美國運通 (AXP) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the American Express Q3 earnings conference call.

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

Later, we will conduct a question-and-answer session and instructions will be given at that time.

(OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, the SVP of Investor Relations, Mr.

Ron Stovall.

Please go ahead.

I appreciate all of you for joining us for today's discussion, and certainly want to apologize for the slight delay; we had a couple of issues with our conference provider through the Web.

It is 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, should, could, likely and similar expressions are intended to identify forward-looking statements.

Factors that could cause actual results to differ materially from the forward-looking statements, including 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-K report already on file with the Securities and Exchange Commission.

In the third quarter 2008 earnings release, supplement and presentation slides, 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 describes the Company's managed basis and other non-GAAP financial measures and the comparable 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.

Ken Chenault, Chairman and Chief Executive Officer of American Express, will provide some brief opening comments.

Then, Dan Henry, Executive Vice President and Chief Financial Officer, will review some key points related to the quarter's earnings through the series of slides included with earnings documents and provide some brief summary comments.

Once Dan completes his remarks, we will turn to the moderator, who will announce your opportunity to get into the queue for the Q&A period, where both Ken and Dan will be available to respond to your questions.

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 Ken.

Thanks, Ron.

Before Dan covers the results, I wanted to say a few words about the economic environment, the reengineering efforts planned for the fourth quarter and our perspective on funding.

Now, given the difficult operating environment, our business performed relatively well this quarter.

Now, we have been very cautious about the economic outlook for most of this year, and that certainly continues today.

But, based on recent trends, we believe consumer and business sentiment is likely to deteriorate further, and we see this translating into weaker economies around the globe well into 2009.

Now, the market turmoil of the past few weeks is clearly going to make conditions even more challenging.

Cardmember spending in such an environment is likely to be very soft.

Loan growth will be restrained, and some of that will reflect the steps we're taking to lower credit risks.

Now, credit indicators are likely to reflect the weaker economy, including a continued downturn in the housing sector.

Now, to prepare for this more difficult environment, we are moving ahead with plans that will result in restructuring charges in the fourth quarter.

Through a combination of cost reductions and revenue-building actions, we expect to be able to free up a significant amount of resources that would be available to earnings starting in early 2009.

We will continue to invest in longer-term business-building actions and programs, but we're going to be very selective with our investment dollars in this environment.

Our intent is to be in the strongest possible position to weather an unsettled economy that will be with us well into 2009.

In that context, we outlined our funding position in an 8-K filing a few weeks ago and noted that we now have broader access to the Fed's discount window.

Now, the headline, so to speak, is this.

I believe that we can absolutely stay liquid.

We have contingency programs in place that would allow us to navigate through this environment for at least 12 months, even under extreme market conditions.

Now, by way of an update, since the filing we're now also in a position to participate in the commercial paper funding guarantee programs that were recently announced by the fund.

In short, we feel very good today about our overall funding position.

We expect to be in a position to capitalize on growth opportunities once the environment improves.

But for now, our focus is on staying liquid in our funding, staying profitable and generating excess capital and investing, but very selectively, in growth opportunities.

And we are confident that we can do all three.

Now I'm going to turn the call over to Dan for his remarks, and then we will be very happy to take your questions.

Thanks, Ken.

So let me start on slide two with our top-line financial information.

Revenues on a GAAP basis grew 3%.

I would note that on a managed basis they grew 9%.

Diluted EPS of $0.74 was 21% below 2007.

This is a result of a slowing in spend growth, as well as higher credit losses.

ROE remains very healthy at 27.8%.

This performance is below our on-average and over-time financial targets and will continue to be as long as the economy remains weak.

Looking now at slide three, we have a number of changes in reporting.

First, AEIDC is an investment subsidiary of AEB, which we closed the sale in the first quarter of this year and we agreed to retain this sub until September of '09.

Now that we're within one year, we're going to move this from continuing operations to discontinued operations.

AEIDC has about $660 million of assets.

Cash represents $340 million of that total.

We file an 8-K on September 12th restating data back to 2006.

Next is the net write-off rate.

As you know, we have historically included principal, interest and fees in our calculation of net write-off rate.

Back in the first quarter, I indicated that we would be moving to the industry standard that only includes principal in the write-off rate.

So we have done that this quarter, and we have restated the prior period information.

Next is a 30-day past due methodology change.

As you know, we have various cycles throughout the month; they don't all end at the end of the month.

