美國運通 (AXP) 2008 Q1 法說會逐字稿

Ladies and gentlemen, good afternoon.

Thank you for standing by and welcome to the American Express first-quarter 2008 earnings conference call.

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

Later, there will be an opportunity for your questions, and instructions will be given at that time.

(OPERATOR INSTRUCTIONS).

As a reminder, today's conference is being recorded.

At this time, I would like to turn the conference over to our host, Senior Vice President of Investor Relations, Mr.

Ron Stovall.

Please go ahead.

Okay, thank you, Tom, and welcome to everyone.

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

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

The words believe, expect, anticipate, optimistic, intend, plan, aim, will, should, could, likely, and similar expressions are intended to identifying 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 2007 10-Q report already on file with the Securities and Exchange Commission.

In the first-quarter 2008 earnings release and supplement which are now posted on our Web site at IR.AmericanExpress.com, and on file with the SEC in an 8-K report, we have provided information that describes the Company's managed basis and other non-GAAP financial measures and the comparable GAAP financial information.

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 related to today's announcement.

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

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

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

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

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

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

As you've seen in our earnings documents, despite the more difficult economic environment, our first-quarter results reflect the continuation of strong business growth on a relative basis, and the benefit of our diversified business portfolio.

Our multi-year investments in a broad range of business-building initiatives again yield industry-leading performance for the quarter, as they have over the past few years.

As expected, earnings for the quarter were somewhat below last year.

Our strong revenue growth was offset by the impact of the more difficult U.S.

credit environment and higher marketing spending compared to the lower amounts in 2007.

As we discuss the results, it's important to keep in mind that the translation of foreign currency significantly impacted reported revenues and expense growth rates, increasing each by 3%.

When you compare our results from continuing operations to the first quarter of last year, net revenue grew 11% while income decreased 11% and diluted EPS of $0.84 decreased 7%.

ROE was 36%.

For those of you who follow revenue consensus estimates, you know that, each quarter, there has been some noise around the way the consensus is tabulated by some reporting services.

This continues to be the case, as it is computed in a way that is likely to the above our reported numbers.

Let me remind you that last year's first quarter included $50 million, after-tax, from the initial adoption of FAS 155, and a $39 million, after-tax, pension-related gain.

Both of these contributed to the year-over-year decline in income.

During the quarter, we returned 38% of capital generated to our shareholders through share repurchase and dividends.

We slowed our share repurchase program during the quarter in order to allow the capital generated through earnings to help fund the recent acquisition of GE's Corporate Payment Services business.

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 double-digit growth in a number of categories, including discount revenue, card member lending finance revenue, card fee revenue, and commissions and fees.

Additionally, revenue growth reflected the benefit of lower interest rates.

Revenue continues to be driven by solid growth in card member spending, loans, and cards-in-force.

Given the weaker economic environment, worldwide [billed] business growth for the quarter was particularly strong at 14%, or 11% on an FX-adjusted basis, which as you know is the more important indicator of the underlying health of the business volumes.

In our U.S.

proprietary business, consumer spending grew 7% in the quarter, small-business spending increased 11%, and corporate services volumes rose by 8%.

These growth rates, while far better than the industry, are 300 basis points lower than the growth rates in the fourth quarter of 2007.

In total, U.S.

volumes for retail and everyday spending grew 11%.

This category represented about 68% of U.S.

billings.

Travel and entertainment-related spending, which accounts for the remainder, rose 8%.

Outside the U.S., proprietary billed business grew 22% on a reported basis.

This translated to an increase of 10% on an FX-adjusted basis, reflecting 9% growth in our consumer and small-business activity and a 10% increase in corporate services.

These growth rates have held up well outside of the U.S.

Within global network services, billed business rose 50%, driven by continued robust growth both in and outside of the U.S.

Worldwide, cards-in-force rose 10%.

We added 1.6 million net new cards during the quarter and 8.1 million net new cards since last year.

This reflects 5% growth versus last year in proprietary cards and 33% growth in network partner cards.

Spending for a proprietary basic card rose 6% worldwide, or 3% on an FX-adjusted basis, even with the suppressing effects of substantial card additions over the past few years.

Our average discount rate of 2.57% decreased 1 basis point from last year but increased versus last quarter, reflecting the typical seasonal impact of lower retail-related business volumes in the first quarter.

Net card fee revenue increased 17% due to card growth as well as higher average fees per card.

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

Worldwide lending balances on an owned basis rose 17%.

