美國運通 (AXP) 2004 Q1 法說會逐字稿

(technical difficulty)

Sir, you may begin.

I just want to apologize to folks.

I know we had a little bit of an issue between the ability to get the call over the conference lines and then into the Web.

So I apologize for the delay.

But certainly, we want to get started now.

I had gone through the Safe Harbor discussion and made the point that we do reconcile our managed basis information to GAAP information, and encourage all of you to take a look at the information that is included in the earnings release and the earnings supplement.

Gary Crittenden, 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 queue for the Q&A period.

Up until then, no one is 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.

And so 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 and thanks for joining with us today.

As you have already seen, our first-quarter diluted EPS before the accounting change of $.66 increased 25 percent versus $0.53 last year.

First-quarter diluted EPS after the accounting change was $0.61 and it increased by 15 percent.

As previously disclosed, we adopted the American Institute of Certified Public Accountant's statement of position 03-1 effective January 1st.

This accounting change entails the establishment of reserves to cover the anticipated future cost of death benefits and other guarantees offered as part of certain insurance and annuity contracts.

Previously, these costs were expensed as incurred.

The impact of adopting this rule change was a below-the-line non-cash charge of $109 million pretax or $71 million after-tax, or $0.05 per diluted share.

We entered 2004 with excellent business momentum.

The first quarter reflected a strengthening of that momentum, validating the benefits of the higher business building expenditures over the last year, in addition to demonstrating the success of our efforts to create a more flexible business model, and a better balanced risk profile.

Importantly, revenue growth accelerate further during the quarter as a result of that momentum, rising 15 percent versus last year.

Net income before the accounting change included four items, which in total, reduced earnings.

First, a DAC valuation benefit at AEFA of $66 million, reflecting the lengthening of amortization periods for certain insurance and annuity products in conjunction with the adoption of SOP 03-1.

Second, a $49 million charge related to managements decision to further improve our investment portfolio's risk profile through an early liquidation of a secured loan trust managed by AEFA.

Third, a $31 million reduction in securitization income, reflecting changes in (indiscernible) assumption factors, principally higher paydown rates on consumer loans.

And fourth, cost of $11 million at American Express Bank associated with the decision to further rationalize certain New York and Asian activities.

We are able to generate particularly strong first-quarter results that exceeded all of our long-term financial targets, while again investing in our future competitive strengths at a very high level.

The benefit of our investment spending is evidence within the strong momentum in all of our card-related metrics, which performed well on an absolute basis and versus the competition.

Field (ph) business growth of 21 percent was exceptionally robust on continued strength within consumer and small-business volumes, and further improved in corporate service's spending growth.

Quarterly growth here was the highest it has been in over a decade.

Cards enforced (ph) growth of 7 percent reflected the addition of 1.1 million cards during the quarter and 4 million cards since last year.

This was the second quarter in a row of more than 1 million net new card additions.

Worldwide lending balance growth versus last year also continued strong, rising 12 percent to $45 billion.

The slight decline in the quarter reflects the normal post-holiday pressure.

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 across a number of fronts.

For instance, assets owned, managed and administered rose 66 percent or 29 percent, excluding the Threadneedle assets acquired as of September 30th of last year.

Total cash sales increased 29 percent, and branded adviser-generated sales grew 35 percent as measured on the internally-used gross dealer concession basis, as adviser productivity improved substantially.

While total expense growth reflects the relatively high level of investment spending and the impact of higher compensation-related costs, resulting from our decision to expense our stock options beginning in the first quarter '03, underlying human resource expense have been well-controlled.

For example, excluding the Threadneedle and Rosenbluth acquisitions, our employee pan (ph) is actually down 1 percent versus last year despite the substantial business volume increases.

Overall, pretax margins improved versus both the first and fourth quarters of last year.

In addition, our consolidated balance sheet remains strong.

Card reserve coverage of past due accounts remains at the high end of historical ranges.

And the continued repositioning of AEFA's investment portfolio and AEB's loan portfolio have yielded a better balance and more diversified risk profile.

The results (indiscernible) our balanced approach to managing the business as well as our substantial organic growth opportunities.

