美國運通 (AXP) 2005 Q3 法說會逐字稿

Good afternoon.

My name is Derek, and I will be your conference facilitator.

At this time, I would like to welcome everyone to the American Express third-quarter 2005 earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS).

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

Please go ahead, sir.

Thank you, Derek, and welcome to everyone.

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

As usual, I want to begin the call by reminding 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 included in 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 2004 10-K report already on file with the Securities and Exchange Commission.

In the third-quarter 2005 earnings release supplement, which is 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 Company's pro forma return on equity to be discussed today with our consolidated return on equity, as well as the U.S. card services segments, managed basis financial measures with the GAAP financial information, and we explain why these presentations are useful to management and to investors.

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

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 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 period.

With that, let me turn the discussion over to Gary.

Welcome, and thank you all for joining with us today.

As you have seen in the earnings documents that we distributed earlier, our third-quarter results reflect the continuation of the strong business momentum we have reported over the last several quarters and the ongoing benefits of our continued high levels of investment spending.

During the quarter, we executed well against our business objectives to achieve outstanding results within our payments business.

Notably, we delivered several new products and product enhancements from our pipeline of opportunities in addition to signing new network partnerships.

We also saw in this quarter the successful completion of our spinoff of Ameriprise Financial, Inc., as well as the sale of our tax, accounting, and consulting business, American Express Tax and Business Services, Inc., as part of our strategy to focus on high-return, high-growth opportunities that we believe can be found within the payments industry.

As a result, Ameriprise and TBS are now included in our financial statements as discontinued operations.

Ameriprise reported their results this morning.

Details about their performance can be assessed through their website or by contacting their Investor Relations department.

In the quarter, we revised our segment reporting to provide greater detail on the underlying businesses and the key drivers within our continuing operations.

The new reporting segments are -- first of all, U.S. card services, which includes our U.S. consumer and small-business card issuing activities, our U.S. consumer travel business, and our global Travelers Cheque and prepaid services business; secondly, our international card and global commercial services, which houses our non-U.S., consumer, and small-business card issuing activities, the global corporate card and corporate travel businesses, as well as our international consumer travel and banking activities; third, our global network and merchant services, where we report the global network services and worldwide merchant-related businesses; and fourth, corporate and other, which is, in addition to reflecting our corporate-level expenses and income, also contains our publishing and membership banking businesses.

Two Form 8-Ks were filed with the SEC over the past few weeks.

The first provided an overview of the pro forma adjustments resulting from our discontinued operations, and the second provided historical financials presented according to the new segment reporting.

If you haven't already done so, I encourage you to review the information within these filings.

One thing you will note as you review these filings is that our income from discontinued operations is not equivalent to the historical reported results of the AEFA segments, mostly because of different reporting rules related to corporate expense allocations.

It appears that, based on the growth rate of some fourth-quarter of 2005 analyst estimates versus our EPS from continuing operations for the fourth quarter of '04, that you may not have appropriately reflected this differential.

You may want to consider this difference as you evaluate your estimates for earnings from continuing operations.

In addition, you should also note that the quarterly growth rates versus last year for our income from continuing operations show a wide range due to certain significant items which have been disclosed in each period.

Because of this, as we plan our investment activities for 2006, we continue to focus on the full-year earnings growth rates, which will create some volatility within our quarterly growth rates.

So be thoughtful about this quarter-to-quarter volatility as you develop your expectations for next year.

My discussion today will focus on results from our continuing operations as these reflect the new American Express.

Furthermore, while the segment financials are available within the earnings release and earnings supplement documents, my comments will review the performance of the Company at the consolidated level, since we manage the Company to achieve our long-term financial targets on an overall basis, utilizing investment spending and cost-containment levers within the businesses to drive flexibility and to optimize overall performance.

Accordingly, results at the segment level vary from period to period, and a clearer picture of the Company performance can be obtained through the consolidated results.

Turning to our specific financial results from continuing operations when compared to last year's result, during the third quarter, total revenues grew 11%, income increased 23%, and diluted EPS of $0.69 rose 25%.

The reported return on equity for the quarter was 24%.

As you know, this calculation reflects net income and equity over the prior 12-month period.

Therefore, the third-quarter return on equity calculation includes the earnings and capital from our discontinued operations.

The suppressing effect of this incremental capital will progressively lessen over the ensuing 12 months, and you should see the Company's reported return on equity migrate towards our 28 to 30% target post spinoff.

Pro forma ROE, which is determined using the trailing four-quarter income from continuing operations over reported shareholders' equity at September 30, 2005, was 32%.

Certain tax benefits in the quarter again enabled us to accelerate various re-engineering initiatives and investments in the business, as third-quarter results included two significant items that impacted the P&L -- first of all, a benefit of $105 million resulting from the resolution of a prior-year tax item related to the sale of American Express Life in 1995, and re-engineering costs of $86 million, or $56 million after-tax, principally related to our ongoing restructuring efforts in our business travel, finance, and technology functions and international operations areas.

In addition, we recorded a $49 million, or $32 million after-tax, provision during the quarter to reflect the estimated costs related to Hurricane Katrina.

We also continue to be on track to deliver the additional $1 billion of re-engineering benefits targeted for 2005.