On a managed basis, balances grew 19% on 18% growth in the U.S.

and 23%, or 13% FX-adjusted growth, within our non U.S.

portfolios.

This is a slower growth rate in the U.S.

managed loans than recent quarters due to the initial impact of various credit-related actions, such as targeted line reductions for higher-risk customer segments, industries and geographies; and increased efforts in our collection and credit areas; and the flowthrough of slower spending growth within our co-brand, lending on charge, and other credit card relationships.

These were partially offset by a slowdown in payments rates, consistent with the weaker economic environment.

Securitization income decreased 3% as higher finance charge and fee revenue, driven by higher securitized loans and a lower cost of funds, were more than offset by higher write-offs and a smaller increase in the evaluation of our interest only strip this year versus last year, which was mostly due to last year's FAS 115 adoption gain.

Card member lending finance revenue rose 19% on growth in owned portfolio.

Interest expense increased 9%.

This was due to an 8% increase in funding costs within the lending business and a 10% increase within the charge card and other interest line -- other interest expense line.

These increases reflect loan and business volume growth, which is partially offset by the benefits related to the decrease in the LIBOR benchmark rate.

Marketing, promotions, rewards and card member service expense increased 20%, reflecting greater marketing investments versus a relatively low level of marketing last year, as well as higher volume-related reward costs.

Human resource expense increased 13%, reflecting last year's pension gain, merit increases, greater benefit costs, and a 4% higher employee level, primarily related to various customer service and sales force-related initiatives, in addition to last year's corporate travel acquisition.

Growth in the remaining operating expense reflects the impact of increased volumes within our technology and card member servicing activities, and shows that the underlying operating expenses continue to be well-controlled.

The total provision for losses and benefits increased 48% versus last year.

As the charge provision rose 65%, the lending provision increased by 41% and the other provision was 51% higher.

The lending and charge provision increased due to higher write-off rates and delinquency rates, reflecting the more difficult U.S.

credit environment and loan and business volume growth worldwide.

The other provision [rose] on greater merchant-related provision in the first quarter of 2008 compared to the delta-related provision benefit in the first quarter of 2007.

The consolidated tax rate of 28% for the quarter reflects the resolution of certain prior-year tax items compared to the 32% rate last year.

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

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 rates than that of most major competitors demonstrates the effectiveness and ongoing benefit of our marketing and rewards investments over the past several years.

Business growth also benefited from the relatively strong growth in our Global Network Services and our non U.S.

consumer and commercial card activities, reflecting the benefits of the diversity of our business segments and our business models, and the balance within our results.

While losses and past due levels within the United States lending portfolio have trended higher, our credit quality indicators compare favorably to the industry and continue to reflect the benefits of our focus on the premium market sectors.

As we've discussed before, our write-off rate calculations include principal, accrued interest, and accrued fees, versus the principal-only calculations that our competitors generally publish and utilize.

This serves to overstate our comparable rate by about 20%.

Overall, our first-quarter metrics demonstrate that the business performance was dimensionally consistent with the 2008 plan that we discussed with you back in January.

We believe we're managing credit effectively in a difficult environment, although our actions are suppressing spending volume somewhat and will negatively impact credit metrics in the near term.

The managed U.S.

card member lending write-off rate rose from 4.3% in the fourth quarter to 4.3% in the first quarter.

I want to point out that the rate for March was higher than the average rate for the quarter.

Therefore, we expect the loan-loss rate will be higher in the second quarter than in the first quarter.

In addition to the combined impact of our actions and the current environmental conditions will likely cause loan growth to be slower than the 16% growth assumed in the initial plan.

We do not plan to update our view of our metric trends as they continually evolve and will likely vary from our original plan assumptions as we progress through the year.

However, our performance, together with the flexibility inherent in our business model, affirms our belief that we're still tracking to the reported EPS growth assumption of 4% to 6% that we discussed earlier in the year.

This expectation is based on the economic environment that is consistent with or moderately worse than what we have experienced to date.

If conditions were to significantly deteriorate from here, we would likely be more focused on the medium to long-term strength of the franchise versus our short-term objectives.

Our strategy continues to be centered on positioning us to continue to gain profitable share, regardless of the environmental conditions.

In light of this difficult environment, we believe we are prudently balancing risk against profitability and growth.

As we've discussed with you before, our ultimate goal is to continue to ensure that American Express navigates through these challenging economic conditions in the best position possible, relative to our payment competitors and relative to the overall industry.

We will continue to be guided by our long-term, on-average and over-time financial objectives.