In addition, as evidenced by the Threadneedle and Rosenbluth combined 2 percent contribution to consolidated revenue growth, targeted acquisitions can further supplement and strengthen our organic growth opportunities.

The integration of both of these acquisitions continues to go well.

With that now, let me review the details by each business segment.

At TRS, managed revenues increased 12 percent and net income rose 14 percent.

On the revenue side, our ongoing expansion into everyday categories and our investment in growth initiatives over the past two years continued to drive strong card member spending, cards enforced and lending balance growth.

Worldwide business volumes rose 21 percent versus last year.

A strong growth in consumer and small-business sectors continued.

And corporate services volume comparisons improved further.

Volumes increased 17 percent on a foreign exchange adjusted basis.

And this U.S. consumer spending grew 20 percent and small-business spending rose 22 percent, while corporate services volumes improved 15 percent.

In total, U.S. non-T&E volumes grew 22 percent, while T&E-related spending rose 15 percent.

Outside the U.S., reported billed business was up 27 percent, which equated to a 13 percent growth on a foreign exchange-adjusted basis.

Within our proprietary business, foreign exchange adjusted consumer and small-business volumes grew 12 percent, and corporate services spending increased 10 percent.

Network partner-related volumes also remained strong, rising in excess of 20 percent.

The discount rate increased by 3 basis points from the third, from the fourth quarter of 2003, and declined by 1 basis point from the first quarter of last year.

The decline versus last year reflects the ongoing shift in the mix of spending towards everyday spend categories, which continued to generate stronger-than-average growth.

The increase versus the fourth quarter reflects a relatively higher proportion of travel-related merchant activity during the first quarter.

Worldwide cards enforced rose 7 percent versus last year as a result of our proactive acquisition efforts within the consumer and small-business segment.

Growth within the corporate services business continued strong network partner-related card growth and an improved average card member retention level.

Managed net finance charge revenue grew 2 percent on 13 percent growth in average worldwide lending balances.

Quarter-end balances were up 12 percent worldwide, reflecting 10 percent growth in the U.S. and 21 percent growth outside U.S.

Spreads declined versus last year and were flat with last quarter as paydown rates increased and credit improvement resulted in fewer customers at higher interest rates.

Additionally, the proportion of our portfolio on promotional rates was higher.

However, it is important to note that both the net interest yield and the intra-rate percent for the portfolio remain within the historical range of the past five years.

Travel revenues rose 23 percent on the benefits of the Rosenbluth acquisition and an improving sales environment.

Marketing, promotion, rewards and card member services expenses rose 39 percent as we took advantage of business strength and maintained our more-aggressive business buildings stance and rewards costs rose, reflecting the strong volume growth and a continued increase in card member loyalty program penetration and participation.

We now expect growth in marketing, promotion, rewards, and card member services expenses to continue at relatively high levels throughout the year, in part due to our view of competitive opportunities in the card market.

The managed provisions for losses declined 9 percent as overall credit remained strong during the quarter.

Within both our charge card and lending businesses, the worldwide loss rate improved versus last quarter and last year.

Past due rates also improved versus last year, but rose slightly versus the fourth quarter in the charge card portfolio, as is typical from the seasonal pattern perspective.

In light of the strong credit indicators, the combined reserves declined slightly on a sequential basis.

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

Our strong credit performance over recent years reflects the strength of our business model, but also substantially enhancements in our credit management capabilities.

As you know, our brand and our reward-based products positively influence selection, improve write-offs, and reduced volatility.

In addition, our processes have become progressively more forward-looking.

We have the ability to quickly modify credit line sizes and adjust point-of-sale logic if necessary, and we very effectively leverage our merchant network in support of these activities.

Paradoxically, the investment spending that this positive credit quality trend enabled serves to pressure TRS's operating expense margins.

Which as you know, have declined over recent quarters.

Improving credit quality suppress assessment revenues and provision growth, although provides a net benefit within pretax income.

When we invest the net benefit through gross initiatives in the operating expense line items, the net effect is operating margin pressure, but improved pretax margins in the near-term and improve revenue growth in the moderate term.