During the quarter, excluding the dividend from the Ameriprise spinoff, we returned 38% of total capital generated to our shareholders through dividends and share repurchase.

As we previously discussed with you, the somewhat lower repurchase activity during the first three quarters of 2005 versus prior quarters reflects a more measured approach to repurchases in light of the capital implications of the Ameriprise spinoff.

Strong revenue growth in the quarter reflects increases in discount revenue, cardmember lending, and at (ph) finance charge revenue and card-related fees, all of which reflect the excellent billings and card growth during the quarter.

Worldwide card billed business increased 18% versus last year.

In our U.S. proprietary business, consumer spending grew 17%, small-business spending rose 22%, and corporate services volume improved 25% despite continued airline pricing-related pressure. 13% -- right, 13%.

In total, U.S. non-T&E-related volumes grew 20%, while T&E-related spending grew 13%.

U.S. airlines related volume increased 12%.

Outside the U.S., proprietary billed business was up 13% on a foreign-exchange-adjusted basis, reflecting 13% growth within our consumer and small-business activities and 15% growth with our corporate services volumes.

We also saw double-digit growth within each major region around the globe.

And lastly, with our global network services business, billed business rose 35%, driven by MBNA-related growth within the U.S. and continued double-digit growth outside the U.S.

Worldwide cards in force grew 9%, as we added approximately 1.7 million net new cards during the quarter and 5.7 million new cards since last year, reflecting 6% growth in proprietary cards and 36% in network cards.

Spending per proprietary basic card in force grew 12% worldwide, reflecting the success of our loyalty-related initiatives and merchant coverage expansion activities.

During the quarter, our average discount rate was 2.57% versus 2.6% last year.

The decrease versus last year continues to reflect in part the changing mix of spending between the various merchant segments.

In light of the growing importance to our results of the network business, the discount rate calculation was restated to include discount revenue from bank-partner-issued cards used at Company-acquired merchants.

This discount revenue is incorporated at a gross level, including both the companies and the GNS partners portion of discount revenue to reflect actual point-of-sale pricing trends.

The calculation also excludes card billings that don't generate discount revenue -- for example, ATM withdrawals.

Worldwide managed lending balances grew 11% year over year, or 15% excluding the impact of the sale of our leasing business in the fourth quarter of 2004.

Net finance charge revenue as a percentage of average loans rose versus last year.

Coupled with our strong credit performance, this has resulted in a risk-adjusted margin that continues to compare favorably to the industry.

Travel revenues decreased 1% as higher transaction volumes were offset by lower commissions and fees per sale.

On the expense side, our decision to extend stock options beginning in the first quarter of '03 continued to negatively impact the human resources expense comparison.

The impact of incremental annual option grant expense, increased levels of restricted stock awards, and other compensation changes are reflected in the 9% increase versus last year.

In addition, this quarter includes $77 million of severance cost related to the re-engineering activities I mentioned earlier.

Importantly, the underlying human resource costs and related employee count continue to be well-controlled.

In fact, the total employee count was actually down 2% versus the same quarter last year.

Marketing, promotion, and cardmember services expenses increased 16% due to both higher marketing and promotion expenses and an increase in rewards-related costs.

The relatively high level of marketing and rewards costs over the past few years continues to generate a very attractive return on our investment.

As you recall, the decision to ramp up this spending was triggered by an assessment that there was a very attractive window of opportunity on which we could capitalize.

The gap between our key metric growth rates and those of our competition have been noticeable.

That's the best evidence that this strategy is working.

I would also point out that the growth rates for these expenses have moderated, and are now more consistent with our overall business growth.

Total provision for losses increased 33% as the charge and lending provisions rose by 45% and 56%, respectively, due to the impact of strong volume and lending growth and higher provision rates.

As you know, we have seen loss rates running at historically low levels for some time now, indicating that we were potentially missing some opportunities within the business.

Therefore, we have been adjusting certain credit parameters to capture these opportunities, and are seeing the natural loss rate impact of those adjustments in addition to the business benefits.

We also recorded a $49 million provision during the quarter to reflect the estimated costs related to Hurricane Katrina. $38 million related to our U.S. consumer and small-business activity, $9 million associated with our corporate activities, and the remainder was merchant related.

While our business in the Gulf region is a relatively small part of the Company's activities, the severity of the disruption is substantial.

Therefore, based on all of the information we have available to us to date, we have established the reserves that we believe are appropriate.

Other provisions decreased 35% as a result of last year's $115 million securitization/reconciliation charge and last year's reduction in the merchant-related reserves of approximately $60 million.

Interest expense increased 18% versus last year, driven by a greater average receivable balance and higher funding costs.

We continue to feel comfortable that we have positioned the Company appropriately for the potential adverse P&L effect from the current interest rate environment.

To begin with, our charge card receivables, which are one of our primary interest rate exposures, are not adversely impacted by a flat or inverted yield curve as much as they are by the effect of increasing short-term rates.

This is because, unlike the typical spread lending business of banks, our revenues from these receivables are not sensitive to interest rate.

We have roughly 50% of our total 2006 expected funding requirements fixed, and we have begun to hedge a portion of our 2007 and 2008 requirements.

In addition to our hedging programs, we have other levers to mitigate interest rate risk within our business model.

