threadneedle and nice growth in their assets overall.

Somewhat above what we had anticipated when we closed the deal.

So the institutional question really is not a Threadneedle question, it's more of a legacy from the old historical performance at AEFA.

You know, obviously, the key strategic thrust for acquiring Threadneedle was to take those capabilities and to sell them through our U.S. distribution network and we are very focused on that and I think part of what you have seen here in terms of our cash sales in the quarter reflects our early success at doing that.

And we really do feel very good about having a substantially improved capability in managing international equities.

The third one is probably a bridge -- a little bit further down the pike than we are ready to commit ourselves to, and that is, uh, taking RUS equity management capability and selling it in Europe through the third party distribution that Threadneedle has already developed.

We certainly have talked about that, but that is -- we've got a fair amount of work to do to improve the performance of the funds in the U.S. before I think that would be a strategy that we'd embark on.

Thank you.

Thank you.

Our next question comes from Matthew Park from AG Edwards.

Please go ahead.

Good afternoon.

Gary, I just want to clarify on the merchant discount side.

Did I hear right that you expect the merchant discount rate to decline further?

And follow-up to that is basically how [INAUDIBLE] sort of steady compression in the -- in that rate and acceleration in the corporate accelerated growth in corporate spending you've been reporting in the past couple of quarters?

And then the third one, I'm sorry, competitive -- any comments on competitive landscape and, uh, any potential derailing of your plan for moderating expenses going forward from changes in the competition, thanks.

I got the first and the third Matthew, but I missed the second one.

Could you just say what the second question was.

Yeah.

Basically you've been reporting acceleration in corporate spending the past couple of quarters.

Yes.

And I just wondered how I squared the decline in the merchant discount rate and the pickup in the corporate spending.

I see, okay.

The -- yeah, it is correct.

We do expect a gradual ongoing reduction in the discount rate going forward driven primarily by the shift in mix that we anticipate seeing.

So that is correct.

You know, the fact is, although our corporate business has done very well, you know, our consumer business is still substantially larger and so the movements in our consumer business at the end of the day really do drive our results here overall.

And our merchants pay the same rate regardless of the card that's being accepted there.

So it just doesn't have the same kind of an impact that you would see in a Visa or MasterCard association to have growth in one type of product and not in the other type of a product.

We just -- we moved a lot in terms of everyday penetration, you know, 69% versus 65% in the third quarter and those factors are just more powerful than -- than the fact that corporate spending, which is more T&E oriented still didn't shift that overall mix enough to make a difference at the end of the day.

You know,, the competitive landscape is -- is interesting.

Obviously there were some demarcations that were pretty stark in this quarter where some had very difficult quarters and others had strong ones.

I think, you know, many competitors were characterized by very substantial reductions in their provisions in this quarter, which delivered good income growth.

Last year there had been some folks who had to respond to some regulatory pressure by increasing their provisions in the year-over-year change.

It was very helpful for them.

You know, we are really about executing our strategy.

We think that, you know, there is a substantial opportunity by focusing on spending.

You know, people talk about the fact that consumers, you know, don't have a lot of opportunity on their balance sheets today.

For us, that obviously is something that we think about.

But our focus really is on driving spending and we think not only do we have a leading position there, but there are just many categories that are still susceptible to having people spend money on a charge card or a credit card and pay that money off relatively quickly at a higher discount rate to make our future look very attractive from an organic standpoint.

So we're going to continue to pursue this strategy and try and ratchet up the cost of others to follow us on this same path as much as we can.

And we're quite confident with where we are.

Thank you.

Thank you.

Once again if there are any questions or comments please press star one on your touch-tone phone.

Well, if there are no more questions, we certainly appreciate you joining us.

As always, Ron and Mary are going to be here to answer any clarification questions that you might have and we look forward to seeing all of you at the analyst meeting next week.

Thank you.

Ladies and gentlemen, this concludes the American Express fourth-quarter earnings release conference.

You may all disconnect at this time.

Thank you for participating.