As expected, interest expense declined on lower cost of funds that was partially offset by the additional borrowing needed to fund higher receivables.

Human resource expenses rose 16 percent as merit increases, higher employee benefit costs, greater management incentive costs, and the impact of the 2700 employees added with the Rosenbluth acquisition, and the impact of foreign currency translation outweighed the positive effect of a lower employee count excluding Rosenbluth.

Other operating expenses rose 13 percent versus last year, reflecting higher business and service volume-related costs and the Rosenbluth acquisition.

The effective tax rate of 32 percent was flat versus last year.

At American Express Financial Advisers, net income before the accounting change increased 71 percent and net revenues rose 22 percent reflecting the improved equity market environment and the continuation of relatively strong insurance-related contributions.

The Threadneedle acquisition contributed approximately 7 percent to revenue growth and modestly to net income growth during the quarter.

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

Investment income was flat as higher invested assets resulting from client demand from underlying fixed rate products over the past two years was offset by investment losses.

During the quarter, $58 million of investment losses including the $49 million charge resulting for our decision to proactively liquidate a secured loan trust, were partially offset by $20 million of investment gain.

Last year's first quarter included $5 million of net investment gain.

The overall credit quality of the portfolio continued to improve as default rates have declined throughout the past year.

As of the end of the quarter, the portfolio had $1.5 billion of net unrealized depreciation.

Management and distribution fees rose 50 percent on a 47 percent increase in management fees and a 53 percent growth in distribution fees.

The management fee increase resulted from higher average assets under management, reflecting the impact Threadneedle, improvement in equity market valuations and net asset inflows.

Net inflows during the quarter at Threadneedle and within the retail channel were partially offset by institutional outflows excluding Threadneedle.

Asset managed increased 86 percent including the Threadneedle asset acquired on September 30th of last year.

Asset managed grew 27 percent.

Distribution fees increased on greater mutual fund fees, increased brokerage-related activities, and higher limited partnership product sales.

Total cash sales were up 29 percent on strong growth in retail-related mutual funds, investment certificates, and insurance product sales.

Branded adviser generated sales increased 32 percent on a cash basis and 35 percent as measured on the internally-used growth dealer (ph) concession basis, a commonly used financial services industry measure of the sales production of the adviser channel.

Institutional sales levels, which have suffered somewhat in recent quarters as a result of our historical investment performance, also improved in the quarter, reflecting the benefit of the Threadneedle activities and increased pension account contribution.

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

Planning and advice service fees rose 5 percent, despite strong underlying plan volume growth, which will impact positively fee revenues over the next several quarters.

The provision for losses and benefits decreased 1 percent, reflecting lower crediting rates, partially outset by higher enforced levels of insurance, annuities and certificates.

In addition, the impact of appreciation in the S&P 500 on equity index annuities, and the stock market certificate product versus depreciation last year added to the provision.

Human resource expenses increased 26 percent on higher field force compensation related costs, the effect of the Threadneedle acquisition, merit increases, and higher employee benefit costs.

These increases were partially outset by 22 million, by $44 million of the total $66 million deferred acquisition costs benefit.

The adviser base rose to a solid 4 percent versus last year but consistent with seasonal patterns, was down slightly from last quarter.

The home office employee count continued to be well controlled as the average number of employees was down 2 percent excluding Threadneedle.

Other operating expense rose 24 percent versus last year in part due to the Threadneedle acquisition, professional fees related to various industry regulatory matters and higher legal costs.

These increases were partially offset by the remaining $22 million (indiscernible) benefit.

The effective tax rate was 28 percent versus 25 percent last year.

Finally, at American Express Bank, the bank continued to make progress on its strategy shift, delivered solid earnings growth of 55 percent on 7 percent growth in revenues and the lower provision.

The bank's results reflect the positive impact of the growth within private banking and its financial institutions group, partially outset 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 institutions group and a provision decline of 82 percent versus last year due to the improvement in bankruptcy-related write-offs in Hong Kong and the related activity within the PFF (ph) lending portfolio.

Private banking client holdings and loans increased 17 percent and 34 percent, respectively.

