美國運通 (AXP) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and good afternoon.

At this time, I would like to welcome everybody to the American Express third-quarter 2007 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 conference over to our host, Mr.

Ron Stovall, SVP, Investor Relations.

Please go ahead.

Thank you.

Welcome to everyone.

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

As usual, it's my job to remind you that the discussion today contains certain forward-looking statements about the Company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today.

The words believe, expect, anticipate, optimistic, intend, plan, aim, will and 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 2006 10-K report, already on file with the Securities and Exchange Commission.

In the third-quarter 2007 earnings release and supplement, which are now posted on our website at ir.americanexpress.com and on file with the SEC in an 8-K report, we have provided information that compares and reconciles the Company's 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 discussion.

Dan Henry, Executive Vice President and Chief Financial Officer of American Express, will provide some introductory remarks highlighting the key points relating to today's announcement.

Once he completes his remarks, we will turn to the moderator, who will announce your opportunity to get into the queue for the Q&A period.

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

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

Based on this, we ask that you limit yourself to one question at a time during the Q&A.

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

Thanks, Ron, and thanks for everyone for joining the call today.

I'm very pleased to address the results for this quarter.

As Ron mentioned, I will make some introductory remarks, and then we will open up the line to take your questions.

As you've saying in the earnings documents, our third-quarter results were a continuation of the strong business momentum we have reported throughout recent years.

They reflect the benefit of our multi-year investments in a broad range of business-building initiatives.

When we compare our results from continuing operations to the third quarter of last year, net revenue grew 11%, income increased 15% and diluted EPS of $0.90 rose 18%.

In addition, ROE for the prior 12 months was 38%.

Significant items this quarter included a $41 million after-tax charge related to the American Express International Deposit Company's investment portfolio, resulting from the previously announced sale of American Express Bank, and a $75 million tax benefit, primarily related to the resolution of prior years' tax items.

Last year's third quarter included a $24 million after-tax gain on the sale of our card-related operations in Malaysia and Indonesia.

In addition, both quarters included reengineering costs, which totaled approximately $7 million after tax in each period.

During the quarter and year to date, we returned 84% and 85%, respectively, of total capital generated to our shareholders through share repurchases and dividends.

Since 1994, we have returned 70% of capital generated to shareholders, which is above our 65% long-term target.

The 11% revenue growth in the quarter reflects strong double-digit increases in a number of revenue categories, including discount revenue and card member lending finance revenue.

As we discussed with you last quarter, overall revenue growth was suppressed somewhat by substantially higher interest expense.

There is one other point I want to clarify, related to revenue estimates that I pointed out last quarter but continues to be an issue.

It generally appears that brokerage analysts' models detailing our revenues haven't adjusted to reflect our revised income statement presentation.

However, within the various services that report the analyst estimates, there seems to be inconsistencies in the revenues reflected from various analysts.

In most cases, revenues reflected are net of interest expense, as we report them, while in others, revenues before interest expense seem to be included.

Additionally, in some cases, revenue estimates are made on a managed rather than a GAAP basis.

Because of this, the consensus revenue figures reported by these services are not comparable to our reported GAAP revenues net of interest expense.

For those who want to compare the Company's revenues from a managed perspective, you need to add the U.S.

Card Services GAAP-to-managed adjustment shown in our earnings tables and supplements.

Now, as previously communicated, we revised our segment reporting this quarter to reflect the impact of our recent realignment of the Company into consumer and business-to-business organizations and the agreement to sell American Express Bank to Standard Chartered.

As a result of these events, the previously reported International Card and Global Commercial Services segment is now reported as two separate segments -- International Card Services and Global Commercial Services.

In addition, the results of American Express Bank have been removed from the Corporate and Other segment and are now reported within Discontinued Operations line.

So let me make a few observations related to the revised reporting.

As you have seen within our prior disclosures, our overall International business growth has been strong, as the combination of our proprietary Consumer, Corporate Services and Global Network Services business have strengthened the Company's position and potential throughout the major regions around the globe.

I would like to note that the relatively slower card and volume growth within International Card Services during recent quarters reflects the constrained level of investments during the past few years, in addition to the negative impact of business sales in Brazil, Malaysia and Indonesia.