Since we set these objectives in 1993, we have generally performed consistent with these goals, and in fact have outperformed them in recent years.

Given our industry-leading results and the products, customers and geographic breadth of our franchise, we believe we are well positioned to execute against growth opportunities in a manner that continues to appropriately balance short, medium and long-term business and financial goals.

Thanks for listening.

We are now ready to take questions.

(OPERATOR INSTRUCTIONS).

Meredith Whitney, Oppenheimer.

Just one main question -- one thing that really stuck with me at your semiannual meeting in February was the market decline you saw in consumer spending from the month of November to December.

Can you comment on -- I know you guys said you didn't want to do this, but can you directionally comment on what you are seeing in consumer spending?

And then remind us if you told us about the line, line issues in terms of cutting consumer credit lines, when that took place and if that's accelerated throughout the quarter?

Okay.

So we saw a 300 basis point drop in December in the U.S.

consumer and small-business.

As I indicated, in the first quarter, we had a 300 basis point drop across our various lines of business in the U.S., compared to the fourth quarter.

I'm not going to give information month by month.

I think that's probably too detailed.

But I would say that 300 basis point drop is consistent with what the 300 basis point drop the first quarter to fourth quarter is consistent with what we saw in December.

So we've seen a continuation of that.

In terms of the line reductions that we've done with regard to certain lending customers, as soon as we saw the deterioration in credit, we took a look at our credit policies and practices and we have heightened default rates across the board.

We have also been surgical in terms of looking at certain geographies, because default rates are higher in certain geographies.

We've also looked at certain industries where they have weakness, and in those, we've taken special actions as well.

So we started really as soon as we saw the credit indicators start to deteriorate, which was back in December, and we've continued that really through the first quarter in total.

So the number of line reductions in the first quarter was significantly more than you would have seen on average in 2007, and we've seen probably fewer line increases.

So we're trying to be very focused on balancing, controlling credit properly.

On the other hand, we don't want to damage the long-term health of the business, and really balancing long-term considerations for customers with a desire to control credit in the short-term.

Okay, if I could just follow up with one last one, one quick one?

You've seen a flurry of large caps like yourselves change their funding strategy over the last few weeks or augment their funding strategy over the last three weeks.

Could you update us as to any changes that you see, any tweaks you'd like to make to your funding strategy, and any changes you see to your securitization strategy?

Okay, so we really haven't changed our strategy.

We actually fund across a number of areas, so we borrow in the commercial paper market; we borrow in the unsecured market; and then thirdly, we borrow through securitizations.

So there has been an absence of availability in the unsecured one to five-year market really over the last six, seven or eight months.

But there has been perfect availability in commercial paper.

We continue to fund there the way we always half.

We have not seen any price increases in that funding vehicle.

We do have availability in the unsecured market, kind of five to ten years.

Liquidity has been there for us.

Also, there's plenty of liquidity in the securitization market.

Now, in the unsecured in the securitization market, we have seen the impact of what's taking place in LIBOR impacting what we have to borrow at.

Plus, the credit spreads above LIBOR in the first quarter were higher than we've seen historically.

But there is plenty of liquidity; you have to pay up a little bit.

One of the other things I would say, I would just point out that, on our Web site, we included on the Web site some information about the funding we are doing, debt funding we are doing.

In there, we indicated that we were going to fund this year, $37 billion over the course of the year.

In fact, because of the slowdown in the business, that's now $34 billion.

I would point out that we funded about $7.8 billion of that in the first quarter, and in the first 15 days of April, we actually funded another $4.8 billion.

So there's been plenty of availability in terms of funding for us.

We think we are very strong liquidity plan and funding plan.

We are an A+, a strong A+ rated Company.

I think we are very well regarded in the marketplace, and we've been able to fund just fine.

Craig Maurer, Calyon.

Looking at the increase in your marketing expense year-over-year, I was wondering if you can comment on how much of that growth is related to higher rewards points accrual.

So, our rewards -- we don't split out those two numbers.

I think historically we've given a dimensional split between marketing and rewards.

I would say that our rewards costs have grown dimensionally in line with the growth in the business.

The rest of the increase is really the fact that, last year, we took our marketing spending down, which we explained at that time.

You know, this year, we brought it back up to more normal levels, so the 20% increase on that line is a combination of volume-related expenses on rewards plus higher level of marketing compared to the first quarter of last year.

Okay.