Loans within the financial institutions group grew 15 percent.

Personal financial services loan declined 12 percent and corporate banking loans continued to decrease and now represent just 2 percent of the total loan portfolio or approximately $130 million.

In conclusion, we view this as an excellent quarter.

Our results illustrate the benefit of the accelerated business momentum resulting from our investments over the last few years.

The flexibility that we have built into the business as well as the improved economic and market environment.

We exceeded all three of our long-term financial targets during the quarter while significantly increasing business building expenditures and maintaining substantial balance sheet strength.

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

The last few quarters underscored that we can use the flexibility built into our business model to invest in strong revenue growth when we see the opportunity to do so.

We think we're in a very strong competitive position as the economy, the market, and spending remain very healthy.

While investors have recently focused on the potential for interest rate increases, our current funding strategy has largely protected us from any near-term risk.

There many details related to our funding strategy within the 2003 annual report, but let me provide a few points about our card-related strategies.

First of all, on a global basis, approximately one-third of our funding requirement, including our charge card receivables is tied to floating-rate receivables.

Second, we have proactively worked to lock in a higher-than-normal portion of TRS's fixed-rate funding requirements by executing hedges that extend into 2006.

In periods of low interest rates we have tended to extend hedges over longer time periods.

Historically our management of interest rate exposure has produced attractive results in varying rate environments.

In fact, based on our current estimate of business levels within TRS's U.S. car activities, we have hedged approximately 70 percent of 2004's U.S. fixed rate funding requirements, 60 to 65 percent of 2005's, and 40 to 45 percent of 2006's.

And finally, in addition, the revenue benefits from the economic and inflation trends that typically accompany rate increases create a natural hedge within our P&L.

Although year-over-year business comparisons do become more difficult as the year progresses, there appear to be a number of environmental opportunity in front of us.

Retail investors have been gaining confidence and investing once again.

Corporations have increased their T&E-related expenditures after three years of working to contain them.

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

We are confident that we are in a strong position to leverage the opportunities for growth.

Our recent success supports this confidence.

Our core businesses are performing exceptionally well.

Additional growth is available through partnerships such as our Costell (ph) relationship which was recently extended, the signing of our network deal in March with the Industrial and Commercial Bank of China, and of course the MB&A deal back in January.

Lastly, it is as successful integration of the Threadneedle and Rosenbluth acquisitions.

Thanks very much for listening.

We are now ready to take your questions.

(OPERATOR INSTRUCTIONS).

Bruce Hardee, Lehman Brothers.

The huge buildup in marketing spent, can you talk about how you are distributing that across your businesses?

And how much of that is branding versus specific product-oriented and where can we really see that -- where should we be looking to see the results over the next 12 months?

Thanks, Bruce.

The overwhelming portion of this is being spent at TRS, not being spent at AEFA.

We are planning a small increase at AEFA this year in terms of branding spending over the course of the four quarters.

But for the most part, this is marketing spending, this is taking place at TRS.

On a percentage basis, it is actually a little higher at AEFA, but the dollars, the absolute dollars we're spending are actually quite low.

The majority of what we're doing relates to normal acquisition types of activities and, obviously, membership rewards activities.

From an MR standpoint, which as you now, is included in that same line item, we are seeing both an increase in the percentage of our customers that are on MR and an increase in the usage of MR by those who are on the program.

That's an intended outcome.

And is a key factor in the improvement and attrition, which has approved our shift growth, and improvement in our revenue growth, and also has a positive impact on our credit line.

And to the extent that we continue to see improvement there, I think you'll see improvements in those line items in the balance sheet as we go through the year.

The marketing dollars, as I say, is largely targeted on acquisition types of activities.

Although we're spending at relatively higher rates for what we have done over the last couple of years, on brand advertising as well.

We tried to be creative with that brand advertising and focus it in channels that will have effectiveness for us.

We recognize some of the fragmentation that is taking place in a medium.

And I think John Hayes (ph) has done a very nice job of trying to be creative about the way those dollars are being spent.

But it is a relatively small portion.

So, you should continue to see the same kind of benefit in the metrics, obviously, that you've seen in this quarter if we continue to spend at these levels.

