美國運通 (AXP) 2006 Q1 法說會逐字稿

At this time I would like to welcome everyone to the American Express first quarter earnings conference call. [OPERATOR INSTRUCTIONS]. Thank you. Mr. Stovall, you may begin your conference.

Welcome, everyone. We appreciate all of you joining us for today's discussion. Before we get started, my responsibility to remind you that the discussions today contain 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 is filed in the company's 8-K report and in the Company's 2005 10-K report already on file with the Securities and Exchange Commission.

In the first quarter, 2006 earnings release and supplement which are now posted on our Web site at IR.americanexpress.com, and on file with the SEC in an 8K report, we have provided information that compares and reconciles the Company's pro forma return on equity as we discussed today with our consolidated return on equity, as well as the US Card Services segment 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 with conjunction with today's discussion.

Gary Crittenden, Executive Vice President and Chief Financial Officer of American Express, will provide some introductory remarks, highlighting the key points related to today's announcements. 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. Based on this, we ask that you limit yourself to one question at a time during the Q and A.

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

Welcome and thank you all for joining today. As you have seen in the earnings documents distributed earlier today, our first quarter results reflect a continuation of the strong business momentum we reported throughout 2005, and the ongoing benefits of our investment in a broad range of business building initiatives.

Before I review these results, I want to make sure everyone is aware of the 8-K we filed in early April which described revisions to our presentation of certain financial information, including certain revenue and expense reclassification. These reclassifications were made in the light of the evolution of our business and accounting guidance. All of the current quarter and historical information is based upon as these revised classifications. It is important to note that the reclassifications have no impact on the pretax income, income taxes, net income, or on the Company's total assets or liabilities. In addition, they have no significant impact on the company's previously reported growth rates and revenues and expenses.

Now let's turn to our specific financial results from continuing operations for the first quarter. When compared to last year's first quarter, total revenues grew 12%, income increased 18%, and diluted EPS of $0.70 rose by 19%. Reported return on equity for the quarter was 27%. As you know, this calculation reflects net income and average equity over the twelve-month period which includes the earnings and capital from our discontinued operations. Pro forma ROE, which is determined using the trailing four quarters income from continuing operations over average shareholder equity during the period from September 30, 2005, through March 31, 2006, was 32%.

First quarter results included several significant items that impacted the income statement. The items negatively impacting results were $112 million or a $73 million after-tax charge resulting from a higher redemption rate estimate within the U.S. membership rewards reserve model. A $72 million or $47 million after-tax reduction in the finance charge revenue and securitization income related to higher than anticipated Card member completion of consumer debt repayment programs and certain associated payment waivers. A $63 million or $53 million after-tax higher provision credit losses in Taiwan, primarily due to the impact of industry-wide credit issues there.

Items positively impacting results included an estimated favorable impact of approximately $150 million or $98 million after-tax due to lower early credit write-offs, primarily related to last year's bankruptcy legislation and lower than expected costs for Hurricane Katrina. And an $88 million or $40 million after-tax gain related to the sale of our stake in Egyptian American Bank. During the quarter, we returned 93% of total capital generated through share repurchases and dividends. We repurchased a higher level of shares this quarter after our activity was reduced last year in light of the capital implications of the spinoff of Ameriprise. Since 1994, we have returned 66% of the capital generated by the Company to the shareholders, which is slightly above our 65% long-term target.

The strong growth rate in revenue in the quarter reflects increases in discount revenue, Card member, lending net finance charge revenue, securitization income, and various card-related fees, all of which reflect the excellent spending, lending and cards in force growth which we achieved during the quarter. All of our customer segments in major geographic regions contributed to this growth. Worldwide build business increased 16% on a reported basis and 17% excluding the impact of foreign exchange translation. In our U.S. proprietary business, consumer spending grew 15%, small business spending rose 19%, and corporate services volume improved by 17%. In total, U.S. non-P & E related volumes which represent approximately 65% of U.S. billings grew 17%, while P&E- related spending rose 14%.

U.S. airline volume increased 17% due to a 6% increase in transaction volume, and a particularly strong 11% higher average airline charge. Outside the U.S., proprietary build business growth, which has been improving over recent quarters, increased 18% on an FX adjusted basis as we saw 16% growth within our consumer and small business activities and 24% growth within corporate services volumes. And double digit growth within each major region around the globe. And finally, within our global network service business, build business rose 25%, driven by strong growth outside of the U.S. again exceeded 20% as well as robust growth within the U.S.