As you know from our prior disclosures, difficult industrywide credit conditions in certain markets and our own restructuring activities reduced acquisition and loyalty-related investments outside the US.

Recent quarters also reflect the more selective premium customer strategy the International Card Services management team has been focused on.

The benefits of that strategy shift are evident in the strong average card member spend growth and the higher average fee for card reported in this quarter.

These results, in addition to increased investment levels, position us well for the future.

You'll note a tax credit in most quarters within International Card Services.

This will likely continue, as our internal tax allocation process reports within this segment the consolidated tax benefit arising from its ongoing non-US funding activities.

Lastly, you'll see that segment capital and return on segment capital for International Card Services and Global Commercial Services include the impact from the allocation of goodwill that previously resided within the old International Card and Global Commercial Services segment.

The majority of the goodwill was attributed to business travel acquisitions.

Consistent with generally accepted accounting principles, that goodwill has been allocated to the two segments based on the relatively fair value of these segments.

Our segment capital allocation method includes a dollar-for-dollar allocation for goodwill.

I note this because it is important to you to understand that the return on tangible equity within the International Card Services and Global Commercial Services segments are substantially higher than the reported returns, which include the impact of this goodwill.

Now, as far as our consolidated results go, they were driven by excellent growth in card member spend, loans and cards in force.

Billed business growth remains strong, and each of our customer segments in every geographic region contributed to the 16% growth worldwide or 14% growth on an FX-adjusted basis.

Let me give you some more detail.

In our US proprietary business, Consumer spending grew 12%, Small-business spending rose 15% and Corporate Services volumes improved by 9%.

In total, US volumes for retail and everyday spend grew 15%.

This category represents about 68% of US billings.

Travel and entertainment-related spending, which accounts for the remainder, rose 10%.

Outside the US, proprietary billed business grew 10% on an FX-adjusted basis.

This was driven by 7% growth within our Consumer and Small-business activity and 15% growth within Corporate Services.

Within Global Network Services, billed business rose 45%, driven by nearly 100% growth within the US as well as continued robust growth outside of the US.

Worldwide cards in force rose 11%.

We added 2.5 million net new cards during the quarter and 8.2 million net new cards since last year.

This reflects 6% growth versus last year in proprietary cards and 32% growth in network partner cards.

Spending per proprietary basic card grew 8% worldwide, even with the suppressing effect of substantial card additions over the past few years.

Our average discount rate of 2.57% was flat versus last year and last quarter.

With strong growth in cards and a higher average fee per card, net card fee revenue increased 13% this quarter.

Travel commissions and fees increased 13%, reflecting a 16% increase in travel sales.

Once again, we saw our strong growth in card member spending generate a high level of loan growth.

Worldwide lending balances on an owned basis rose 32%.

On a managed basis, balances grew 23% on 24% growth in the US and a 17% increase in our non-US portfolios.

This strong growth continues to reflect the flow-through of particularly attractive spending levels within our co-brand, lending on charge and other credit card relationships.

It also reflects our successful acquisition efforts surrounding these products.

Securitization income increased 2%, as higher gains from issuances and a greater average balance on securitized loans offset higher write-offs and interest expense.

Card member lending finance revenue rose 30% on growth in the owned portfolio.

Interest expense increased 39%.

This was due to a 40% increase in funding costs within the lending business and a 38% increase in the charge card and other interest expense lines.

Much of this reflects volume increases within the business but also higher market rates, which, as you know, rose during the third quarter as LIBOR-based rates and market spreads increased in reaction to the credit concerns that were pervasive throughout the markets.

As we discussed with you last quarter, interest expense was also driven by the expiration of some fixed-rate debt and hedges at the end of last year.

Specifically, fixed-rated debt and hedges within the US card business declined by $11 billion.

The effective funding rate on that amount was 3.2%.

It was replaced by funding based on higher market rates of approximately 5.4%.

This resulted in about $59 million of incremental expense in the quarter versus last year that was solely related to the debt and hedges that expired.

Marketing and promotion rewards and card member services expense increased 14%, reflecting higher volumes related to rewards costs and greater marketing and promotion expense.

Our marketing efforts this quarter were somewhat more focused on spending outside the US versus the US-oriented investment activity during the second quarter.