Ed Groshans, Moors & Cabot.

Yes, I was just wondering about the securities gains, the 20 million?

And if that's more of a normal event or was that taken specifically to reduce the charge at AEFA?

No, it is a normal event.

I think as you saw, at least in my comments, and its also found in the supplement, that we had a positive, we had a net investment loss last quarter, last year in the same quarter of $5 million.

That was the same kind of affect where we had some positive that came from the sale of securities and a negative on the other side.

This is a very normal course of, normal course of events for us.

If you look over the last many quarters we split out both the gross and the net, both investment gains and losses in each quarter.

Thank you.

Chris Brendler, Legg Mason.

Good evening.

I just want a little more detail, actually, if you could give me a little more sense of what's happening on the membership rewards side.

You just mentioned that it sounded like there was an increase in redemption.

Is that part of the increase in the marketing spending we're seeing right now?

It is.

Those are contained on the same line item.

I probably should just back up a little bit and provide a little more background on this.

It's probably three years or so ago, when Ken said he was going to make a real push to try and drive up the use of MR, and we've seen a real acceleration in the percentage of our customers that are on MR today.

We showed almost a year ago now, in an analyst presentation that we did, that about 60 percent of our card members were on MR.

Not surprisingly, even more of are dollars of spending are on MR than the number of card members.

We continue to drive that up.

So you get both the impact of a larger portion of our base being on MR when we do strong billed business as we did in this quarter, 21 percent growth in billed business, you get substantial growth in the MR line that comes from the strong volume growth.

Additionally, what we have seen, particularly outside the United States, is as we have made these programs more and more relevant, which is what we want to do, they actually drive royalty and topline growth and better credit performance.

As we have made the programs more relevant in the individual countries, we've had increases in the utilization rates of the programs.

And so that is the second factor.

So it's both increase in penetration of the program and increase in usage among those who are on the programs and that drives very strong expense growth on that line item.

But, you know, our view has been pretty consistently that this is one of the best investments that we can make.

It clearly contributes to our strong revenue growth.

It lowers attrition.

I think I mentioned in my comments that our attrition, that our cards enforced were aided by one full percentage point this quarter by a reduction in attrition year-over-year.

A big piece of that is related to the MR benefit.

And now, obviously, their credit benefits.

You've seen all during this very difficult economic period we've had nice reductions in our credit losses.

And that has in large measure been attributable to the successes of membership rewards.

Thank you.

Michael Hodes, Goldman Sachs.

Two quick questions -- one, you alluded to somewhat of a change in your outlook for marketing and you were implying that there were new opportunities in Cardland.

I was hoping you could elaborate on that.

And then secondly, regarding the accounting change that impacted AEFA, these expenses that are being taken in one fell swoop, over what period would they have come in under the old accounting?

I will answer both quickly.

In terms of the opportunities that we see, we're going to be quite opportunistic about this as we go through the year.

And as we see opportunities both because the business is performing very well as well as any sign of competitive weakness, we are going to continue to push from a marketing perspective.

And we will be prudent with us.

I think we've talked a fair amount in the past that today we have an ability to both increase our marketing expenditures and cut them back much more rapidly than we might have been able to do three or four years ago.

So, we have a planning process that is kind of a rolling monthly planning process.

We evaluate both the upsides to our forecasts, and what we believe the risks are.

We've look at our unhedged and open positions that we have and we make judgments about what we believe the right level of marketing expenditure is.

And, obviously, in the last couple of quarters of last year and this quarter, we made the judgment that we thought there was an opportunity and the strength of the business would support higher spending and allow us.

And I think this is important to exceed all of our financial targets.

We've exceeded revenue, we've exceeded income, and we exceeded our ROE target.

And so, we consider all those factors when we decide what the levels are going to be.

And I think we just want to be opportunistic as we go through this year.

And I think you rightly point out that our view now is that it is possible, if the strength in the business continues, that our marketing dollars, the spending that we're doing on marketing could be a little higher than what we had anticipated going into the year.

On the AEFA front, what we are essentially doing is setting up a reserve.