It is the practice in the industry to take cash received after the cycle cut, which could be any time during the month, and apply it to the oldest delinquency bucket.

We had not done that in the US, and so we are now changing to the industry standard, and again, prior-period information has been restated for that.

Turning to slide four and speaking about capital, to cite the impact of the slowing economy on our results to earnings we retained or increased capital by over $600 million in the third quarter and by almost $2 billion year-to-date.

This demonstrates our capital generation power of our business model.

We did not repurchase shares in the third quarter and we do not plan to repurchase shares as long as the economy remains weak.

Instead, we will continue to build capital.

Looking at slide five, our metric performance, billed business continues to grow faster than our competition at 8%, although it has slowed.

In the first quarter, our billed business grew by 14%, and in the second quarter by 12%.

During the third quarter, while the average was 8% growth, September grew at 5% and we have seen a further slowing in the first 15 days of October.

Business was stronger in international consumer, global corporate card and GMS, although we did see some slowing in the third quarter in each of these businesses.

In the quarter, we added 2 million net new cards since the second quarter and 7.4 million net new cards since last year.

In the quarter, we had 4% growth in proprietary cards and 25% in network cards.

If we look at managed loans, we had growth of 5%.

This is about the same as our competitors.

We are not growing faster than the industry.

This is a reflection of the economy, slowing spend and our credit actions.

I'd also note that travel sales has slowed significantly from last quarter.

Looking now at slide six and revenue growth, GAAP revenue, as I mentioned, in the bottom right hand corner grew at 3%, but [then] on a managed basis, we grew 9%.

Discount revenue grew 5% based on the 8% billed business growth that we saw.

Net card fees reflect proprietary card growth and higher average fees per card.

Net interest and securitization income decreased 7%.

The decline was driven by lower securitization income due to higher credit losses and a write-down in our I/O strip.

Net interest income increased 13% as higher net interest yields more than offset the lower owned loan balances on the balance sheet.

We will see pressure on yield in the fourth quarter due to current LIBOR levels, which are way off historic relationships to Fed funds.

Historically, LIBOR has been 20 to 40 basis points above Fed funds.

In early October they were nearly 300 basis points above Fed funds and peaked at 4.59%.

This is the one-month LIBOR rate.

So we will be watching this closely, and the relationship between LIBOR and Fed funds.

Fortunately, today, LIBOR dropped 43 basis points and now stands at 3.75%, and we will continue to watch its direction.

Moving to slide seven, in terms of metrics within USCS, pure billed business grew at 4%, down from 6% in the second quarter and 8% in the first quarter.

Small-business growth has been higher than consumer throughout '08.

We continue to acquire Cardmembers with positive economics, and we encourage creditworthy Cardmembers to spend, but we're managing small-business spending very closely.

Credit operations is limiting or stopping spending on customers with high probability of default.

We continue to selectively invest in US consumer and small-business and grew cards in force 4%.

Cardmember loans -- you can see we securitized about 35% of loans as of the third quarter of '07.

We have historically securitized less loans than our competitors, so we had the capacity to do more securitizations in the period of stress, and that's exactly what we have done this year.

As I'll discuss later, approximately 50% of our funding was unsecured and 50% was done through securitization.

Moving to slide eight, metric performance for international consumer -- we continue to have strong metrics in international consumer, although we did see some slowing in billed business in the third quarter.

FX-adjusted growth in the first and second quarter was 10% compared to the 8% in the third quarter.

Cards-in-force growth and average spend growth reflect our investments in charge cards and premier lending in certain international markets.

Cardmember loans is well-controlled, although we did start to see some weakness in credit metrics in Mexico.

Slide nine -- Global Corporate Services also continues to have very solid metric growth, although again here billed business slowed in the third quarter.

First- and second-quarter growth on an FX-adjusted basis was about 10%, and now we see 7% FX-adjusted growth.

Cards-in-force growth and average spend growth are very positive, although travel sales of 14% compare with 17% growth in the second quarter, again reflecting the slowing economy.

Slide 10 -- Global Network and Merchant Services -- spending growth of 8% was driven by 7% growth in US, retail and everyday categories, which represent 17% of US billings and international spend growth.

US T&E spending grew 2%.

Global Network Services continued to have very strong billed business growth at 29%.

Moving to slide 11, Marketing and Rewards growth of 7% reflects Marketing at similar levels to the third quarter of '07 and higher Rewards costs in line with volume growth.