For example, we have shifted the variably priced portion of our lending portfolio from 40% two years ago to 60% today.

And within the fixed lending business, we have pricing flexibility.

The consolidated tax rate of 20% for the quarter decreased compared to last year, primarily reflecting the $105 million tax benefit discussed earlier.

With that, let me conclude with a few final comments.

We delivered particularly strong revenue and earnings growth during the quarter while continuing to invest in the business and maintaining substantial balance sheet strength.

Our results again illustrate healthy momentum in our payments business, where our competitive position continues to strengthen as evidenced by the relatively wide gap between industry growth rates and our spending and lending growth rates.

In fact, the strong momentum within our business held steady throughout the quarter, and we continue to see healthy spending to date in October.

We continue to deliver against our business objectives.

This quarter, we rolled out a number of new major products and continue to grow and maintain an active pipeline of growth opportunities.

Importantly, we also continue to focus on leveraging our market segmentation abilities to provide highly relevant and targeted offerings which, coupled with incentives to drive our customers to expand their breadth of spending on the American Express network, supports the premium value that we deliver to our merchant and card customers.

Over recent quarters, you have seen many new highly targeted products and service offerings that have resulted from this focus and our results reflect the success of these efforts.

Overall, we are very optimistic about the growth prospects that exist within the payments industry and our ability to leverage our closed loop network and our marketing capabilities to continue to capture cash and check spending on our payments products.

We are fortunate to have such a diverse set of businesses that span across the industry.

To ensure that we are positioned to invest aggressively for the future and to capitalize fully on the growth opportunities we see, we continue to work to reengineer the business and to control underlying operating expense growth.

Our recent business success coupled with our strong track record of innovation, product development, and customer-focused marketing make us confident that these investments will continue to drive our growth into the future.

Thank you very much for listening, and we are now in a position, Derek, to take some calls -- take some questions.

(OPERATOR INSTRUCTIONS).

Bruce Harting, Lehman Brothers.

Gary, now that you can focus 100% on businesses at hand, can you talk about what we might see on the re-engineering front as you go forward over the next 12 months to 24 months in line with continued spending and marketing?

And maybe you can just comment a little on the extra marketing spend as well in this quarter.

Yes, we continue to have an aggressive agenda.

The additional marketing spending in large measure is driven by the brand advertising expense.

If you look in the third segment that includes GNS and our merchant business, you can see the increase in brand advertising year over year.

And I think that's one of the primary drivers, obviously, of the 16% increase.

But we continue to have a pretty aggressive agenda for our marketing activities going forward, and that has to be supported by a lot of what we're doing.

We got a number of programs underway internationally to drive rationalization in regions where we feel like we can combine some of our structures and take advantage of the scale that we have an aggregate across all of our business lines.

We've got a major set of activities underway in our travel business to reduce our travel costs.

We continue to look worldwide at opportunities to service our business from the lowest logical cost source that is language-appropriate.

Six Sigma continues to represent typically about half of what our benefit is.

And then we have revenue re-engineering initiatives, which I think in this quarter accounted for something like 25% of our total re-engineering benefit.

So -- and obviously, as we think forward into 2006, we have got an aggressive agenda.

And it includes items like that on the agenda.

Ed Groshans, Fox-Pitt Kelton.

There's been a lot of talk about interchange.

We saw -- I know you talked about it at the financial community meeting.

And I guess -- there are concerns out there that the Visa Signature product is just as competitive as American Express products, if not more so.

And I was wondering if you can address that to some degree.

This is particularly, obviously, of interest to a partner.

And I think there's probably two ways to think about it.

One is the absolute spread that we have versus Visa and MasterCard, or the Signature and World cards, specifically.

And we have a point of view on that that we've never really disclosed.

But even if you assume that gap was not particularly wide, the real opportunity for a partner bank is to increase their spending by having their cards on the American Express network.

And so as we sit down and have a discussion with partner banks, there is obviously one element that focuses on what the spread differential is.

But a second and more important element, because you get the full amount of the interchange on each one of those incremental dollars, is how much we can drive incremental spending.

And a lot of the marketing programs that we're doing with MBNA and that we're working on with today with Citi and with UBS and USAA focus on how we can drive incremental spending on those cards, because that's really where the big opportunity lies.

And I guess that also falls into your retail program, when you're working with the retailers -- because there are some concerns out there that if Visa or MasterCard are forced in the U.S. to cut their interchange, that American Express is going to have to follow suit in basically a relatively similar fashion.

There has obviously been a lot of talk about that.

The only thing I can say is that our job every day is to sell the value that comes from American Express.

And that value is driven most clearly by our increase in average spending.

So in the quarter that we just completed, our average spending was up 12%.

I think we demonstrated pretty conclusively in the last analyst meeting that if you looked at Visa and MasterCard, it would be very difficult for them to make the same kind of argument.

So their prices, as far as we can tell, have been increasing in a period of time where they have had flat average spending.

Our prices have been pretty steady during a time period where we have had absolutely outstanding growth in average spend per card.

Okay.

And just finally, I wish you could just clarify -- you made some comments about going into the fourth quarter.

And I'm looking at like $0.59 or so as -- that being sort of the benchmark or run rate going forward.

Is that appropriate?

Well, what I wanted to just make sure that everyone did is that they had a good chance to look at the 8-K.