The $109 million pretax reserve that we set up is something that historically we've expense.

I think in last year's full year, it was about $40 million that we expensed to cover this same cost.

This is a little bit like a credit provision in the sense that you put it up, but as you go along through the year, you still have to make adjustments to the provision based on the growth in the business and the actual drawdown of the provision or the reserve.

And so, there's really no year-over-year income benefit associated with it; it just puts the reserve up and then they'll be ongoing expenses associated with maintaining the reserve over time.

Thank you.

Kevin Posner (ph), Morgan Stanley.

First of all, congratulations on a very strong quarter.

Secondly, I wanted to ask about the lawsuits that are out there.

According to the 10-K, there were half a dozen lawsuits, which I think your general counsel has referred to as Wal-Mart copycat-type lawsuits.

I'm just curious to know if you can give an update if some of these lawsuits been dismissed?

Are there some new ones out there?

And what would be the strategy for addressing them?

There are, as you can see in our 10-K.

We do a pretty good job of enumerating what these individual lawsuits are.

There is, at this point, nothing here that we think is an earth-shaking event for us.

I think we, I think it was widely reported a month or so ago that we made an offer to settle one of these suits for $66 million.

And we are working through that process today.

Anything else that I would say beyond that, it probably does not help our side of this discussion, I wouldn't think.

So they are what they are.

There has been really no significant additions to that list that you're aware of.

And there is the $66 million settlement offer that we put on the table in the last month or so.

Thank you very much.

Michael Cohen, CIBC World Markets.

I was wondering if you could talk about some of the trends in the corporate spending.

Obviously, you're up 15 percent.

Can you talk about which sort of sectors of corporate spending are driving that?

And how much of that is a function of being off the lower base where SARS and international travel volume was reduced because of the Iraq war a year ago?

You're exactly right.

So, in the first quarter of last year, we had 1 percent growth in corporate.

And in the second quarter we were down by 1 percent.

Obviously, in this quarter of this year we are up by 15 percent.

So, you can see that, clearly, there was an impact of both the war and SARS on corporate volumes last year.

In absolute terms, you know, corporate volumes are starting to come back into the range of the 2000 level or so.

But we still have a ways to go to kind of dig out of that low point that we had post-2001 and then the other impact that happened as a result of the SARS and Iraqi war last year the same time.

If you look within corporate, the middle market segment has grown more rapidly than the large corporate segment and that continues to be the case.

Our small-business business has grown however strongly throughout this entire time period, even last year at this same time.

So, our small-business business grew at 11 percent in the first quarter of last year, 14 percent in the second corner, and is up 22 percent in this quarter.

We've often said that that small-business number is one of the best indicators of the economic health of our franchise and also the trends that we see in the economy.

And it appears to be very strong, obviously, in the first quarter of this year.

And consumer business has been also pretty strong throughout.

It was up 10 percent the first quarter of last year, 12 percent in the second quarter, and is up 20 percent in the first quarter of this year.

So, you'll obviously see some -- we assume you'll see some reduction in these billing growth rates as we come up against the more difficult numbers in the back end of this year ahead of us.

Great.

Thank you very much.

Matthew Vetto, Smith Barney.

Good afternoon.

A question for you -- you mentioned the reevaluation on your I/O coming primarily from a pickup in pay rates.

Just wondering, we've heard that from a couple of other competitors in the business too.

Wondering, is that a seasonal thing from tax refunds?

Is that something that is atypical of what you have seen historically?

And maybe more broadly, any insight you might have into your portfolio as to what extent mortgage refinancings, or lack of them, impacts both balanced growth and credit trends?

I can give you a few statistics here that we actually just took out of our ABS lending trusts, so this is probably available data.

We look at the monthly payment rate going back into early 1999 and up through today.

And the monthly payment rate back in early 99 was between 8.5 and say, 9 percent.

Kind of in that range.

In the first quarter of this year, it was 22 percent, 23 percent, in that range.

So you can see, obviously, that the payment rate has increased substantially.

And the payment rate in the first quarter of this year is above where it was in the latter part of last year.