Worldwide cards in force grew 10%, marking the strongest quarterly growth rate since the second quarter of 2001. We added $1.5 million net new cards during the quarter and 6.4 million net new cards since last year, reflecting 8% growth since last year. In proprietary cards -- I'm sorry, reflecting 8% growth versus last year in proprietary cards and 24% growth in network partner cards. Spending for proprietary basic card in force grew 8% worldwide, despite the suppressing effect of the substantial card additions and the negative translation effect of the stronger dollar.

During the quarter, our average discount raise was 2.58%, versus 2.61% last year, and 2.55% last quarter. The decrease versus last year continues to reflect selective repricing initiatives and the ongoing changes in the mix of spending between various merchant segments. The increase versus last quarter reflects the normal mix-related seasonal rate benefit, in addition to the inclusion in the fourth quarter rate calculation of an unusually high level of investments in strategic merchant partnerships. Worldwide managed lending balances grew 16% year-over-year on 15% growth in the U.S. portfolio and an 18% growth outside the U.S., while the portfolio spread was relatively stable despite the negative impact of the consumer debt program finance charge reduction.

Travel commission and fees decreased by 1%, reflecting lower average transaction fees due in part of the ongoing transition to online booking. Total travel sales were up 6% as consumer travel sales continue to grow rapidly, increasing 25% while corporate sales rose 4%. Human resource expenses increased 4% versus last year on a higher employee level, merit increases and greater benefit cost, partially offset by lower management incentive expenses.

Marketing, promotion, awards, and Card member services cost increased 15% reflecting greater rewards costs and modestly higher marketing and promotion expenses. Increases in rewards cost continue to reflect the strong spending growth and increasing Card member participation in our rewards program. In addition, the rewards expense growth reflected a decision to modify the ultimate redemption rate assumption within our U.S. membership rewards reserve model in order to reflect more recent redemption trends. Historically, we have utilized redemption trends encompassing activity since the inception of the program in 1991.

However, in light of program changes in the four or five years which have been geared toward enhancing utilization level, we have seen redemptions rise. Based on this, we have modified our redemption rate assumption to reflect redemption trends over the past five years. This period provides a rich enough set of data within the calculation and also captures the impact of the program enhancements on redemption rate. Going forward, we will continue to review redemption trends, both within and outside the U.S. to ensure our reserve model reflects the evolution of those trends.

The total provision for losses and benefits increased 13%, as the lending provision and the investment certificate and other provision rose by 9% and 75%, respectively. While the charge card provision declined by 3%. The increase in the lending provision was primarily driven by the impact of industry-wide credit issues in Taiwan and higher lending volumes worldwide, which were partially offset by the bankruptcy and Katrina-related benefits in the U.S. The charge card provision decline reflects improved loss rates issue partially offset by higher volumes. The significant growth in the other provision was due to higher interest rates on larger investment certificate balances.

Interest expense increased 39% versus last year, driven by higher funding costs and a greater average receivable balance. Growth in the remaining operating expenses reflects the impact of increased volumes, partially offset by the gain of the sale of our stake in Egyptian American Bank. The consolidated tax rate of 34% for the quarter increased from 32% last year due to a relatively low effective tax rate benefit on the credit losses in Taiwan and a relatively high effective tax rate related to the Egyptian American Bank gain.

With that, let me conclude with a few final comments. We again delivered strong revenue and earnings growth during the quarter while continuing to invest in the business and maintaining substantial balance sheet strength. As we have indicated previously, there will be fluctuations in the 2006 versus 2005 quarterly earnings growth rates, created by some significant positive and negative items within the last year's results. In last year's second quarter, we recognized an $87 million tax benefit, as well as a 9/11 insurance-related benefit of $73 million after tax. In the third quarter, results reflected an additional tax benefit of $105 million, offset in part by a $32 million after-tax Katrina-related provision expense. And of course, the fourth quarter reflected the impact of bank-related write-offs as well as a $60 million state tax benefit.