If you go back and look at the corporate expense for example -- the corporate expense has a slightly different allocation than it had before.

And some of the overhead expense that was allocated to AEFA, which we refer to as stranded overhead around here -- things that still have to be paid for -- my salary, Ken's salary, some portion of our audit activities, those kinds of things -- when you do a discontinued operations calculation, end up on our side of the ledger as opposed to on the Ameriprise side of the ledger.

And I think it's pretty clearly outlined in the 8-K, and I just wanted to make sure everybody took a good look at that.

Obviously, we continue to focus on a long-term target of 12% to 15% income growth on average and over time.

And I just think it's important that people keep those kinds of things in mind as they do their estimates for this year and for next year as we go forward.

Howard Mason, Sanford Bernstein.

Two quick questions.

I noticed that the other overhead line item came down a little bit sequentially and year on year, and just wondered if you could talk us through that.

And then secondly, I wondered if you could summarize your loss recognition policies for bankrupts and tell us roughly how much of the spike in bankruptcies in the first two weeks of October is in this quarter versus perhaps the fourth quarter.

Yes, let me focus on the second of those first.

Our policy, as you know, or you may not know, is to recognize bankruptcies as they happen.

So as we went through the September time period and we saw a pretty substantial increase in bankruptcies, we were recognizing those as we went along.

The impact that we have seen from the dramatic increase in the quarter -- I guess it was the week just before the 17th of October -- will be reflected in our provision numbers in the fourth quarter of this year.

Many of our competitors have a policy where they delay recognition anywhere from 10 to 75 days depending on the individual competitor.

And so if they've had substantial increases, that must mean that they were seeing very substantial increases early in the third quarter, because they have now recognized those increases in their results that they have announced for the third quarter.

So we have obviously seen a pretty significant hunk of that expense in the third quarter, but we're obviously going to see a big piece of that in the fourth quarter based on what happened during the first couple weeks of October.

But it's pretty much what we had expected with the exception of that week just before the 17th -- that obviously was a little higher than what I think any of us had anticipated, but it's nothing that we are overly concerned about.

So on your first question, if you look in the supplement, if you -- there's -- the third quarter of '05 reflects the 105 million tax benefit that we talked about and then $51 million of re-engineering cost and $3 million worth of after-tax spinoff-related expenses -- in the prior year, we have a 54 million tax audit benefit -- let's see, and we had a 74 -- I'm sorry, the second quarter of '05 had a 54 million tax audit benefit, and we also had a $73 million -- these are pre-tax numbers -- benefit from the credit that we got from our 9/11 insurance claims.

I'm sorry, what I was trying to get at is this other overhead -- so the item that in this quarter was 301 million pre-tax and in the June quarter was 379 million and year-ago quarter was 345 million.

I'm sorry, we're a little perplexed about it, so --

I'm sorry;

I didn't mean to correct you (ph) -- I'll call you back and we'll do it off-line.

David Hochstim, Bear Stearns.

I also have a bankruptcy question.

Could you just give us a sense of how much of charge-offs in the lending business are attributable to bankruptcy?

And then another company had indicated that it would be necessary to make adjustments or provide for the early October spike in bankruptcies in third-quarter financials if the increase -- the spike occurred before the 10-Q was filed.

Would that apply to you as well, or --?

Maybe you're indicating it would be a fourth-quarter financial event.

Yes, I think the first point is that I think generally, the impact of this on us is less than I think what you would see for many of our competitors, just based on the segment of the industry that we focus on.

Secondly, the policy that we have is to recognize bankruptcies immediately upon occurrence.

We do that, and I think we're unique in doing that across the industry.

I think all other competitors as I have looked at their policies show that they recognize bankruptcies anywhere from 10 to 75 days after occurrence.

And what you do is you recognize at the moment that you close your books, all of the losses which you think at that time are properly estimatable.

And that's what we've done.

So I don't obviously know the specifics of the circumstance that you're talking about, but we think our financial statements obviously fairly reflect what our historical policy has been about the recognition of bankruptcies.

Clearly, there was a run-up in the first couple of weeks of October, but we don't view that in any way to be kind of way out of pattern from what we had anticipated.

So that should be reflected, then, in the third quarter, because you hadn't closed your books until after that spike.

So should there really be that much of an increase in the fourth quarter, I guess, is what I'm asking -- in terms of provisioning?

I think the way we would think about it is what bankruptcies we had seen at the end of the third quarter is what we would recognize into our provision in that quarter into our write-offs into the third quarter -- not the first two weeks of October.

Laura Kaster, Sandler O'Neill.

Gary, could you please go over again the new calculation for the discount rate?

I just want to make sure that I have that all sorted.

Yes, the way we have approached it because of the growing importance of the GNS business is we now look at the total gross discount rate through the merchants that have been acquired by American Express.

So we take our proprietary discount rate and we take the gross discount rate of our GNS partners, and that reflects our gross discount rate -- that volume that flows through the merchant that we have acquired.

So what it would exclude, for example, are things like the ATM business, which does not run through our merchant calculation.

There are some people, for example, that take cash advances, and that runs through their billed business.

In our particular case, it neither runs through our billed business, nor would it be in this particular calculation.

And then, the other part of this is obviously, it's the merchants where we have actually done the merchant acquisition.