We do this calculation on a lagging 12-month basis, but clearly, as credit quality has improved, as the economy has improved, and perhaps as you mentioned, as people have benefited from refinancing, there's been an increase in the paydown rates year-end, and that is what is reflected in the changes that we made in the recognition of securitization income.

Also, obviously, there's the impact of the spread.

And the spreads have been tighter as well.

And that's part of what is going on, too.

So do you have a view on if we were to see rates drift up here in the course of the year?

Do you have a view on where you'd expect those pay rates to go?

I probably shouldn't forecast it.

It's a pretty complicated set of events.

So it both has to do with the quality of the card members in our base, as their credit quality improves, then we see a faster paydown rate.

In part, that's related to our membership rewards penetration.

It is exactly the same thing we've seen on our nonsecuritized portfolio.

And so, that's positive from a write-off standpoint, it is negative from a paydown rate standpoint.

But in the overall scheme of things, we think the right thing to have happen.

So, it's a little bit hard for us to forecast this.

I do believe it's somewhat related to what happens with refinancing and the positive -- an increase in interest rates and therefore a decline in refinancing could have the impact that you talked about.

But we probably shouldn't forecast it.

Okay.

Thanks.

Eric Wasserstrom, UBS.

My question is the (technical difficulty) products have gotten better.

Are you starting to see any of the economic benefits flow through (technical difficulty) of your own products as opposed to other competitors (ph) products?

The direct answer is no.

And let me explain what is going on there.

Clearly our performance has improved.

If you look over the last two years, the performance that we had in the latter part of 2003 was not as strong because we were somewhat defensively positioned.

But the performance improved in the first part of 2004 as the way we have approached the management of those funds resembled more closely what took place positively in the market.

We had, going back several years, a very high proportion of what we sold that was proprietary product.

Today we have an absolutely and completely open system, where there is absolutely no incentive for our advisors to sell our product versus another product.

The natural impact on us and virtually every other company that we have studied of opening up your system, is that the percentage of proprietary product that you sell goes down over time.

Now, there's many things that we do to work with that.

We have brought in partner funds, where we have a more attractive financial relationship from the perspective of American Express vis-à-vis those partner funds.

We sell a lot of our products in the context of a wrapped product, which adds particular features on it to make those products more attractive to our customers and have better economics for us.

But there is a natural downdrift that is taking place among our proprietary products that really has not reached its bottom.

And I think over time we will see, hopefully, as our performance continues to improve, a bottoming in that trend and then an eventual upturn.

But we're still in the process, I think, of working off what were very high levels of proprietary sales from earlier years.

Okay.

And just to clarify -- this downward drift, is that both a function of (indiscernible) product performance as well as a secular (ph) trend toward openness?

My own view is, since our performance has improved over the last few years, it's not related to our product performance; it's really related to the fact that the network is now completely open and available.

Our product performance over the last two years, particularly as compared to the period before that, has been really quite attractive.

And we are very pleased with what Ted and his team have done.

But the fact that the network is now completely open, I think really has caused this downward trend in the percentage of purely proprietary products that we sell.

That being said, as I said, we have a number of products that have attractive economics associated with them that have done quite well.

So if you look at our total funds flow, the total funds flow is actually been slightly positive.

The other factor that is taking place here is the impact of institutional products.

Track record really does have a been big impact on institutional products.

We had quite negative institutional flows last year.

That has continued into the first quarter of this year.

And you really have to have a three-year track record to begin to have a positive influence on institutional flows.

So we don't expect to see that for the next -- until we get to the point where we've got three years worth of track record, which is the end of this year.

Thank you.

Brad Ball, Prudential.

Regarding the DAC valuation benefit that you saw in the quarter, was that entirely related to the implementation of the SOP 03-1, or were there other DAC adjustments in the quarter?

And how should we look at DAC going forward?

Will you be adjusting DAC in conjunction with the increases or decreases in this reserve that you just set up?

How does that work?

The $66 million was entirely related to SOP 03-1.

And I said it that way on purpose.

It is related but it is not caught specifically by that.