Increases in rewards costs continue to reflect strong spending growth, higher redemption rights and increased card member participation.

Human resource expense increased 11%, due to merit increases, greater benefits costs and a higher number of employees, primarily resulting from customer service initiatives and acquisitions within Corporate Services.

The growth in the remaining operating expenses reflect the impact of increased volumes within our technology and card member servicing activities.

However, excluding the impact of last year's gain on the sale of our Malaysian and Indonesian businesses, these expenses were flat.

The total provision for loss and benefits increased 25% versus last year, as the lending provision increased 41%, the charge provision rose 9% and the other provision was 5% higher.

The increase in lending provision was driven by higher loan volumes and increased past due and write-off rates in the US portfolio relative to the lower year-ago levels that benefited from the impact of the 4Q 2005 bankruptcy legislation.

The charge card provision rose 9%, reflecting growth in volumes and relatively stable credit indicators.

The consolidated tax rate of 24% for the quarter declined versus the 29% rate last year, due to the $75 million of tax benefits I referenced earlier.

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

We again delivered strong revenue and earnings growth and excellent returns during the quarter, while continuing to invest in key business initiatives and maintaining balance sheet strength.

Business metric performance, like growth in billed business and loan balances, continued to be in the top tier of the industry.

The gap between our growth rate and that of most major competitors demonstrates the effectiveness and ongoing benefits of our marketing and rewards investments over the past several years.

Credit quality continues to compare favorably to the industry.

As expected, losses and past-due levels within the US have trended higher post the bankruptcy reform benefit of last year.

However, credit quality indicators remain in line with historic ranges, as we continue to benefit from our focus on the premium market sector and our rewards-oriented strategy.

Needless to say, in light of some signs of stress within aspects of the environment and our strong receivable growth, we continue to be carefully monitoring the trends as we go forward.

While our bottom-line results were strong during the quarter, as expected, we continue to be negatively impacted by near-term interest rates and provision grow-over challenges discussed with you in prior quarters.

Within interest expense, we saw the effects of the items I mentioned earlier, the $11 billion reduction in our fixed-rate debt and hedge position, higher volumes and generally higher market rates.

The interest expense level in the fourth quarter is obviously dependent on the credit market environment.

Credit spreads remain wider for debt issuers across all rating classes.

Our spreads did not widen as much as comparable rated financial institutions in the third quarter, and have since narrowed along with the rest of the market.

For the remainder of 2007, if the more recent reductions in the LIBOR benchmark rates persist but the wider credit spreads continue, we believe our funding costs would not be materially different than what we shared with you last quarter.

As you know from our prior discussions, we have made considerable efforts over recent years to implement flexible business plans.

These plans position us to pull back on spending when required by external economic factors or business performance.

They also allow us to increase spending if the environment permits.

As such, for the remainder of 2007, we continue to plan to work to target our marketing-related investments to further build upon our competitive strengths at a point where some of our competitors may be experiencing comparatively weaker business results.

In addition to the flexibility measures, we remain focused on reengineering to maximize our ability to invest in key growth opportunities.

While reengineering will likely generate some costs from period to period, it positions us to continue to effectively control underlying operating expense growth.

Despite some of the near-term interest and provision pressures we see, we continue to have confidence in the outlook of our business, for several reasons.

Our position within the affluent and high-spending card member sectors remain excellent.

It is supported by our ability to leverage our direct merchant relationships, the unique information benefit of our closed-loop network and our attractive rewards program.

Given our business momentum and industry-leading results in recent years and our strong track record of innovation, product development and customer-focused marketing, we believe that we are well-positioned to execute against growth opportunities in a manner that continues to appropriately balance our short, medium and long-term business and financial goals.

So thank you for listing, and we are now ready to take your questions.

(OPERATOR INSTRUCTIONS).

Meredith Whitney, CIBC World Markets.

I had a couple of questions.

The first is, Dan, could I just get you to rephrase your final comments?

Were you saying that you're going to use the excess earnings or any upside in earnings to plow that back into marketing as opposed to -- I know I'm extrapolating here -- to buy back shares, because you feel the opportunities are so rich this quarter?

That's just my first question, and then I have a really quickie on the second one.

So I think our outlook now is the same as it has been for a number of years.

We look to continue to invest in the business momentum that we've achieved.