And so this gives, I think, a very clear kind of view of what the pricing is at point of sale.

That's what we've tried to do with it.

Okay.

And so how does that differ from how you had done so before?

So in the past, we had treated the GNS portion on a net basis.

So we had taken the net amount, which took the gross discount rates from the GNS partner minus the interchange rate and weighed that in with the gross discount rate that we had on our side, which was overstating the reduction in discount rate, given the gross -- given the increase in the GNS volumes.

And so it was just not reflecting a true picture of what was happening at pricing at point of sale.

And then I guess for a follow-up question, excluding the optics (ph) of the bankruptcy law and fact that that will front-run and have charge-offs possibly go up in the next couple of quarters, could you just speak to what you see in the health of the consumer, both domestically and abroad?

Other companies that have reported have spoken to the relative good health of the U.S. consumer, but maybe not so great in the UK.

And I'd just like to see what you are seeing there.

Well, we did have double-digit growth in every region around the world, but the growth rates outside the U.S. generally were lower than the growth rates in the U.S.

Our best measure of the health of the U.S. economy is -- we always refer to these small-business numbers.

And as you saw, small-business was up 22% in the quarter, which is a continuation of really outstanding momentum that we have seen there.

And so the U.S. really does appear to continue to be very strong.

I wouldn't say that there's substantial weakness internationally, but if you go through the GDP growth rate, particularly in some of the major European countries, the UK has slowed substantially;

Germany has slowed substantially.

I think the good news is that in spite of the slowdown in growth that has happened in the economy there overall, our business has actually performed quite well.

And I assume that implies that we're gaining share there as well.

Meredith Whitney, CIBC World Markets.

Congratulations on the quarter, you guys; you really deserve it.

My question relates, Gary, to your GNS -- well, actually, excuse me, to your U.S. card account growth.

You doubled card accounts -- new accounts from last year.

And I was wondering if you could some more detail in terms of -- were those specifically from the GNS partners, the U.S. partners?

And is that a base case scenario for future quarters?

Well, we have disclosed the growth rate in GNS cards and the growth rate in U.S. card.

It's in the supplement.

And off the top of my head -- you're going to have to forgive me here;

I think I have this right -- it was 7%, I believe, on the proprietary business, and I think it was 35% in the GNS business.

And so that gives you a little bit of a flavor.

So obviously, the U.S. business on the proprietary side is substantially larger than the GNS business today.

But GNS clearly made a contribution to that growth rate, because its growth rate was so much higher than the proprietary business growth rate.

So we certainly hope that those kinds of numbers are sustainable going forward.

We think that performance was absolutely outstanding in the quarter and hope that we see the same kind of strength in the next few quarters.

Michael Hodes, Goldman Sachs.

My question pertains to the strong growth that you saw in U.S. card lending.

I think it was up 3.4% sequentially and almost 15% year-over-year.

I was a little surprised to see the margin expansion as well sequentially in the quarter.

And I know some of that has to do with less reliance on introductory rates, but I was hoping you could a give us little more flavor of what's actually going on.

Well, there's a couple of things happening.

Generally -- first of all, our business is responding very well to a lot of the new product launches that we have done, and that's been a helpful fact for us.

Our paydown rates have increased somewhat, but not an awful lot over the last quarter or so.

They have been relatively steady over the last quarter or so.

We continue to, as we work on new products, deemphasize balance transfer products.

And we've had a modest reduction in balance transfer products quarter over quarter.

And the new products that we're putting into the marketplace, we're putting in at what we think is a competitive price for their value proposition.

And all of that taken together has really enabled us to have a very attractive margin on that business.

All right, and just so I'm clear, you indicated when you were talking about potential credit trends going forward, that there was perhaps a slight move downmarket.

And I was hoping you could just clarify what you meant there.

Yes, what -- our objective is not necessarily to have the lowest possible provision rate.

Our objective is to try and maximize our net present value.

And so Ash (ph) and the risk team work very hard to make sure that we are trying to optimize at all times the business overall.

And so for example, they might provide within the appropriate underwriting standards, the opportunity for customers to spend more.

They might loosen up on some of those standards.

And as they do that, obviously, it benefits our business.

But we do it in a way that keeps very careful track of what's happening from a loss perspective, and we feel that overall, it optimizes the net present value of the business.

So we really don't bonus anybody on having the absolute lowest provision rate.

And we've been operating a very low provision rate, both relative to the industry and relative to our own history.

And we really have felt like there's been an opportunity for us to use this in a way that will facilitate the growth of the business.

Joseph Dickerson (ph), Atlanta Equities.

I just had a quick question on the -- well, actually, I've got two questions.

The 77 million of severance costs -- I noticed that that wasn't broken out sort of at the top key sort of onetime items.

So can we think about this level as being a run rate over the next couple of quarters?

And then additionally, on the marketing spend, I wanted to know if the brand advertising that you mentioned -- is that all booked in GNS?

I was noticing that GNS is about 11% of the total marketing for the consolidated franchise.

And I was just wondering if all of the brand advertising went into to that business.

We have product brand advertising, and then we have overall company brand advertising.

The product brand advertising is in the P&Ls of the individual segments.

The overall company brand advertising -- for example, "My Life.