We could have links and the amortization periods on this DAC last year, but we understood that we would be going through this review of potentially setting up this reserve for 03-01, and therefore deferred the final analysis on what the appropriate amortization periods were on this until he actually implemented setting up that reserve and officially accounting for those products as insurance contracts.

When we did that, the appropriate accounting around that is to have them be amortized, have the DAC be amortized to over the period of the life insurance contracts, which is what we have done.

So, that is kind of an out-of-period adjustment for us, in the sense that we typically do this in the third period, not the first period.

But we decided given the adoption of this accounting change that it made sense to do it in this quarter.

In the third period of this next year we will again review our DAC in detail as we always do.

We do a quarterly adjustment on this, and if there is significant movements we make those changes.

But major questions like changing the amortization period -- we generally defer and review in the third quarter of each year.

So I think you're unlikely to see anything in the second quarter of any magnitude.

In the third quarter we will once again go through that comprehensive process.

But I think we have made some fairly significant adjustments to those assumptions in the recent past.

And I think, again, the likelihood of major changes in that line item, that approach, I think are quite low.

Okay.

David Hochstim, Bear Stearns.

Wondered if you could just talk about your long-term 12 to 15 percent earnings growth goal and how earnings this year might get you back to that range, recognizing that your math and my math might be different again.

David, I think your math is right on this.

So, I appreciate the question.

You know, we have said many times in the past that there will be times when we will be above that trend and times when we will be below that trend.

Clearly, this is one of those quarters where the pieces have come together and allowed us to be above the trend.

And we are certainly not adverse to that outcome.

Clearly when our revenue growth rates are lower than we would like to see them, then we've really pushed hard on the marketing side.

When we've had attractive revenue growth rate, good income growth rate, exceeded on a return on equity basis, we have also continued to spend on marketing and the expectation of building our business going forward.

And we make these investments because we have every anticipation that they will sustain and maintain our competitive strength in metrics.

Obviously we feel good about the environment.

I mentioned some things at the end of my comments, there.

We feel good about the environment, but we also recognize that the comparisons that we have are substantially harder in the third and fourth quarters of this coming year.

So, again, we don't provide, as you know, any type of short-term guidance on this.

But we are pleased that we performed above in this quarter.

We are certainly not adverse to continuing to perform above if that is what our business allows us to do.

But the comparisons are somewhat more difficult as we get towards the back end of the year.

On another matter, on Rosenbluth, have you seen a material increase in the corporate card issuance from the travel relationships?

I don't know the answer to that question, I'm afraid, David.

I just don't know.

Okay.

Thanks.

Ed Groshans, Moors & Cabot.

Just a follow-up.

I was wondering if you could address the Supreme Court ruling on the Visa and MasterCard association rules?

As you know, this is now up for review and they will make a decision, we anticipate some time this year, whether they will hear that or not.

We don't know what the outcome of their decision will be.

I think almost all observers believe this'll not be heard by the Supreme Court, but of course we don't know that for certain.

But we still anticipate fully that the decision will be reached, whether that case will be heard during the course of this year.

Is there some timeframe of like 180 days that it would need to be reviewed?

Is that correct?

You know, our expectation is that it will be sometime late summer.

But it is hard for us to pen them down.

Okay.

And then based on that, I have been hearing with the MBNA deal.

I guess there's some murmur out there that MBNA is getting the bulk of the economics of the agreement.

I don't know if you could address that or not?

Obviously, we don't go into the detail of any of our contractual arrangements that we have with our network partners.

I can assure you that this is a very attractive deal for both companies.

This is something that, I think, they are going to benefit from substantially, and we will benefit from substantially.

And we are really just delighted to have them as partners.

Excellent.

Thank you.

Thank you.

At this time, we have no further questions.

Thank you, Maricella.

And thanks to everyone for joining us tonight.

I apologize for some of the technical glitches early on and I guess the quality of the call also sounded like there were some point where it was a little bit difficult for us to hear.

But I appreciate all of you joining us and look forward to talking to you with any follow-ups and going forward.

Thanks very much.

Thank you.

Ladies and gentlemen, this concludes the American Express first quarter earnings release conference call.

You may all disconnect.

Thank you for participating.