This quarter's results continue to illustrate healthy momentum throughout each component of our proprietary business as well as our network business and our competitive position continues to strengthen, as evidenced by the relatively wide gap over recent quarters between industry growth rates and our spending and lending growth rates. To ensure that we are positioned to invest in growth opportunities, we continue to reengineer the business. While this will likely generate reengineering related expenses from period to period, it will position us to continue to effectively control underlying operating expense growth. We are optimistic about the opportunities currently available within the payments industry. We believe that the relatively low level of current plastic penetration within the geographies we operate provide significant opportunity for us to drive additional spending to our network, further penetrating cash and check payments.

As you know, even the more mature U.S. consumer segment still as less than 40% of total spending penetrated by plastic. Outside the U.S., within the U.S. small business segment. and within the global middle market sector, penetration rates are significantly lower. We believe the strong growth received over recent quarters which has been trending upwards from 7% in the first quarter of 2004 to 10% this quarter provides further volume-based growth potential as these customer relationships mature and the expanded customer base further enhances American Express' relevance.

This card growth is particularly important in light of our ability to drive customer spending by focusing on leveraging the rich customer and merchant data our network provides, we believe we can continue to create compelling products and services that operate like a virtual marketplace, linking our high-spending Card members to merchant offers and helping to drive incremental spend. In particular, we believe that our share capability which we highlighted at our February financial community meeting will be one of the key drivers of our ability to assess unmet customer spending needs and to identify customer spending that is currently being captured by other payment products and to drive that spend to our network.

We are also very excited about the momentum in our global network services business where we delivered 25% billings and 24% cards in force throughout this quarter. We believe there are still significant opportunity for growth, not only given the pipeline of U.S. partner products to be launched this year, but also given the additional partnership prospects, both within the U.S. and internationally. In addition, our GNS model provides us with the flexibility to optimize our business globally.

As an example, during mid-March, we announced an agreement to sell our proprietary card operations in Brazil through an independent operator partnership. This transaction exemplifies our ability to maximize our business across different markets by leveraging the business model that offers us the broadest distribution and greatest relevance at the best economics within a market. In summary, our recent business success coupled with our strong track record of innovation, product development, and customer-focused marketing makes us confident that we're positioned to continue to drive attractive growth and returns into the future. Thanks very much for listening.

With that, now James, we are ready to take questions.

Thank you.

[OPERATOR INSTRUCTIONS]. First question is from Joel Houck from Wachovia Securities.

Your question really, I guess pretty simple. The tax rate, I think you talked about one timers in the quarter and I guess last quarter the guidance was for kind of a low 30s tax rate. Is that still the expectation going forward with kind of the sale and divestitures, or has that outlook changed?

No, I think the two factors I mentioned did have the influence on the quarter were the Taiwan losses that were not fully tax-effective, and then the gain on the sale of Egyptian American bank had an effect. And if you look back to the first quarter of last year, I think we were at the 31, 32% level. I think that historical benchmark continues to be a good guidance.

Thank you.

Our next questions comes from Chris Brendler with Stifel Nicolaus.

Hi.

Hi, Chris.

Hi, Gary. I have a couple questions. If you can give us a quick clarifying comment on the debt repayment plan. I could understand what happened there, but just making sure I understand exactly what the dynamics were the that drove and the second question would be, could you comment at all about U.S. GNS, the reported numbers, it looks like there's a slowdown in GNS growth, maybe it's a function of larger numbers, but I think City bank went online fourth quarter. If you could give me color on what's happening.

On the debt repayment plan, I assume you're talking about Delta?

The consumer debt repayment.

Yeah, what that was, four or five years ago, we had agreed with an nonprofit organization to allow consumers who met certain criteria to have essentially some portion of their interest obligation discharged. And we had made assumptions as people went through about that rate at which people would comply with the program and it turns out that over the course of the program, more people complied that we had anticipated would comply and so when we got near the end of this first significant part of the program, we recognized that we needed to take a catchup charge, essentially, to reflect what we should have been reserving during that time period, and that was what was reflected during the debt repayment plan. We now have a good understanding of this. It's a relatively modest program but the fact that we hasn't accurately captured what is actually the admirable diligence that many people had to stay with the program is reflected in the charge we took today.

And for that initial, or is a catchup for all the --?

The entire time period .

All these.

Yes. And we feel very good about it. If you look back over time, we're -- in the U.S., obviously performing better than the average number. The average number was 25. We said we grew internationally at 20%, so we're doing better than that in the U.S. and for the first time we're lapping the initial MBNA numbers of we've got the start-up of City kind of lapping these initial numbers from MBNA now, MBNA BA, and it does take a while for people to get into the market, do the appropriate testing on the products decide what value proposition it is that they're going to go forward with, and then have those programs roll out going forward. And so I think we feel very good about what we are and feel confident about the results our partners are going to see.