HR and other operating is up 2%.

If we exclude the Visa and MasterCard payments, which are netted on this line, it grew 10%, which reflects investments in sales force as well as investments in certain international consumer markets.

Charge card provision, while increasing $72 million, continues to be well-controlled.

Lending provision on a GAAP basis is up 65% with higher growth on a managed basis.

Both charge and lending reflects the impact of the economy.

In a minute I'll review a number of credit metrics with you.

But before I leave this slide, you will note that the tax rate is 20%, which reflects the resolution of certain prior-period items -- prior-year items and the benefit on the revision of an estimated in the annual effective tax rate.

Moving to slide 12, the net charge card loss ratio has increased slightly across each of the businesses.

Overall, the loss rate increase by 4 basis points.

We continued to control spending very thoughtfully, balancing both the short-term and long-term view.

Looking at slide 13, we see the charge card 90 day past due have also moved up slightly across each business.

In aggregate, past dues have increased 20 basis points.

Although we are seeing a greater impact on the P&L from our lending portfolio, which we will look at next.

On slide 14, you can see the net write-off rate.

In the second quarter we indicated to you that the third-quarter write-off rate would increase.

The US write-off rate increased 60 basis points compared to the second quarter and in the US is up to 290 basis points compared to the third quarter of '07.

This rate is faster than some of our competitors' growth rates.

This is due for three reasons we've discussed before.

Small business is a higher percentage of our business, and small business has a higher write-off rate, although small business continues to be very profitable.

We have a greater concentration in Cardmembers and balances in Florida and California because it is a more affluent area, and due to the housing environment we are seeing higher losses there.

In addition, we have historically had faster growth in spending and a consequent faster growth in loans, although I'll point out that in the third quarter we're growing at the same rate as our competitors.

In the US, while the write-off rate in the quarter was 5.9%, the write-off rate in September was 6.1%.

We expect the fourth quarter to be higher than the third quarter, and we expect the first quarter of 2009 to be higher than the fourth quarter of '08.

International consumer ticked up somewhat, primarily given by credit metrics in Mexico.

Moving to slide 15, after only a modest increase in the second quarter, US lending managed 30-day past dues increased 60 basis points, reflecting both increases in the current to 30-day past due category and the 30-day to write-off roll rates.

Reflecting the inherent risk in the portfolio, we increased managed credit reserves by over $250 million.

International consumer 30-day past due had a more moderate increase, again, largely driven by Mexico.

Now let me turn to capital funding and liquidity.

On slide 16 you can see our capital ratios.

We believe we have historically been very prudent in our approach to capital retention, which was very consistent with our goal of maintaining a strong A rating.

Let me just speak for a moment about the rating agencies.

Today, Moody's moved our parent company rating from A1 to A2, and our funding subsidiaries from AA3 to A1.

Moody's previously had our funding subsidiaries a notch above all the other rating agencies.

They also reaffirmed our short-term rating of P1.

They have us on negative outlook, given the current economic environment and capital markets.

This is similar to many other financial institutions.

I would also note that S&P put us on negative outlook in July, and we meet with them and other rating agencies periodically to update them on our financial results, capital and liquidity plans.

We believe those plans are both thoughtful and will enable us to continue to fund in this difficult environment, and our strong capital position provides us with the strength, given the environment as well.

So, a combination of capital funding and liquidity plans, we believe, put us in good stead.

Now, despite the environment, we continue to generate capital during these difficult times compared to some others who have taken substantial hits and needed to raise additional capital.

We will continue to generate capital, and we will continue to forego our share repurchase until business conditions improve.

As you can see from the chart, our capital ratios improved throughout 2008.

We have a well-established method with the rating agencies of doing a bottoms-up calculation asset by asset to calculate our capital needs, and then we keep a layer of surplus on top of that.

In 2008 we're building that surplus to higher levels.

I will also note, related to capital, that based on a Treasury Department clarification issued today, it suggests that we may be eligible for the capital purchase program.

We will be reviewing the program's details and definitions.

Let me move to slide 17 -- funding.

Our goal is to fund ratably over the year.

We have been successful at meeting this goal in 2008, funding when many other companies could not, although we have paid higher spreads.

As you can see in the chart, we raised $23 billion year-to-date compared to a funding plan of $27 billion.