On the credit side, the reserve coverage ratio that you have in place right now, which seems to be in line historically with where you have been -- are we to assume that you're going to maintain that similar leverage -- that similar level of coverage or will that be increasing due to, like to said, March was the highest quarter?

So the reserve coverage of delinquencies and charge cards is 96% this quarter compared to 95% last quarter.

On the lending side, on an owned basis, the coverage ratio was 100% in the fourth quarter; it's now 100%.

If you look at lending on a managed basis, it went from 96% -- from 106% to 105%.

So we're keeping it in the first quarter at dimensionally a similar level that we had at year-end.

You know, where we will take reserve coverage in the future will depend on the economy and the delinquencies that we're seeing in our own business, and what credit actions we are taking.

When you are sitting, you also take into consideration what your recent acquisitions have been.

So I think we will take all of those factors into consideration in the future, in terms of where we will set out reserves and our coverage ratios.

Have you thought about how the GE acquisition will affect that coverage yet?

So, I do not know the answer to that question.

It's I guess about $4 billion of business, so I don't think it will have a dramatic impact on the overall ratios.

We will make an evaluation of what the appropriate coverage ratios are for that particular portfolio, based on historical experience.

Thank you.

Bob Napoli, Piper Jaffray.

Good afternoon.

Just two questions I guess, one on the funding side.

Can you quantify the percent of your funding that is floating-rate at this point, and how much benefits you've got?

I understand that your spreads were up and LIBOR was up, but obviously the Fed has cut rates (inaudible) rates a lot more, so you must be benefiting.

I was just wondering if you could give a feel for how much benefit you're getting from the interest expense side.

I would imagine that you would expect that to somewhat offset the higher credit losses that you're probably going to see this year, versus your prior plan.

So approximately 30% of our funding is fixed, either because it's fixed-rate or it's fixed through hedges.

In the annual report, I think we make a disclosure that, as it relates to charge card or fixed-rate lending products, a 100 basis point drop in funding cost yields us about $225 million in benefit.

Now, you have to think about our funding costs not just where the Fed has gone -- because actually it's the LIBOR rate that's key -- and you have to factor in where credit spreads above LIBOR have gone.

So I think you need to think about all of those.

As it relates to our variable-rate book, you have to think about it a little differently because when we design the product, we really just want to lock in a spread.

When interest rates go up or down, that's really the cost that gets passed on to the customer.

Inherent in there is the assumption that there's a relationship between Fed funds and LIBOR rates, right?

Because we price to our customer off of prime, which is driven by Fed funds.

So, now that LIBOR is not moving in concert with Fed funds, that has a negative impact on us, and that's moderating the benefit that we're getting.

So over time, it will be important for us to have Fed funds move back more in line with LIBOR rather than move back more in line with Fed funds.

So we're getting a benefit, clearly, but I think you have to factor in all of the things I just discussed to fully understand what the impact to us will be.

As we go forward through the rest of the year, how much benefit we get will also depend on the relationship of those two curves.

Is it kind of your expectation, though, that that benefit is offsetting the higher provisions that you will likely have?

So I think interest rates, as I think about our business, to the extent you stay "floating" are always a built-in hedge.

So you actually have higher provision and slower growth in billings, normally interest rates would go down and actually hedge that economic condition.

We are actually seeing that happen during the current period.

Okay.

Then a big-picture question which I'm sure you can't give me an answer, I just don't know if maybe you could give me some kind of a thought process around American Express.

But American Express is trading at around 12 times earnings.

I mean you can argue that the earnings could be cyclically impaired more than what people currently have them modeled at.

Nonetheless, it would be cyclically impaired to improve when a credit cycle improves.

But you have MasterCard and Visa trading at 25 to 30 times earnings.

You're earning double what maybe a Visa might earn but have a lower market cap, so that brings some strategic thoughts, it must -- or certainly discussions within American Express about what the right structure is.

Does the lending business have to be attached or should they be separated?

I just don't know if you can give any thoughts.

I'd love to hear what thoughts you have on valuations of American Express versus competitors of yours in MasterCard and Visa.

Okay, so we certainly do discuss our P/E; it's something that we're focused on because it's an important part of our share price, which is important to our shareholders.

So you know, if you went back several months ago, there certainly was a notable higher P/E for us compared to the issuing competitors.

When you think about our company, I think you really need to think about the various elements of it, because we are -- have some diversified businesses here.

Within the issuing side, you know, we have a charge card business which has less credit risk attached to it, and I think probably deserves a P/E that's higher than the average of the industry.