Thanks a lot.

Your next question is from the line of David Hochstim from Bear Stearns.

I wonder if you could clarify what you were saying about membership rewards reserving. Did you say you used redemption rates for the last five years. So if you've changed the program in the last five years, couldn't you end up with another catchup reserve if you used more recent redemption rates. And second, could you give us a sense of how much of a gain you would have from the sale, or what your basis was?

Okay. In terms of membership rewards, you probably recall, you certainly recall that it probably has been four or five years ago when in an analyst meeting Ken stood up and talked about the fact that we were going to drive up the penetration of rewards significantly from where it had been historically and we had reported on those metrics overtime and the success of doing that and we enhanced the program as we went through that time period .

And although there is some year to year volatility, it's not a straight line calculation, the program is more successful than it's ever been in its history. But you need a certain reservoir of data to do the calculations properly. We feel like the last four or five years is a different time period than the period going back to 1991, so it was appropriate for us to shorten the period we were using to calculate the average ultimate redemption through this shorter time period. When you do a change in the ultimate redemption rate, you do it across the entire bank, though. So points earned going back to 1991, you apply that higher level to the entire bank so there's no catchup that is required to get you in the right spot. If you went to a shorter time period, there's enough variability from year to year you're not sure you're capture the true trend in the business. So we feel like this is the right place to come out. This is something we continually fine tune.

We look at this all the time and look at both the domestic markets and the international markets and as we feel that it's appropriate to make adjustments, we'll continue to make adjustments so we reflect the true long-term amount. On the gain, we obviously have an estimate internally about what it's going to be. We can't disclose that yet, we're still in the process of gaining regulatory approval and it will happen sometime, we hope, before the end of the second quarter as we dis close in the documents we sent out. But at this point, we can't disclose our estimate.

Can you give us some sense of the basis is in that proprietary business?

I probably shouldn't. We're completing all the work that needs to go into completing a final balance sheet. All the things you do, is what we're engaged in today and I wouldn't have an exact number.

Okay. Thanks.

Your next question is from the line of Ed Groshan s with Fox-Pitt Kelton.

Good afternoon, guys.

Hi, Ed.

Just on the marketing expense came down a little bit quarter over quarter. Could you give us what your expectation is for the year and what you're looking to do there?

Well, as you are very aware, we do tend to think about marketing and rewards as being somewhat fungible. Sometimes we are pushing a little bit harder on rewards and sometimes harder on marketing and sometimes when we have an extraordinary rewards cost, as we did in this quarter, we're modulating our marketing expenses to ensure we come in where we would like to come in. And I think that's what you're seeing in this quarter. We did a big push with My Life, My Card in the first quarter of last year.

We sustained that for a pretty lengthy period of time and we tend to pulse these things back and forth and what you're seeing in this quarter is the normal give and take back and forth between marketing and rewards. It was up a little more modestly -- to get kind of a better read, if you look at the segment data, internationally I think the numbers were up about 11% and I think that gives you a better sense of the underlying growth rate numbers. If you take out the additional MR charge that we had in the quarter to do the higher ultimate redemption rate.

Okay. And the MR charge, we have kind of a one-time true-up, but does it seem that, overall, the expense of the program is going to be higher going forward, also?

Well, there's two factors that go into it. One is the calculation of the cost per point. And the second is the ultimate redemption rate. If you look back over the last four years, the cost per point has gone horizontally. And the redemption rate has generally trended upward. That is good from our perspective. The more people -- we're actually out there trying to get more people to redeem, because the more people redeem, the more loyal they become to the American Express franchise and the better knock on characteristics they have.

They're better spend, better delinquency patterns, faster speed of pay, all of those things come about. We have the opposite mind set about this that most people have about rewards programs. We would love to have no breakage and have as many people take advantage of it as possible. And what you're seeing reflected here is the ongoing success of this program and it's being reflected in the distance we put between ourselves and our competitors.

Okay. Thank you very much.

Your next question is from the line of Bob Napoli of Piper Jaffray.

Good morning.

Good morning.