This funding has had a weighted average term of six years, although from a spread perspective we have paid 165 basis points above one-month LIBOR.

In recent years we had been paying 20 to 40 basis points above one-month LIBOR.

We're also looking to continue to diversify our funding sources.

The new retail note program which began in late August has raised $400 million with maturities from three to five years.

The CD program which started a few weeks ago has raised almost $200 million with maturities ranging from three months to two years.

It is our plan to expand our funding from deposits.

Turning to commercial paper, we have had full access to -- at historical levels at similar prices, although the weighted-average maturity has become shorter.

In August on a daily basis we funded $745 million.

In September on a daily basis, $854 million.

The average cost during that period was 2.56%.

In October on an average daily basis we have funded $627 million, and the cost has been 5.15% -- I'm sorry, 2.15%.

However, similar to other financial institutions, long-term unsecured and secured markets have been unavailable since mid September.

Now let me review our liquidity plan, which we believe is comprehensive and enables us to meet our funding needs even if we do not have access to commercial paper, unsecured or secured markets.

Now looking at slide 18, as you would expect, liquidity has been an important focus for us.

On October 6th, we filed an 8-K outlining the strength of our liquidity plan.

More recent announcements by the Federal Reserve further strengthens our position.

Let me review with you our funding needs over the next six months and 12 months and how we plan to utilize liquidity resources if commercial paper, unsecured and secured markets are unavailable.

So, as you can see on the chart, we have a net funding need for commercial paper.

Now our commercial paper is actually at a higher level.

But from those issuances, we're holding certain levels of cash.

So our net need for commercial paper is $4 billion.

Net bank time deposits is $2 billion and we have maturing long-term debt of $12 billion.

We would meet those needs by using our liquidity investment portfolio of $5 billion, our conduit facility of $5 billion, as well as the commercial paper funding facility that's available to us.

If we have to fund by 12 months, we would again have requirements of net commercial paper and net time deposits, but our maturing long-term debt would be $21 million.

Let me just modify that.

Okay, so I was reading from an earlier draft.

So in the first column, for six months, we have $11 billion -- a little lower than I said -- for six months.

And for 12 months in total we would have a funding requirement of $24 billion.

In that case, again, we would use our liquidity portfolio, the conduit facility, we would use the commercial paper funding facility, which runs through April.

After that, we would rely on the temporary liquidity guarantee program, where we can access, we estimate, $8.8 billion.

And that, in combination with the Fed task and discount [revenue] window, would enable us to meet our $24 billion of funding needs.

So the point here is not to demonstrate how it will play out, but instead to give you an understanding of the various options we could deploy to ensure that the Company can fund during a prolonged period of disruption.

Over recent months there has been a lot of discussion about the effectiveness of a wholesale funding model versus the bank deposit model.

And, while we see the merits of building a deposit capability, the reality is most people who have substantial deposits are also large capital markets borrowers.

The bottom line is that we believe we are will positioned with capital funding capabilities and liquidity resources to successfully navigate through this difficult environment.

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

Despite the impact that the weakening economic environment has had on our customer spending, credit performance and bottom line this quarter, many key business metrics that serve as an indicator of our competitive position continued to perform relatively well.

We see that in our overall billed business and cards-in-force growth rates, where our performance demonstrates the benefits of our Marketing and Rewards investments over the past several years.

These benefits were more visible within our International Consumer, Global Commercial Services and Global Network and Merchant Services segments, where our volumes in card growth were relatively strong, although billed business growth did slow somewhat versus prior quarters.

In the US the slowing growth in our managed lending balances is in line with a tempered spending environment that also reflects the proactive credit actions and tighter standards that we have implemented this year.

In the quarter, despite the decrease in our owned loan balances, we did increase our loss reserve levels.

We believe this action is both appropriate and prudent, positions our reserves to reflect the inherent portfolio risk and our expectations for increased write-off levels, which we anticipate will rise further in the next two quarters.

Our investment portfolios hold high-quality securities, and we did not recognize impairments within continuing operations during the third quarter.

As you would expect, both spending and loan volumes slowed in the latter part of the quarter and into October as increasing stress in financial markets worldwide further eroded consumer and business confidence levels.

In addition, LIBOR rates have been particularly high in October and will negatively impact our variable debt borrowing costs during the month.

LIBOR levels in November and December will be another important factor impacting results in the fourth quarter.

Looking forward, it's our belief that today's difficult economic environment will persist well into 2009.