We certainly balanced to the amount that we're spending on marketing so that we can balance our earnings targets, as well as continue to invest appropriately to achieve the kind of metric growth that we have over recent periods.

So we're very focused on our billed business growth, as well as loan growth and cards in force.

So we will continue to invest to maintain that business momentum.

So your summary is basically no new changes?

Correct.

Then the follow-up is you guys experienced, again, receivable growth that none of your competitors experienced, not to mention the billed business growth.

Is your provisioning policy that you're just keeping up with the receivable growth?

That's what you're allowed to do.

Can you explain your provision policy?

Because obviously the market is freaked out sufficiently about some of the bank players who have increased their provisions for different reasons.

So, as we have discussed, we are focused on acquiring customers that have high level of spend.

We put products in the marketplace, both charge products and on the lending products, and we allow, really, the customer to choose which product that they want to use, but focused on customers with high spend.

As people spend on lending products, there is a flow-through effect of that high level of spending, which is driving the increase in our loan balances.

Now, as it relates to our provisioning, we have used the same model for provisioning for the last several years.

It's focused on the experience that we see, and used those models the same way this quarter as we have in past quarters.

So we continue to use the same methodology.

We think it's a methodology that appropriately matches credit expense with the revenues that are being generated and provides us with reserves that are appropriate, given the behavior that we're seeing within our customers.

What are you seeing in terms of behavioral trends with your high-end consumer?

I think you can look at both our average spend numbers, which, despite the fact that we continue to bring in a substantial number of new cards, continues to be very strong, continues to be well above the competition.

I think that's a reflection of the quality of customers we're bringing in, as well as the loyalty of those customers, based on the value proposition that we offer to them.

Chris Brendler, Stifel.

A related follow-up -- are you seeing any signs of a slowdown, particularly domestically?

I think last time I discussed this with you, it seemed like the small-business sector would be a place where you might see an early warning sign from a slowdown.

But 15% this quarter looks pretty good.

Anything beneath the surface that suggests that you're seeing any sort of slowdown in the US?

So, as I mentioned, small-business, billed business grew by 15%.

That's the same level that we had last quarter.

Quite frankly, the portfolio continues to perform very well, and we are very pleased with it.

So in the third quarter, as I said, 15% growth we view to be very positive.

Then I guess a different question.

The discount rate continues to defy gravity a little bit.

You mentioned in the supplement that you expect that to continue to trend down over time, but it's not trending down this year.

Any color on the discount rate?

Is that still a mix issue, or is it any sort of pricing initiatives that you'd be able to push through?

So our discount rate is affected by the mix of spending.

We have emphasized, over the last few years, spending in everyday spend categories.

Some of those categories have lower discount rates than the average, so to the extent we continue to grow in that area, you'll see discount rates potentially come down.

Also, as certain merchants increase their billings, there is some impact on our rate related to that.

So those two factors, in large measure, in recent quarters have been offset by value recapture, where there are merchants where we can clearly demonstrate the value that we are bringing to them and, as a result, are able to actually increase discount rate.

So over recent quarters -- I mean, this quarter's rate is the same as last year on last quarter.

But what happens in the future will depend on the mix of those items, and that's what will will drive discount rate.

It could well be that in the future there is a drop in discount rate.

Ken Posner, Morgan Stanley.

American Express is clearly generating very impressive revenue growth from its lending strategy.

With the credit delinquencies starting to march up as, of course, has been long expected, and with economists in the US calling for a little bit of a slowdown, are you guys taking steps now to tighten underwriting standards and dial back on the growth?

Or are you planning to keep growing, so that the denominator keeps the credit loss ratio from getting too high?

I think it's important to view our results in the context of the industry, which everybody is aware of.

We've been able to balance strong business growth, along with credit indicators which continue to be favorable to the industry.

Certainly, if you look at some of our competitors, while their growth in spending and their portfolios have been significantly slower than ours, some have been able to control credit well and some have not.

As we all know, credit risk is inherent in our business.

But our main focus is to ensure that we are making good economic decisions that really maximize the portfolio, as opposed to being focused on simply keeping write-off rates at a low level.

That has always been our outlook and will continue to be our outlook.

As we've discussed numerous times, we think we have built very strong credit capabilities, and those capabilities will monitor very closely what is taking place within the portfolio.