The earnings growth rate in the quarter, I understand your comments about the fluctuations in year-over-year growth rates, but your earnings were up over 18%, 18.6% this quarter and arguably the net of all these onetime items would add $0.03 to earnings, so is this a statement about the earnings power you see in the business given that your target for earnings growth is 12-15% year-over-year, exing out one times, you're well above the top end of that target.

What I was trying to do is -- we are conscious of the fact that we have all of these one-time factors that happened in the second, third, and fourth quarters last year. And most people as they have analyzed this have captured those properly, but we want to make sure people have thought about those properly. And in terms of our long-term guidance, really nothing has changed about that.

We still feel the same way we have for a long period of time, that the long-term earnings power of American Express is reflected in 12 to 15% income growth or 8% or better revenue growth, this quarter we had 12% and return of equity of 28 to 30% and this quarter we were fortunate enough to have it be 32%. In this quarter, very good momentum in our business, but that doesn't negate the fact that we have some bumpiness ahead in some of these future quarters that you have to be mindful of.

If I could sneak in on share repurchases, the employee benefit plans, you bought back a bunch of stock, $10 million issued how should we think about the amount of stock under the employee benefit plans?

Well, the total amount of options that we have distributed to employees went down quite a bit about 2.5 years ago when we decided to expense stock options. We're currently issuing somewhere just north of 1% on an annual basis for employee benefit plans, for option plans and for restricted stock programs and I think that's probably -- I don't know anything that would cause me to change my thinking about what that number is.

So the high number in the first quarter as these kick?

I think you might have seen some option exercising in the first quarter what's probably coming through in those numbers. People make their own decisions about what they do and you probably saw some option exercising that was a little higher than normal.

Thank you.

Next question from Ken Posner with Morgan Stanley.

Good afternoon. I wanted to ask a couple questions about revenues, just making sure I can understand how to reconcile some of the different disclosures. The first one, I know you mentioned high teens international and bill business growth.

Right.

Looking at the international card segment, the discount revenue was up 6% year-over-year. How do I square those two numbers.

Well, in that total number, when we do the segment, we also combine, that's discount revenue and other revenue, we include the travel numbers in that segment as well. So as I saw, travel overall, I believe was up 6%, if I'm not mistaken, it was up 6% -- or sales were up 6%, revenue was actually down. So the combination of those two things resulted in a lower discount revenue line item in that segment.

Okay, great. Then the second question I had was, the discount revenue was up year-over-year for the Company 13% on 16% growth and billed business, the reported discount margin only came down slightly from 261 to 258. When I do the math on just the division of discount revenue into the billed business, that's going down a little bit more steeply -- a little bit further. What's the difference between the calculation of the discount rate versus the reported discount rate?

Right. The discount rate itself is reflective of all the volume that passes through American Express-acquired merchants. That's the number that's calculated there. Differences would relate to the relatively small amount of merchants that are acquired by parties other than American Express and then you have other items that go against the discount revenue number, some of which we had in this recent 8-K filing.

But if we do a cash incentive program with a large corporate card customer, for example, that number would go as counter revenue against our discount revenue. If we have a -- there are certain joint venture payments that we make to our joint venture partners that have to do -- that are more cash in nature that go against discount revenue, so there really is a number of -- there are a number of items that are in discount revenue that aren't in the discount rate calculation, so you just can't do the straight calculation.

Okay. Thank you very much.

Your next question is from the line of Eric Wasserstrom.

Thanks very much. Gary, can you talk a little bit about the investment that you made in last period in terms of strategic partners, strategic merchant partners. How will we evident -- how will we see the evidence of that and how should we measure that. It is it simply in volume figures?

Yeah. It manifests itself inextended merchant agreements that we have for the most part. We'll have some kind of an arrangement with the merchant and in return for an agreement that extends over a period of time, there are payments like that that can flow into the quarter. At the time, we talked about that being an unusually high number and it was an unusually high number in the quarter. You saw some bounce back in our quarter that was in part related to that. And there is some seasonal reason for the bounce back, but in part it's due to the fact we're at a more normalized level in this quarter than we were in the fourth quarter.

And to follow up on your comments, just so it was clear, you seemed to imply that city is still in a testing phase determining how they want to roll out the program, is that correct?