We obviously have a lending component of that.

But then our B2B business, we have corporate services which certainly has less risk.

Again, it's a charge card company; it should derive a higher P/E from that.

Then we have our merchant business and GNS business, which is much more analogous to either a processor such as First Data Resource, or a network such as Visa/MasterCard.

So I think our P/E over the years has reflected that.

I think people need to focus on the fact that there are really several different elements to it.

I think what we're trying to do is navigate through the short-term here in the best possible condition, maintain our business momentum, and come out of the slowdown in a stronger position compared to our competitors.

We think, if we do that, that will be in the best interest of our shareholders and hopefully get reflected in our share price over time.

In terms of lending, you know, lending is an important part of our business.

We put value propositions into the marketplace that we think customers want to use, and then we let them decide whether they want to use a charge card or a lending product.

The important thing for us is that it's a spend-focused card and that's how we design our products.

So we think all pieces of our business are an important part that people should think about each of those components when they think about our valuation.

I guess also I would just add that, if you looked at the performance of the Company over the last really five to ten years, you know the performance has been really very strong and consistent with if not better than, over recent years, than our financial targets.

I think the kind of performance that we have been able to generate is clearly differentiated from most companies in the marketplace.

Hopefully, that will give us some credit on the P/E side over time.

Thank you very much, very helpful.

Sanjay Sakhrani (technical difficulty).

I just wanted to make sure I understand the guidance first.

So, we should just think about the '08 guidance as being 4% to 6% EPS growth and not think about the charge-off guidance and the worldwide billed business guidance you guys provided in January?

That's correct.

Okay.

Then secondly, I mean just in terms of kind of your expectation on credit quality when you guys mentioned it in January and sort of how things are progressing, I just want to know how the behavior has been across segments, vintages, etc., just kind of if you could help us with that.

Then just finally, on the tax rate, I just wanted to get a sense of sort of what a good tax rate would be to use on a corporate level, because it seemed like it was a little bit lower than what I thought it would be.

Okay.

So, well, on the spending side, we've really seen, in the U.S., a slowdown really across all products, all vintages, all geographies.

On the credit side, it's been different.

Where we've seen the greatest impact are in geographies where the housing market has really dropped more than 5% or more than 10%.

So when we look at our data and we look at geographies that really have not had a drop in housing, you know, they're really hasn't been that much deterioration.

Where there's been a greater drop, the greater the drop in housing prices, the greater the change in -- or deterioration in credit metrics.

The other key thing that we've looked at is looked at where people stand in terms of their mortgage.

So if you look at folks who either are renters or people who have had a mortgage that is older than 2003, you know, again, it's been a relatively modest change in terms of credit behavior.

On the other hand, if you look at folks who have a mortgage that's more recent than that or people that really don't have mortgage information, that's where we've seen the greatest increase in delinquencies.

So that's to kind of give you an idea of how it's different, but it's really different on the credit side as opposed to on the spend side.

To answer your question about tax rate, you know, I would generally think about a tax rate in the low 30% range, 30% to 32%.

Over the last several quarters, in certain quarters, it's been lower than that, such as this quarter.

That's really driven by the fact that we settled and resolved certain prior-period tax issues that resulted in a benefit to us and therefore lowers the tax rate in the period that that's settled.

So, for the remainder of the year, 30% to 32% is a good run rate to use quarterly?

So we don't -- I don't do a forecast for rest of the year, but I would think, absent some settlement related to prior years, that 30% to 32% rate is about the right rate.

Okay.

I'm sorry, just one more question on that credit color -- how about small-business?

I mean, that's an area that we've heard some of your competitors talk about seeing quite a bit of deterioration.

I was wondering if I could just get some color on that.

Yes, so in some prior periods, we've said small-business was kind of a leading indicator that credit was going to deteriorate.

That wasn't the case this time.

You know, we should keep in mind that small-business, just by the nature of the business, has higher credit losses in good times or bad times than consumer.

But what we've seen so far is both a similar impact to both consumer and small-business during this cycle in terms of our card members.

Now, in terms of our merchant business, we actually had some higher provisions in this quarter in part because some of the small businesses that are merchants, you know, we've seen some impact there and so we set up a reserve to cover ourselves on the merchant side.

Okay, great.

Thank you.

David Hochstim, Bear Stearns.

I missed a minute or so of the call.

I wonder.

Did you explain or discuss what the investment losses that were in the corporate segment were this quarter?

Yes.