My Card.", is the kind of brand spending that you would see in the third segment.

And on the re-engineering costs, if you look at the start of the supplement -- and I'm sure I'm just missing an element here -- but if you look at the start of the supplement, we talk specifically about the amount of re-engineering cost and restructuring costs that we've had overall, and the amount that's associated with Hurricane Katrina.

Craig Maurer, Fulcrum Global Partners.

Most of my questions have been answered.

I was just wondering if you were on pace to launch the Citi card in the fourth quarter.

Yes, our expectation continues to be that towards the end of the fourth quarter, that we will have a launch with Citi.

Obviously, we are excited about it and enthused about its prospects.

And that continues to be our plan.

So the hope is that we have a launch somewhere late in the fourth quarter.

And obviously, we will start seeing the real benefit associated with that as we move into the first and second quarters of next year.

Matthew Park, A.G. Edwards.

Just following up on some questions on the loan balance growth in the United States.

I guess you mentioned that you had deemphasized the balance transfers.

So how can you outpace the industry on a fairly consistent basis for the past couple of quarters without relying on perhaps more aggressive pricing?

I'm just curious how you got there.

And you sort of talked about be receptivity to your products, but can you be a little more specific in terms of what other (multiple speakers) parameters you're changing.

Sure.

If you go through the list of new product launches that we have had this year, virtually all of those have been targeted against lending segments.

So we've had in IN:NYC, IN:CHICAGO; we've had the JetBlue card, which was announced.

And our overall business -- if you look at our overall business, our overall billed business was up 18% in the quarter, and along with an 18% growth in billed business comes a certain amount of accounts receivable that gets brought along with it.

So as you know, we don't generally set about to have an on-purpose strategy to drive our receivables up.

What we do is have a strategy that drives our spending.

And fortunately, that strategy has been working exceedingly well.

And then there's a certain amount of receivables that obviously come along with billed business that is at that level.

And so I think it's a combination of both having very strong -- good product launches that we feel good about, and then the fact that our billed business has been so strong.

And that's up substantially because we think our value propositions are good.

The rewards programs are terrific.

Our merchant coverage has increased.

It's hard to isolate on a single variable that would show us driving that, but that's clearly been the case.

Another thing I'll point out is if you look at the overall growth in our small-business business, our billed business was up 22%, but the lending products were up more substantially than the 22% overall billed business was up.

And so we've seen very good growth also on new small-business lending products, and that's been part of the growth rate that we've seen in receivables as well.

Gary, if I were to follow-up -- given the success of perhaps a little better than what you were expecting at the beginning, do you feel the reserve level is appropriate at this point?

Yes, we actually think our reserves are right where they should be.

Obviously, it's something we look at absolutely every quarter, and that we're very careful to measure.

And I think our track record here speaks for itself.

We have had absolutely superb credit performance historically.

I think we have done an excellent job of judging the appropriate level to maintain our reserves.

And we feel very good where they are.

The reserve coverage on the lending side of the business was down a little bit in this quarter, but if you dissect that, the primary reason for the reserve coverage being down is that we have products which, when they come on as brand new products, we reserve at a very conservative rate, at a high percentage of their billings.

Some of those products have now annualized themselves, and so we actually now set their reserve rates at what they are actually running at, and that's giving us some benefit in the quarter.

So if you look at -- our provisioning overall was up pretty substantially.

I talked about numbers of up 55% and 45%.

Our overall provisioning was up pretty substantially.

And we feel that we are in the right spot as we come into the fourth quarter.

(OPERATOR INSTRUCTIONS).

Christopher Brendler, Legg Mason.

I just have, I guess, a question that follows up on Matthew Park's question.

The strong growth in lending -- I suppose against a tough industry backdrop -- can you give us any detail on what you are seeing sort of by origination channel?

You know that the mail is very competitive, and I'm seeing -- I'm sort of guessing that with these new products, you're not actually going through the mail, and therefore has taken some of the nasty competitive conditions?

And then also, has anything really -- sort of if I step back a little bit and look at these strong results in both spending and lending, has anything changed in terms of consumers' usage of the American Express products that you think may be driving this switch?

Because it definitely seems like -- if I take out -- the product in pricing mix aside, the brand has always been there.

But we're definitely seeing acceleration, particularly the last two quarters.

Anything you can provide there would help think about that?

Sure.

On the first one, I don't know if we've talked much about it in the past, but roughly half of what we are recently acquiring in terms of new customers is coming through the on-line channel.

And so John Hayes and his team, along with a big part of the domestic business team are really focused on finding ways to reach customers so that they come to us via on-line application vehicles.

And so that's obviously one piece of that.

The interesting thing is you have to think about the full breadth of the Company when you think about this question, because we also have a big initiative focused against the growth of the middle market that is really coming into its own now, as we have increased that sales force now for a second time and are seeing outstanding growth in our middle market accounts.

We launched a new strategy against our open business two years ago, which obviously is delivering outstanding results.

And that continues to keep pace.

And then we try to be smart about how we do new card acquisitions.

Certainly, direct-mail continues to be an important vehicle for us.

But we're obviously also clear about the fact that there are other channels that are important ways for us to acquire customers and we're seeing good response as we work to have customers respond on their own through the channels.