We will react appropriately to any changes in the credit environment.

Could I take that to mean, then, that there are no plans underway at this moment, or no steps being taking right now to tighten underwriting or dial back on that growth rate?

So I think we continue to want to focus on the premium sector.

As you've seen from the charts that we showed at the financial community meeting in August, the make-up of our portfolio this year is exactly the same as it was last year, and the make-up of that portfolio is certainly focused on the prime and superprime.

So we haven't changed that focus.

We will continue to have that focus.

Again, our immediate reaction to what is taking place in the marketplace isn't to constrain spending of our customers.

We do that on a customer-by-customer basis, and as long as customers continue to behave appropriately, we will continue to have them spend, which is very much in line with our business model.

David Hochstim, Bear Stearns.

I wonder if you could talk a little bit more about the growth in cards in the quarter and the change in average spending per card number.

Is there an effect -- just looking at the sequential changes there, an effect from the timing of the increase in cards on average spending per card member?

Could you give us a sense of what kind of shift there has been in the last quarter or two on different relationships -- Costco, for example, or Delta?

Are those still contributing meaningfully to growth in spending as well as cards, or not so much?

Okay.

So our cards in force growth this quarter was strong.

It actually is pretty consistent with what we seen over the last several quarters.

It was a little better, actually.

A little better; a little better, but consistent.

That's a reflection of where we're putting our investments.

We are very focused on continuing to bring new card members into the franchise -- once we have them into the franchise, to build their loyalty over time, to ensure that we offer them the right product at entry, but also, as they evolve as customers, to modify what product they may have, so that we continue to meet their needs.

So I think that is part of the average spend story as well, and we continue to be very focused on having the right loyalty programs in place to drive that higher level of spending.

Quite frankly, I think we're also benefit, in terms of average spend and overall spend, by the fact that the affluent sector is performing very well, and that is really our sweet spot.

So I think both how we're investing, what our customer base is and our focus on loyalty programs are all contributing to the high level of spend and the improvement in average spend per card member.

Is there any change in the relative mix of things like Costco and Delta, in terms of new cards and spending, or the other top relationships?

I think our co-brand partners continue to be a very important part of our franchise.

We're seeing an appropriate amount of growth in both cards and spend from those co-brand partners.

So I would say that we have had a very good relationship with them, which has been beneficial to both our customers, to them and to us, and that is continuing.

Can you give us a sense of how different funding costs were on secured and unsecured financings in, say, the second half of the third quarter versus like the second quarter?

I was a little unclear on what you were saying.

So we have -- as you think about it, we really broke this into two pieces.

One, we were comparing the $11 billion of fixed-rate funding we had last year.

When those hedges and fixed-rate debt rolled off, they had a rate of about 3.2%.

When we had to refund, the average cost of that was about 5.4%.

We have higher expense in the quarter this quarter compared to last quarter, just as a result of that, of $59 million.

If you look at the rest of the portfolio, I think the funding costs in the third quarter are slightly higher than in the second quarter, because there was a run-up in interest rates last year, and so the comparisons -- well, I guess the goal in the second quarter this year was higher for us, because interest rates were lower in the second quarter of 2006 than they were in the third quarter of 2006.

I think funding costs for us from the second quarter to the third quarter are relatively comparable, and we think, assuming the environment doesn't change, we would be similar in the fourth quarter to the third quarter.

So that's saying basically you weren't affected by the spread widening (multiple speakers)?

Well, I think there's multiple things going on in the marketplace.

Right?

We had LIBOR jump up.

We had the spreads widen.

On the other hand, there were -- Fed funds were moving down, even though that's what we collect from our customers.

But when you put it in the mix of all the events that happened in the marketplace, we would think we would wind up in about the same place from a rate basis in the fourth quarter than compared to what we were in the third quarter.

Thanks, and I just wanted to thank you for including the Corporate segment.

I appreciate it.

Sanjay Sakhrani, KBW.

Dan, you mentioned most of the marketing dollars -- or a lot of the marketing dollars were spent internationally.

What were the regions where most of those were spent?

So I think we spent broadly, across many regions, including Australia and Inida.

So we mixed it up of both some of our larger, more mature markets as well as some of the markets that are smaller and emerging.