So as part of the sale of AEB to Standard Charter, part of that was an agreement that we would continue to own AE IDC, which was a subsidiary in which they actually had investments and then deposits really from customers where they invested money and made payments to customers.

We would hold that for 18 months past the time of the closing.

In the first quarter, we actually had about $100 million of losses related to that AE IDC portfolio.

Now, when we first took the portfolio, we had about $4 billion worth of investments in mortgage-backed and other asset-backed investments, and we took that down to about $1.6 billion as of year-end, and we've now taken it down to I think $783 million.

So, we've really reduced our exposure within that portfolio.

Now, 93% of the assets within the remaining portfolio are AAA-rated.

That probably gives us less comfort that it used to, but basically that $100 million loss that we had in the first quarter related to that portfolio.

Was that a realized loss, or an unrealized -- mark-to-market?

It's a combination of both.

And so were there other unrealized losses that haven't been (multiple speakers)?

So the mark-to-market was the vast majority of it.

Okay.

Then I know you said you're not providing guidance, but in January, you did talk about a 5.1% to 5.3% charge-off range for the year, and you indicated you're above that now.

I guess is there some relationship we should think about between billed business growth and that loss rate?

I mean, billed business was a little bit higher than I think you thought in the first quarter.

Well, certainly billed business was a strength in the fourth quarter.

I mean, it was higher than the full-year guidance that we indicated.

In terms of billed business, we continue to be very cautious in terms of our outlook as it relates to the U.S.

On the other hand, we are encouraged by the performance internationally, so we will have to see how that plays out.

You know, again, I think our performance, compared to competitors', compares very favorably.

On the credit side, you know, as I said, we came in at 5.3% for the quarter, and we expect that to be higher in the second quarter.

You know, where credit will go after that is very dependent on a combination of the economy and what business actions we take in the future.

Is there a reason to think that it won't go -- I mean, shouldn't we expect it to go higher when we look at delinquency trends?

I mean, those moved up pretty significantly in the first quarter as well.

Yes, and I think that's why we've indicated that the second quarter will be higher than the first quarter.

In delinquencies, you know, a large part of the delinquencies will play out in the second quarter.

But what happens, those people who are current or only 30 days will be very much driven by what happens in the economy.

Did you see any change in [roll] rates during the quarter, relative to the fourth quarter, a significant change in the later stage buckets?

Well, you can see that just total delinquencies are higher in the first quarter than they were in the fourth quarter.

We don't want to give out disclosures kind of bucket by bucket.

Right, that's why I was asking.

No, we don't disclose that.

Oh, thanks.

Brad Ball, Citi.

Just to follow-up there, Dan, you did say, in your prepared comments, that you are seeing slower payment rates.

In response to an earlier question, you were talking about seeing more credit deterioration in the markets where home prices have dropped 5% to 10%.

Are those things what's accountable for the change in credit results versus what your outlook was back in January?

So what I would say is, you know, I don't know -- so certainly payment rate is slowing down.

I don't know it by geography, but I think it's probably reasonably broad-based.

You know, there's lots of things we can do in terms of how much we allow people to spend, but it's completely up to them in terms of how much they decide to pay.

So, we've actually had a nice move in terms of the growth in managed AR in the U.S.

You know, it dropped from 23% growth in the fourth quarter down to 18% growth.

So we think that's a good trend, given the environment that we're in.

But I don't have specific information on paydowns as it relates to geographies.

Okay.

Then a follow-up on the comments you made earlier about the $34 billion of funding in '08 -- is that all expected to be done in the ABS market?

What kind of pricing are you seeing on ABS deals these days versus where they were a year ago, and where would you expect them to normalize, and any idea when?

So I don't have any idea when.

That would be nice to know that I think; lots of people would like to know the answer to that question.

So, we don't fund solely in the securitization sector.

It's really a combination of commercial paper, unsecured debt, and securitizations.

In the first quarter and in the first two weeks of April, we actually borrowed certainly in the commercial paper market, but we also did a number of ABS transactions.

In January, we did about $3.7 billion of ABS, but we also did about $3 billion of unsecured.

If you look at what we actually did in April, again it was a combination of ABS transactions where we did about $2.5 billion, but we also did another $2.5 billion, approximately, in unsecured.

So we really continue to borrow through each of those channels, as we have historically.

Where is the pricing on those?

So the pricing is certainly higher than what we saw historically.

Often, we were paying 10 to 20 basis points above LIBOR.

Back in January, early January, on a three-year deal, we paid 45 basis points above LIBOR.