You know, if you think about what is happening in our business overall, we have now made, for a sustained period of time, a very substantial investment to grow the business.

If you go back -- really now two years is when we started, in the third quarter a couple of years ago, to really -- we said at the time we saw a window of opportunity for us competitively to try and turn up the heat a little bit.

And it's been the consistency that we have had available to us to enable us to turn up the heat that we think has given us this kind of momentum.

And you don't see the real value of the cards until you have a little bit of time go by.

They don't come on, and in the next quarter begin to deliver results.

But we're seeing now -- we are starting to reap the benefits of what has been very consistent, high levels of investment spending, really going back for two years.

And once you're into the positive cycle, it's a really wonderful thing.

You see some competitors who, frankly, are in the opposite direction, where they are cutting investment spending.

They have seen a drop in their receivables growth.

Perhaps they're widening their margins.

And you see a number of competitors that are moving in that direction.

Well, fortunately, our flywheel is moving in the other way.

Our spending is increasing on the part of our customers.

That's generating additional flexibility and capability for us as an organization to grow the business.

We have now seen the benefits of that sustained level of marketing and membership reward spending for quite -- that we've made for quite a while.

Bob Napoli, Piper Jaffray.

Question on return on equity, I guess, from stock repurchases.

Running, as you mentioned, above your guidance range or your target range of 28 to 30%, you expect, you said, to gravitate back down towards that 28 to 30%.

I was wondering if you could comment on where specifically -- is it because of a build of capital, or are margins just kind of above peak levels?

No -- actually, I'm glad you asked the question, because I didn't mean to say it that way.

What I meant to say was that if you look at our actual reported return on equity today, that it was going to migrate up towards our targets as the quarters where we have Ameriprise reported in our results fall off.

But the 32% that we talk about on a pro forma basis that we reported in the quarter is what our actual run rate is based on the calculation as we did it.

And we don't expect that number necessarily to drop back down into the 28 to 30% range.

As you know, when we set these targets, we set them in a way that we can sustain over a very long period of time.

And we view them as on average and over time targets.

And as with income, there have been times in the last five years when our income growth rate has been below 12%.

And there's been times, like this quarter, last quarter, where income growth rates have been substantially above.

That same thing has been true with return on equity as well.

So what I would think about is in this particular quarter, we happen to have 32% return on equity.

There may be future quarters where that's not the case, but it's not as a result of an on-purpose business strategy.

We're working as hard as we can to be as efficient with our use of equity as we possibly can be as a Company.

And I think many of the initiatives we have underway to try and drive the appropriate management of our balance sheet are reflected now in these nice improvements in return on capital.

In that regard, would we expect to see accelerated stock repurchases, now that you have completed the spinoff?

Well, I don't know if we should forecast it.

But what we've set for ourselves is a target of being at 65% or better.

So obviously, this quarter didn't help our average.

So if we're going to get our average to where we want it to be, it's got to be higher in the future.

Last question -- on return on equity as well, the U.S. return on equity is substantially higher than international.

I was wondering if you could comment on that gap.

Is it primarily scale related?

And if you looked out five years from today, what would you expect to see from the return on equity on those two businesses?

Yes, it's primarily the fact that the travel business is reported in that segment, and that has obviously a big impact on the overall returns.

There are some scale differences between the international business and the domestic business that do result in some portion of that number being lower.

And then finally, American Express Bank is in that segment.

I have to say, though, American Express Bank, as you know, was so low historically, and the team there has just made very significant progress.

The bank continues to improve its returns on capital as they have both reengineered their balance sheet and reduced their capital intensity of the business, but also have grown the parts of the business that are not so capital intensive.

So it's really a mix thing going on there, Bob, more than anything about the international business that is less attractive than the domestic business.

Bruce Harting, Lehman Brothers.

A follow-on to the capital management question that you just discussed.

Can you talk about sort of the next way you might spend money on the acquisition side -- when you look back over the last 20 years at American Express and the growth through acquisition and the divestiture of much of that and how streamlined the Company is right now, Gary, how should we really think about that streamlined organization?

Is that the way it's going to stay for quite a while and just build out the core businesses?

Or do you think you could start to see some opportunities outside the immediate realm for capital deployment in the next year or two?

We like streamlined.

There's no doubt about it.

We have been through a real effort if you go back now a couple of years.

We shut down the student leasing business.

We've sold the student loan business.

We've sold the business leasing business.

We've sold the ATM business.

We've now sold the Tax and Business Services, and we have spun off AEFA.

And so there's been a pretty consistent pattern here that I think has evolved over the last three or four years that shows that we believe the prospects that exist within the payments industry are very substantial.

And the great news is that we have a business model that is demonstrating that we can do that organically, that at times when our competitors seem to be struggling, we really have the opportunity to both grow our lending business and our charge business, our billed business overall, in ways that are really outstanding.

And so, as we look kind of at the future, we continue to see a business in the United States that is still unpenetrated to a large extent with plastic, where there is still plenty of cash and check being used, and where we have opportunities to penetrate.

And that opportunity exists in even larger fashion outside the U.S.