We focused most of the dollars on acquisition, as we're looking to bring in more card members to the franchise.

So I would say it was pretty broad-based and, again, heavily focused on the acquisition side.

It also continues to support the strategy in International that I referred to, where there, we're focusing on the premium sector.

So if we were to think about the next couple of years and where the growth would come from, what regions would the growth in that segment come from?

I don't think we do forecasting, although I think we will continue to focus on our major markets, which make a strong contribution.

But we would be looking to selectively decide which other markets are important that we invest in.

Effectively, it will be driven in large measure by both strategy as well as by using our investment optimization process, where we look at which investments will give us the greatest long-term return.

So a combination of those two things, I think, will dictate year by year and over the longer term where our investments go.

Bob Napoli, Piper Jaffray.

I was also focused on the International opportunity and any change in viewpoint, given you've had a very substantial run-up or increase in marketing in the International segment.

You're starting to see an acceleration of card growth.

You had talked about underinvesting internationally, so I would like a little more color.

Your marketing is up, what, 50% year over year, 43% internationally and up $60 million quarter over quarter.

So, as I said, because of just general issues, industry issues, there were credit issues internationally and the fact that we were doing some restructuring.

If you look back over the last couple of years, our investment levels were constrained.

We think the international markets represent a significant opportunity to us, and so we wanted to increase those investment levels.

Now, when you saw us increase investment levels in marketing in the second quarter, it primarily came within the US business, because when we realized we had the opportunity, there was more readiness in the US to spend within the second quarter.

So, as we moved to the third quarter, we wanted to balance that out so that we were increasing our investments in both the US and the international markets.

Therefore, you saw that in the US segment in the third quarter, the growth wasn't as robust, but we increased marketing in the third quarter.

So if you look at the two quarters together, it really shows an increase in marketing dollars across all regions of the globe.

You also talked about, Dan, the tax credit that you had, you expect to continue?

Yes.

What kind of a tax rate are you looking at next quarter and the next couple of quarters, so I can understand what that is?

So, in this quarter, within the International Card Services, there was partial sharing of the $75 million, $17 million in there.

But even excluding that, there was a credit for that segment.

That, I think, will continue, and it's really based on the way we do our internal tax allocation within the Group.

We realize some benefits that are in high tax rate environments that we allocate to the International segment.

But a large portion of their taxable income is actually in low tax-rate environments, and we permanently reinvest the dollars there.

So on that, there's a very low tax rate.

We don't expect that to change, so we would continue to see that tax benefit as we move forward.

What is the global or the corporate tax rate, then?

This quarter, our global tax rate was, I think, 26% compared to (multiple speakers).

So it was 24% this quarter, compared to 29% the quarter last year.

[What are you], ongoing?

The 24% is largely driven by the $75 million tax benefit that we received related to prior periods.

So I think we've talked about this on other occasions.

If you think about our tax rate, absence any items related to prior periods, we will probably be around that 30%, 31% range.

That's on a consolidated basis, but the amount that we're allocating to the International Card Services group, for the reasons I just cited, it's likely that they will continue to actually have a tax benefit even when they have pretax income.

On the hedges, is that the last big significant -- you know, the $11 billion to run off?

Could you say that again, please?

The $11 billion of funding where the hedges ran off this quarter that cost you $59 million -- is that -- you said that fourth-quarter cost of funds should be similar to the third.

So is that the last significant amount of funding?

The $11 billion ended last year.

So every quarter of this year will have an impact.

Are there any additional --?

So related to that, we will, again -- next quarter, the fourth quarter will be negatively impacted for a similar amount when you compare it to last year.

But there are no additional hedges that are running off in your --?

No significant hedges that are running off, no.

One of your competitors had said that they had seen an uptick in delinquencies in credit issues in areas that have experienced high home price appreciation, like California in Florida, for example.

Are you not seeing that same kind of a thing?

So, as you can see from our credit metrics, they have ticked up slightly, but very much in line with what we expected coming off very low rates last year.

So, at the current time, the credit quality of our portfolio continues to be the same.

I think we benefit from the fact that we are focused on the prime and superprime areas.

So we have not directly seen an impact from subprime activity at the current time.

Brad Ball, Citi.