In February on a ten-year deal, we did 126 basis points above LIBOR.

Then if you came back into April, they came back a little bit; we did some two-year ABS at 95 basis points above LIBOR.

We did a six-year deal at 140 basis points above LIBOR.

Then we did a one-year deal at 70 basis points.

So it really depends on the maturity or the length the debt is going to be outstanding, but I would say it's come back a little bit in April, compared to where we were in the first quarter.

Great, thanks.

Eric Wasserstrom, UBS.

Could you just -- I know you said that your expectations at this point are based on an economy that looks similar to ours or maybe moderately worse, but would you mind just quantifying what that means in terms of nominal GDP and unemployment?

So I won't try to put either an unemployment number on significantly or a GDP number.

I think, certainly, if unemployment moves up a little bit or GDP slides a little bit, I think we would stay with our current thoughts about where we're tracking in terms of EPS.

If they were to move notably -- and I'm not going to put a percentage on that -- then that will have an impact on our business decisions.

At that juncture, we have to decide, is the correct thing to do is pull back on spending and continue to track towards 4% to 6%, or should we be more focused on continuing to spend at comparable levels, move away from that EPS number and be more focused on continuing to have strong business momentum?

No matter what the facts are, we will be very focused on continuing the business momentum we have and investing at a level that will enable us to continue to take share just as we have over the last several years.

Okay.

I guess could you just help me to think about how, as an outside observer of the Company, we can make a judgment about whether the broader economy is moving in a way that's consistent with your expectations, or perhaps worse than?

Yes, so I think I tried to indicate that I'm not an economist; we don't have any economists in American Express, so I really don't try to forecast where the economy is going.

What I try to do is set up a plan based on a certain set of economic assumptions, and then we have a contingency plan, either positive or negative, depending on which way the economy moves.

So, we could take a very dire forecast of the economy and really pull back on spending now.

We've chosen not to do that because, if it doesn't really move down, then we would have missed a business opportunity.

So I think the thing that's important is us to know what actions we will take to either spend more money or less money, depending on where the economy goes, and be ready to move quickly in that direction, and we have those plans.

So I'm not trying to forecast the economy, but I'm ready for a variety of scenarios so that we can operate in the most positive way going forward.

What would be -- and this my final question -- but what would be, if things were to get worse, what would be the first two actions that you would look to take?

So I think we have a variety of actions that we could take, including how much we spend on marketing, how much we spend on technology, how much we spend on consultants, contractors, just what our overall operating expense levels would be.

So, those are all things that we will consider.

But we don't consider them in isolation.

We have to consider them in terms of, if we take those actions, what will be the impact on near-term metrics and the mid-term health of the business.

We will factor all of those things together in determining whether we actually reduce expenditures or whether we decide to stay where we are or increase them.

The other thing is -- another barometer is just what we are doing with credit, right?

So we could, depending on where the economy goes, we could tighten up our credit further.

We may assess that, at this point, it's better to actually loosen up on credit and let more billings come through.

So our total objective will never be just one line item in the P&L.

Our objective is not to have, for instance, the lowest-possible provision rate.

It's really to make decisions that have the greatest economic gain over time.

Thanks very much.

Mike Taiano, Sandler O'Neill.

Thanks for taking my question.

Dan, how should we view the $70 million payment that you received from VISA this quarter?

Should we just assume that was reinvested in the marketing line?

So, Visa's payments that we will receive for the next four years we really consider to be part of our ongoing operations.

In some quarters, we well fully reinvest it; in others, we won't.

In the first quarter, we came into the year really very cautious about what was going to take place.

So we actually only approved certain limited spending against that $70 million.

We were actually comfortable doing that because, as part of our regular plan, we had planned to actually increase marketing expense quite a bit compared to last year.

So I think, each quarter, we will make an evaluation about how much we will spend.

Now, we have already approved some spending over the balance of the year of those Visa funds, and then after that, each quarter, we will make an evaluation of whether we're going to approve more of that for investment spending.

Okay.

Could you just maybe give us a little bit of color on what's going on with utilization rates, or on both consumers and small businesses?

Are you seeing those utilization rates going up over the last three to six months, let's say, or they've been basically stable?

So utilization rates are curious.

I mean, customers kind of self-regulate themselves.

I mean, customers generally only like to take their line up to 50%, 60%, 70% of their total line.

I think they always like to keep some for a rainy day.

Quite frankly, when someone hits their line, that's an indicator to us that we need to be very cautious about them in terms of payment behaviors and whether we consider actually increasing the line or not.