Well, city has clearly launched and has a number of products on the market, but as we would do when we launch a new proprietary product or a series of proprietary products, you go through many different iterations to decide where you're going to focus your items and they are going through the normal start-up process. I think we saw the same kind of thing in the early phases with MBNA. It takes a while for the value propositions to evolve and for that momentum to build. I'm quite confident with what I see in terms of our success that we'll see in the U.S. I feel pretty good about it.

But the GNS numbers, we did transfer out of GNS and into the other segment. Symptom corporate card billings we did in the emerging markets, GNS managed the markets for corporate card and in the first quarter, we made a decision to transfer that business over to the corporate card business and that had a negative impact on GNS as well. If you taken that out, the growth rate would have been in excess of 30% in the quarter.

Thank you very much.

Your next question is from the line of Bruce Harting of Lehman Brothers.

Hi, Gary. Just over on page 6 it says other revenue increased 12% due to fees associated with transition services agreements with Ameriprise. Will that be ongoing, just I forgot actually what you said in the past about how long that continues. And then kind of a follow-on to Bob's question, each quarter should we always assume that anything you view as kind of one-time or nonrecurring will be clustered together in the first bullet point of the supplement and just as part of that, is the -- you've talked about the higher redemption rate in a previous question, but just wondering if that -- that's effectively building a reserve as you've explained, but there's an ongoing higher cost with that as well, thanks.

In terms of the fees, most of what we do for Ameriprise will finish within the first year of our relationship with them. There are a few things that we will provide as ongoing services to them. We're going to provide procurement service on a third party basis to them as we offer and make available to other partners as well, but for the most part, we will have no ongoing relationship with them. The higher redemption rate was your last point. Again, the way to think about that is we did have a charge in the quarter. That charge did have a, include the catchup for all of the historical bank.

It will result in us having a higher membership rewards on a going forward basis, but that is tied together to the benefit that we see in the income statement. So it's hard for us to think in isolation for any one of these. Why we see spending as attractive as it has been, all of those things are linked together and continue to be linked to a strong and successful rewards program. And I missed your second point.

In terms of the five or six items there, the complication is all of these should really be net out.

As much as we possibly can, we bring those to the floor. There are always things where we have to make a judgment call. In this quarter, we securitized a little less than we did in the prior year. We didn't call that out. There were some minor differences in the amount of restructuring we did. But we try to identify all the material items and put those up in the headline to make you understand what the underlying business trends are.

And when we talk about reengineering costs, given you had some in both years and a couple other quarter last year, can you just spend one second on how much of that is discretionary and what exactly you -- when you start the quarter versus when you end the quarter, you're looking at in terms of deciding what to exactly reengineer in that quarter?

Well, we have a very sophisticated reengineering plan which enables us to hit the target we've been hitting historically. We said we're going to have $1 billion worth of savings this year. So as we begin any year, we have a pretty clear sense of what we would like to do. As we have opportunities, we opportunistically from time to time spend more on reengineering or restructuring, where we see we have some incremental investment dollars that we can utilize in that way and we view it to be a good return. We do a little bit more restructuring or reengineering or there may be times when the pressure is such that we simply don't have the investment dollars in order to do that. So we'll pass on something for a while until we're back in a position to do it. They are discretionary, but they do take a little while to implement. It's not like something to change from from one month to the next, but it's probably something you can change over the course of four or five months, what the commitments are that you make.

Thanks and appreciate the timing change in reporting. Is this going to be ongoing every quarter, or did I see this is just a one quarter --?

It's related to have our annual shareholder meeting. So because we announced the results early this morning and had our annual shareholder meeting in between, we're doing the call with roughly the same time spacing. As we did before. Ron is always happy to take feedback on that.

Well, one person's opinion, thanks, Ron.

Thanks.

Your next question is from the line of Brad Ball with Citigroup.

Thanks, Gary. Just to clarify, did you say that the 258 discount rate this quarter is more normalized, did you use that expression when you were talking earlier?

Well, it's completely accurate. The 258 is the actual number and what it reflects is the total amount of bill business that passes through merchants that were acquired by American Express, which is the vast majority of all of our --

Referring to it relative to last quarter where you had some --?

Yeah, I'm sorry, right, we didn't have the same kind of bunching of promotional activity that took place in this quarter that we had last quarter.

Okay. And then my question is actually on credit. As everyone else in the industry is seeing, you also saw a good benefit from the pull forward of the bankruptcies into the fourth quarter out of the first. Can you give us a sense of how much of the improvement is driven by that and if there'll be anymore in the second quarter and a sense to what the underlying credit quality of your portfolio looks like today?