Just a quick comment or question about the GNS business.

You have been ramping the growth there significantly.

Is there any particular relationship or product that has really been behind that growth?

Can you talk about any prospects for additions on the GNS side?

So, our GNS business continues to be very strong.

We had growth in the US of almost 100%.

Growth outside the US continues to be very robust.

I think we are seeing positive results across a broad spectrum of products that we're issuing, as well as a broad section of our partners.

So we continue to be very pleased with the GNS growth and the way that it fits into our overall strategy, both in the US and internationally.

So, when you really put together internationally a combination of our proprietary business and the GNS business, we are very pleased with the position we are in.

One quick follow-up on credit.

You said in your prepared remarks that there was an impact in the year-ago quarter from lower bankruptcies.

We are still seeing bankruptcy levels running a bit below normal.

Are you still seeing some benefit from that?

How long do you expect that to play out?

I think if you look at industry statistics, they have gradually been rising over the past year or so, and in recent time probably ticking up a little bit faster.

So I think we'll keep our eye on that.

But when you look at the bankruptcies in relation to our other write-offs, they're in line with what our expectations were, and reflect the fact that we're coming off very low levels in 2006.

Eric Wasserstrom, UBS.

I'm just trying to reconcile two distinct trends.

On the one hand, in terms of your payout ratios, you talk about how you continue to be far above the standard that you've set for yourself over time, which in some ways seems to question the appropriateness of that standard, given where your ROE is.

So I wonder why that target isn't, maybe, discussed.

The only reason I could think of would be if there was some concern about credit trends.

But on the other hand, of course, the message is that the credit trends, though rising moderately, are very well contained.

So can you help me understand that interplay between credit pressures and capital allocation?

Yes.

So I don't think what we are returning to shareholders, in terms of dividends or share buybacks, has anything to do with concerns about credit.

We've been at levels above 65% for quite a while now.

I think we like to keep the flexibility that we have, in terms of returning returns capital to shareholders by having a lot of it come through share repurchases.

It enables us, if sometime in the future we were going to do some supporting acquisitions, that we would have a way of funding that, using the capital that's generated from our business quarter to quarter.

That's really the driving force behind keeping the dividends level at where is today or somewhere near that.

As you know, we periodically have increased that over time, but having the flexibility to either absorb bumps in the road or to be available for acquisitions is the reason that we have our current policy.

We'll largely continue that in the future.

Mark Sproule, Thomas Weisel Partners.

Maybe a little bit of a rehash of some of the prior questions discussing your managed receivable growth.

But can you talk a little bit about the investment there, and where you see opportunities distinctly, given some of the pressures that your competitors have noted, and how you balance the desire to build the portfolio with the market pressures of the current environment?

So, as we say often, we have a spend-centric focus.

So it is not our objective to build the loan balances.

It's our objective to bring on card members who have higher-than-average spend.

We allow those customers, really, to pick the product that best suits them.

So that could be a charge card, it could be a co-branded card, it could be lending on charge, it could be a Blue card.

As long as, on average, we're bringing in customers that have higher average spend, that really meets our business model of being focused on spend.

Now, what we're getting is really a flow-through of that higher spending on our lending products, which is what's growing our loan balance.

So we don't have a loan balance growth target; it's really driven by our spend, and we continue to be focused on the behavior of our customers.

We think we have excellent best-in-class credit capabilities.

They are very -- at all times are focused on the behaviors of our customers, and given the environment today, are even more so.

So I think loan growth is coming from really strong billed business growth that we are seeing at the end of the day.

I think we're comfortable with where we are, based on our focus on investing and allowing spending that will have an economic gain for us over time.

I think you had mentioned earlier sort of the bifurcation between international spending and the domestic spending.

As you look into Q4 and beyond, should we see some of that revert back to being maybe a little bit more evenly divided between the two, as you try to acquire more customers domestically?

Well, I think our spending growth, if you're going to split it between the US and outside the US, in part will be driven by our investment dollars.

So if we are tending to invest a little bit more on one section than the other, you would expect to see somewhat stronger growth there.

Now, it's not spending that comes five days or even a quarter after we bring on customers, but it builds over time.

So I think where we're doing our investing has an influence, as well as the economy also has an influence.

But we have been pleased with the investments we've been making.