So I don't know that we've seen a marked change in the utilization percentage.

Certainly, to the extent we've reduced lines on people, that clearly has had an impact to help our credit, but it's probably also had an impact in terms of reducing spending in the first quarter in those categories where we've actually reduced lines.

All right.

Then just the last question -- where do you guys stand with what's going on with the airlines?

Are you guys withholding more cash these days, given the high price of oil and some airline bankruptcies?

So we evaluate all airlines on an individual basis.

So, they are very big customers of ours.

As you know, we have exposure because, to the extent a card member buys a ticket, you know, that card member pays us, we pay the airline.

To the extent they are not going to fly for a week or two months, during that time, we basically have effectively a receivable from that airline, but if they go into -- if they were to liquidate, we wouldn't collect it.

So over the years, we have been very focused on this.

When appropriate, we do hold back to mitigate whatever exposure we have.

Over the years, from time to time, we've had small losses, but we've never had any large, significant losses in the airline industry.

So, we don't have a blanket policy.

It's airline by airline.

Okay, thanks a lot.

Moshe Orenbuch, Credit Suisse.

Just getting back to a couple of earlier questions, when you said that the expectation was for higher losses but similar earnings, I guess would you say that the steps that would be needed to offset those higher losses already were taken in the form of falling interest rates, or do you have to make changes on the marketing front on top of that?

So I didn't make any forecast for the full year as it relates to credit losses.

I simply indicated that, in the second quarter, we think write-off rates of going to be higher than they were in the first quarter.

So our assessment of the full year and tracking to the 4% to 6% takes into effect everything that's happening, from billings, from fees, finance charge revenue, interest rates, investment spending, operating expenses.

So we factor all of those things together, we believe we are still tracking to the 4% to 6% EPS for the year.

Okay, and kind of -- okay, thank you.

Meredith Whitney, Oppenheimer.

Okay, this will be our -- we'll take one more question after this.

Okay, sorry, I couldn't help myself.

It's sort of a two-parter; I'm going to cheat with a two-parter.

You guys say you don't have internal economists, yet the external economists and what not are known to call you and ask for guidance.

So I'm wondering.

Wouldn't you have an ability to see, from a behavioral standpoint, further out into a couple of quarters and comment on that?

Then with respect to the guidance on the losses, the losses are accelerating.

So, why would you assume that they would do anything other than stabilize at best if not accelerate further as the core fundamentals in the environment deteriorate?

Okay, so we certainly have a very good window within the quarter about what's taking place not only month by month but day by day.

We can see what the trends are.

From that, we can have a window, a little bit, into the next month or two.

What's going to happen beyond that is going to be very dependent on what customers' view of the economy is, as opposed to our view of the economy, so it's really to be their behaviors that are going to impact it.

So we have a little bit of a window, but I don't think it's a long-term window that expands to the third quarter or the fourth quarter.

So on that basis, so certainly all of the decisions we make we take into consider everything that know, but we don't have an economist in-house.

We are really picking a scenario around which we plan, and then we have contingency plans, either up or down, around that.

In terms of credit losses, you know, as I said, March is higher than the average.

We have a view of what's going to happen in the second quarter because of roll rates, in terms of what's taking place there (inaudible) most likely to happen in the second quarter.

But once you get beyond that, it gets a lot more difficult because, if you're going to have high delinquencies out there, it's going to be based on the behavior of the customers that are currently either current or 30 days.

Only time will tell what their performance is actually going to be.

So the bigger wild card is spending and the shortness of your (inaudible) because if it goes beyond 30 days, you guys know where it's going?

So, in the very near-term, I think we know where it's going.

We certainly also listen to all of the external information that's out there and what economists are predicting.

But as we know today, there are one group of economists that have a very dire forecast, and there's another set of economists that think the slowdown is only going to last for a short period of time.

It's hard to figure out which is actually going to be the case.

I'd rather listen to you guys than an economist.

Thanks!

Okay, last question?

There are no more questions in queue.

Okay, so let me just make a few final -- share a few final thoughts before we sign off, which is, despite the more difficult environment, we generated strong business growth during the quarter and metric performance is in the top tier of the industry.

While we continue to be cautious about the U.S.

economy, we believe we are prudently balancing risk against profitability and growth.

Our goal is to ensure that American Express navigates through these challenging conditions and emerges on a stronger footing relative to the competition.

So thanks, everyone, for joining us and I look forward to speaking with you in the future.

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