And if you think about the opportunities that we're right on the brink of here with our partnerships with -- hopefully, the launch of a successful program with Citi, with USAA, with UBS, the Lloyds program that we have just launched in the UK; we just signed a new partner in Korea; the success that we've had with Westpac in Australia -- there are just many, many opportunities that are right in front of us that have great characteristics, that have low capital intensity, that have nice reoccurring revenues associated with them that just have all of the cash flow generating flavor to them that we're really trying to optimize.

At the end of the day, what we're focused on is trying to deliver as much cash flow back to our shareholders as we possibly can.

And all of these kind of areas that we focus on today fit into the category that match with that nicely.

Now if we found something that in some way could significantly accelerate our capability to do what I just described, then I don't think we would foreclose it as an acquisition opportunity.

But that's a pretty tight set of parameters that something would have to meet, I think, in order to fit on our list.

It doesn't mean that there aren't things out there that might, but it would be a pretty tight set of parameters.

So it would really be with in more payments than technology rather than a bolt-on credit card portfolio or something like that.

I shouldn't really speculate.

But we have done, and could do, credit card portfolios if they made sense for us in some way.

The pricing in the U.S., as you know, has not been particularly attractive.

Outside the U.S., it's been a little bit better.

And so I wouldn't foreclose things like that if they really did improve our strategic situation in some way that was fundamental.

But I think the kind of overriding strategic direction here is low capital intensity, reoccurring revenues, very attractive returns on capital, organic growth, segmentation -- take advantage of the myriad of opportunities that we have.

One of the great things about this Company is that we have all of these different business segment that we can address -- the middle market business, small-business, the consumer -- charge lending, international, domestic.

There's just a long list of opportunities, and our appetite for organic growth still is stronger than our ability to feed that appetite.

There are just still a lot of opportunities ahead of us.

Ed Groshans, Fox-Pitt Kelton.

I want to follow up on Michael's question regarding credit and I guess expanding the criteria a little bit.

I guess the major concern out there is some type of housing hiccup or slowdown.

And people are pointing to the UK as -- we see the slowdown there, and credit quality deteriorate.

And I guess if we still have to see that here in the U.S., what kind of comfort can you give us that you have the proper controls in place, or you're not going to expand it so wide as to create a problem?

You know, I think the best defense for the quality of our credit performance is what we've actually done over the last couple of years.

I think the record really speaks for itself.

We have by a wide margin the best credit performance in the industry.

We have absolutely world-class capabilities in virtually every aspect of credit granting.

You know, one of the wonderful things about having a charge business and a lending business is that we re-underwrite every single transaction when somebody makes a charge on our products.

And many of our lending customers are also our charge customers.

There's a high overlap among those two customer bases.

So we get very early indication when we have difficulty among our customers in one way or another.

And so we clearly have got enormous capability here that we use to our advantage when we think there are opportunities out there to grow our business competitively.

It wouldn't be helpful for us to develop unique capabilities and then not exploit those unique capabilities.

And I really do believe that we've got an absolutely world-class credit team and they're giving us the opportunity to take advantage of nuances that we see in the marketplace.

And I would view those as nuances.

It wouldn't view this as -- American Express has suddenly opened the fire hydrant, and the fire hose is now wide open.

It's nothing like that all.

On the margin, we see some opportunities where we can tweak our credit parameters and take advantage of that small tweaking.

And that obviously gives us opportunity for growth.

And you see modest increases in losses as a result of that.

But again, we're not trying to minimize losses.

We're trying to maximize overall net present value.

And I think again, we talked about in the last analyst meeting how our average FICO scores had improved in our lending portfolio.

And our average FICO scores are absolutely outstanding in our lending portfolio.

Nothing has changed about our target customer, the focus that we have in our lending business -- all of that remains absolutely as it has in the past.

What we have done is very carefully look customer by customer, individual by individual, and tried to make wise decisions to maximize the net present value of each of those customers.

I think, Derek, we've got time for one more question if you have got anyone on the list.

Meredith Whitney, CIBC World Markets.

I wanted to talk about the competitive gap that has grown between you and your competitors, and if you could give any explanation for it.

At the low end, you saw 4% volume growth year on year at some of the banks -- you guys with 18%.

What do you make of it?

Outside of -- of course, you're going to say, that much better -- but what can you make of it?

Well, actually, in some ways, it's even a little bit better than it looks, because we don't include cash advances as part of our calculation.

Our billed business basically reflects just the result that we have from the ongoing activities that we have in our business.

And so it really is very strong.

And as I said a few minutes ago, we think in large measure, that is driven by the fact that we have made investments consistently over a long period of time that we now have the opportunity of reaping the benefit of.

It not an overnight thing, and it's not an individual products thing.

It is a series of investments that we have made across the Company to improve our coverage, to grow both our middle market and small-business business, and to drive up the -- our proprietary business and our GNS business with new products and new partners.

And so it's hard to isolate it down to one factor, and I think that's one of the great things about the Company, is that there isn't one factor that drives our results one way or the other.

You gave a data point last quarter on Centurion's growth year on year.

Could you provide the same data this quarter?

I don't think we did.

We must have been misunderstood if we did.

It was qualitative.

Yes, Centurion and Platinum continue to grow right at the high-end of our business.

Now, I might have said that before, and that continues to be true in this quarter.

Thank you.

Thank you all very much for joining us.

Thank you for participating in today's American Express third-quarter 2005 earnings conference call.

You may now disconnect.