I think we've had very good returns.

Going back a little bit to the question on how do we feel about our AR growth, our AR growth is significantly higher than our competitors', but our billed business growth is also significantly higher than our competitors.

So it's really -- you have to link those two together, and that stronger billed business growth is what is driving the higher AR our growth.

So we will continue to invest both in the US and internationally.

What the growth rates will be will be dependent on our investments and the economies within the respective regions.

I understand that the credit markets or your credit stability has been much stronger than your competition.

When you look at your portfolio and you're assessing issues that might be problematic, what are you doing to proactively stay ahead of what might be consumer issues across the country, whether it's regionally or group-specific?

On the charge card side, every charge is something that is approved as the charge comes through.

We are very focused on our lending customers.

If we see good behaviors, we increase their lines.

If the individuals' behaviors are not, we actively manage those lines down.

I think we also benefit from a wide amount of diversity within the portfolio, based on the products that we offer and the co-brand partners that we have.

So it is something that we are diligent about all the time.

We're constantly investing in improving our capabilities and seen what information we can use to help improve our assessment of a customer's credit worthiness, and therefore according to what we allow them to spend.

So it is an ongoing mission of ours to have capabilities that will help to drive our business.

Ken Posner, Morgan Stanley.

I wanted to ask a question about the discount rate, which, as an earlier questioner had pointed out, has remained stable year over year.

Can you address the incentives and cashbacks that are netted out in that calculation?

Have those changed as a proportion of the total, or are those flat year over year as well?

So as it relates to cashbacks, which are reflected in the discount revenue line, our cashback product continues to perform very well.

So that is increasing within that line.

As we deal with commercial clients, that is also something that gets netted on that line, and we continue to have strong growth in that business as well.

So discount revenue is growing, and those are elements that are actually slowing that growth down.

So when we're doing comparisons from billed business to discount revenue, those are some of the elements that come into play here.

Forgive me, because I've misplaced which page has the footnote that refers to the items that are netted out of that calculation.

So I guess I'm just asking what is the effect of incentives and other kinds of things that are netted out of the discount rate calculation.

Are they increasing or decreasing?

So I don't think they are having a material effect on the discount rate.

The thing that has a major effect on the discount rate is really the mix of business that we're seeing by type of merchant has an impact.

The volumes at specific merchants have an impact; those would have an impact in terms of driving the rate down.

The major thing that's having an impact in improving the rate is really value recapture, where we are dealing with merchants where we can clearly demonstrate that we are bringing value to them and that it's warranted that we have a higher rate.

Those are the three key elements that are driving discount rate.

James Fotheringham, Goldman Sachs.

Just with respect to growth opportunities, can you just talk about what you see as the greatest opportunities to grow the network, and what is the best way to realize these opportunities with respect to organic versus strategic initiatives?

So, I think our network is going to grow in two ways.

The network is going to grow just based on the growth in our proprietary business.

As we've said, we think we have great opportunities both in the consumer sector, in middle market, within small-business.

So we think there is an abundant amount of growth, as customers and businesses will continue to use credit cards more and more into the future.

So I think, as we grow the proprietary business, that will strengthen the network.

GNS will also have a very positive effect on the network, as we bring more cards onto the network, more spending onto the network.

How we utilize independent operators also will benefit the network, in terms of allowing our customers to use their card in more places.

So I think it's really all elements of our business will help to improve the network, strengthen it and help us to continue to gain share, as we have over the last several years.

Just with respect to debit, do you see that as an opportunity for growth?

Or is that not in the consideration that you just outlined?

So debit is something that we've talked about many times.

It's hard to have a large debit program without demand deposits.

There are certainly a number of things we can think about doing.

But when we look at those opportunities compared to the investment opportunities that we have in our core business, we have so many opportunities in our core business, that's where we will continue to invest.

Thanks, everybody, for participating in the call today.

Just before we get off, I wanted to mention that we will be filing an 8-K within the next couple weeks, which will actually provide restatements back through 2005.

So you should be on the lookout for that, and that will provide you with some additional historical information on the restated basis.

So thank you, everyone, for joining the call, and have a good evening.

Ladies and gentlemen, thank you for participating in day's American Express third-quarter 2007 earnings conference call.

You may now disconnect.