Sure. The -- we do anticipate that there will be additional benefit as we go through the year, obviously it gets less as you go through the year, but it would speculative for me to say exactly how that would play out. This is a relatively large number as you saw in the documents, we had $140 million in the U.S. segment related to this and Katrina. And so it's a relatively big number if you think about it relative to the size of the numbers we talked about in the fourth quarter. And so the magnitude we are likely to see going forward is not going to be like the same order of magnitude, I wouldn't guess. Our underlying credit quality is outstanding. You saw the last -- I guess two analyst's ago, we did a deep dive on the FICO scores. And the credit quality is very good.

That said, I've mentioned on several occasions that we anticipate that there will be a gradual increase in some of our credit losses in our lending portfolio related to the programs we have underway that are driving our receivables at the rate that they're currently growing. There's nothing untoward about this, we're not taking crazy risks. This is a tightly control and very well understand by our credit group, but we do anticipate some modest increase in our losses in our lending portfolio as a result of some of these programs.

Would that suggest that there might be in a future period a disconnect between the performance of your lending portfolio and your charge card portfolio?

You could have different trends. It certainly possible. We continue to use our customer information to try and make wise choices about the extension of credit facilities and credit lines. And if you kind of dig to the next level of detail, I think all of the data that I have seen would suggest we've made very good decisions about that. But you could clearly have different trends. It's possible.

Okay. Thank you.

Your next question is from the line of Joe Dickerson with Atlantic Equities.

Hi, Gary. I just had a quick question on the source of the loan growth and I wanted to know if it was driven by line increases for the most part or if it was marginal growth and new accounts. And then also in the acceleration of international billings growth, is that due to more merchants coming on our incentive programs with merchants?

It's a broad question. I guess the first thing I would say is yes certainly on billed business and new accounts. Obviously we had a 10% increase in cards in force. That number has been growing each quarter sequentially over the last year or so and this is the highest level we've seen for a while. Our billed business has continued to be very robust, it stayed in in the 16 to 18% range for several quarter and that brings along some receivables. Thirdly, we have, as I was just talking about with Brad, we've tried to be thoughtful about how we extend line increases, and as we get more and more sophisticated in the ways we think about the capabilities of our customers to repay us, we've done selective work around line extensions and also line pair back, for that was necessary, but that's been a part of the program.

And then finally, we strive to improve merchant coverage all of the time. As our GNS partners outside the U.S. become more and more relevant outside the country, we see that coming over to our international business. But the primary thing is that Ed has done a terrific job in focusing the international group on the model of the company. So if you go back and trace the history of that business, what you saw when Ed took over is a declining growth rate of cards enforced and a slow increase of average spend and as that strategy has been reoriented you see a nice increase in average spend, a nice increase in cards and the billed business is starting to come through reflecting the higher increase in average spend. So I think it's related to the job Ed has done redirecting that strategy toward the core strategy of the company.

Thanks.

Your next question is from the line of Matthew Park with Prudential Equity Group.

Good afternoon, Gary. I just wanted to come back to the membership rewards reserve issue one more time. Is the redemption rate you have used for that revision -- are you taking that from the most recent redemption rate or how should we think about that? Are you taking the average of the past five years or the point in time in.

That's the average of the past five years is the way we look at it. So there's no specific guidance for exactly how one should do that. You have to be thoughtful about it. We've been at this for a very long period of time. We think that changes we've made in the program over the last four or five years have in fact increased the redemption rates at which customers will utilize the program, which is a good thing. But there's enough volatility from year to year that you just can't take one point in time, that wouldn't make sense to do that and so you have to have a rich enough set of data so you can do the analysis you need to do and have enough trend information so you can feel some degree of confident in projecting. And that's the reason we settled on five years. And I underline again, this is unlikely to be the last time we ever have this conversation. We modified this all the time. We look at it both domestically and internationally and will make adjustments as we feel are appropriate to ensure we have properly captured the ultimate positives of the program.

Are you willing to tell us how much percentage terms, how much your redemption rate has been raised in getting this cost charge, I guess?

We don't disclose that. There is, I believe, in the annual report a disclosure about the change in redemption rate and the dollars related to that. And so it says for every hundred basis point increase in redemption rate, it talks about what the financial impact would be. One thing I can say is the vast majority, and I underline vast, vast majority of our points are redeemed. I'm amused when I see these articles from time to time that talk about how people are unable to redeem their rewards. It's certainly not happening here. People are finding plenty of opportunity to redeem their rewards and are being redeemed at a healthy rate and we think that's good for us and good for our customers.

Thank you.

Your next question is from the line of Craig Maurer of Fulcrum Global Partners.

Good afternoon, Gary. Just a quick question regarding security rates. For the year and a half under your belt in the MBNA relationship, I'm curious if you've seen any material difference in the length of time it takes customers to reach full spending, or what you would view of full maturity in their cards in MBNA versus what you do on a proprietary basis?

The answer to that is no. MBNA is hard to use as a model because we launched with MBNA and then with the BA/MBNA acquisition and discussions that took place at the time about whether or not they would continue as a issuer, essentially, or at least a strong issuer of our products, we just don't think that time period was particularly reflective of what their long-term potential is. And obviously, what you see is that over time, the customers who do have the cards continue to spend. And 18 months is certainly not a long enough time period, or 14 months certainly not a long enough time period to include it's mature, or even close to mature. We look at each one of our partners, obviously on a daily, weekly, monthly basis, and we track their spend in each of those cells over time. and when you look at that in aggregate, you see a very attractive picture for the portfolios that are newer than two years in age.

I'm talking about worldwide now, not just MBNA, but you see very nice improvements in volumes on a month-to-month basis across virtually each of these portfolios. The only real difference you see is the Christmas quarter is a little higher than the January/February quarter, but that's the normal seasonality that takes place. But there appears to be a very comfortable pattern that's taking place in these portfolios over time that underlines the confidence that I have in the things I've said.

Just a follow up, if you look at the partners you've signed in the U.S., they've been predominantly, majority of their issuance in terms of credit cards has been predominantly Mastercard and not Visa. Is this more of a coincidence or is Visa's signature card, the banks that issue that heavily, is that become a little bit of an impediment in getting into those banks or just coincidence.

Purely a coincidence.

Okay, thanks.

Your next question is the from the line of Laura Kaster with Sandler O'Neill.

Yes, thank you. Brad did ask most of my questions regarding credit quality. Can you give us an idea where you're seeing the best risk-adjusted returns in the U.S. card business given the fact you're growing so much more quickly than the industry average.

The best place for us is in middle market commercial cards. That's the highest risk adjustment return we have.

And how about in the U.S. consumer? Where are you seeing those risk adjusted returns. Do you see Capital One throwing the brake on growth because in the prime area they can't make a rate of return. Would you agree with that assessment?

I know nothing about their underlying economics. The thing I till you, everything we do, we do well above our cost of capital. And we have more investments we would make before we got close to our cost of capital. We feel good about that.

The strongest area to your point that we have in terms of returns is in the premium charge card portfolios on the proprietary side and if you look in the U.S. segment, you can get a flavor for the return on capital that we're getting in that segment overall. It's relatively clean. The traveler's checks business is in there, but those numbers are on the high 30 return on capital, so we feel like we are doing good things and we have worked hard to optimize the capital requirements of our portfolios. We've talked about that quite a bit in the past. So we've spent a lot of time and effort going through to make sure we have the right equity weights against each part of our portfolio and have some degree of sophistication about that which has enabled us over time to manage our equity so asset ratio.

We probably have time for one more question, I would guess.

Our next question is from the line of Chris Brendler.

Hi. Thanks. One quick follow up.

Sure, Chris.

On credit quality. The international segment saw a pretty sizable increase in delinquencies and losses. If you could talk about that a little bit and give us color on how much Taiwan represents of that.

Taiwan was a relatively large number here. I'm just making quick reference to my segment chart here. So we said $63 million or $53 million after tax, higher credit provision than Taiwan. Taiwan is the lion's share of that number, but there are a couple of markets in international that do have credit stress. There's credit stress in the U.K. right now, for instance. And so I would say credit trends in a couple of international markets are a little higher than they have been over the last year or so. Taiwan is clearly the outlier and the primary factor that's driving the number.

In delinquencies?

Correct. What's happening in Taiwan, in order to qualify for the program, you have to become delinquent. So the government program is essentially driving people towards delinquency.

Okay. Thanks.

Thank you all very much for joining us.

This concludes today's conference call. You may now disconnect.