We will be impacted by the resulting slowdown in spending as well as continued pressure on write-off rates.

However, we believe our business model will be positioned to generate earnings and free equity cash flow that will build capital even in an economic environment that is likely to be the weakest we have seen in many years.

We also believe we have the capital strength, the funding in place and the liquidity, capacity and flexibility to effectively manage through these difficult market conditions.

In fact, our current liquidity resources, which have been enhanced by the benefits available through the Fed commercial paper funding facility and temporary liquidity guarantee program, are designed to fund maturing obligations and normal operations for at least 12 months even if the capital markets are not available.

We are working to best position the Company to withstand the tests that lie ahead.

Growth opportunities continue to exist in the marketplace, but over the coming quarters we will have to be even more selective with our investment dollars and work to prudently balance near-term performance against long-term profitability and growth.

As we have indicated before, we will be implementing an accelerated re-engineering program over the latter part of the year, which will result in a restructuring charge in the fourth quarter.

We expect the benefits of these actions to begin in the first quarter of 2009 and build throughout the year.

In addition, we will also be implementing a number of pricing actions which will help mitigate the negative impact of the current credit market and economic environment.

The antitrust settlement we reached with Visa and MasterCard also provides us with a multi-year source of income that can help to lessen the impact of the environment and, when conditions improve, give us the ability to step up investments in the business.

Collectively, we believe these factors will position us for the difficult period that lies ahead.

While the current economic turmoil has negatively impacted our results, we continue to believe our business model remains strong and that we are positioned to generate returns that provide capital flexibility and strength.

We have a strong position within the payments industry, our brand is recognized and respected around the globe, we have shown the ability to adjust to the economic conditions, whether it be to implement defensive measures or take advantage of competitive opportunities.

Our balance sheet is appropriately positioned with capital, funding and liquidity profile that provides us flexibility in these volatile times, and across all of our businesses we have instilled a strong focus on the customer, someone we need to stay close to regardless of the environment.

Our ultimate goal is to ensure that American Express navigates through these conditions in the best position possible relative to our payments competitors and the overall industry.

Thanks for listening, and we are now ready to take questions.

(OPERATOR INSTRUCTIONS).

Bob Napoli, Piper Jaffray.

Questions, I guess maybe a lot of questions, I'll ask one or two.

The restructuring -- if you could quantify maybe the restructuring charge in the fourth quarter, and the outlook for savings benefits into '09 from the restructuring.

We have not completed all of the work on what programs we are going to institute.

Once we do have those plans finalized, which we think will be in the near-term, within the fourth quarter, we will make an announcement in terms of what the reserve amount would be, as well as the anticipated savings that will be generated through the restructuring programs.

But we think they will be very important in terms of enabling us to continue to generate earnings and capital in 2009.

Thank you.

And just on loan growth, or the outlook for loan growth or shrinkage, and in line with that because it's a denominator effect, where do you think peak -- I know it's very difficult to say, but if you could try to put some gauge around how high you think credit losses could go in 2009.

Is it 200 basis points above the current levels?

So if you tie that into loan growth, maybe -- .

Yes.

So, I think what you've seen is, as our spending growth has come down, our loan growth has come down at the same rate, which I think is a real positive.

I think that helps and is a reflection of both the economy plus the credit actions that we are taking.

Now, as that slows, it will have a negative effect on the denominator effect of the write-off calculation.

And, as I said, we expect write-offs to increase over the next two quarters.

But it's not our plan to actually forecast exactly how much they will increase.

Chris Brendler, Stifel Nicolaus.

Can you talk about your deposit taking business?

I take it the retail note program is on top of your deposits you've already gathered.

Did you [regularly] grow deposits in the quarter?

And just on a broader strategic point, I know you mentioned, I guess, or alluded to the fact that you don't think you need to change your business model.

But why wouldn't it make sense to add a broader retail deposit capability at this point, given all the assets are out for sale right now?

We would agree with you that it makes sense to diversify our funding sources.

I think the note program, which raised $400 million since its inception in late August, and the CD program, which raised almost $200 million in just a couple weeks, is just the beginning of actions that we plan to take to really build a broader deposit base.

We think that makes a significant amount of sense, and we are just at the beginnings of that.

And it will be a focus of ours over the next year or two.

It's something that will take time to build, but we think over time it will be an important part of our funding base.

I would say the other point that is important is, as we look at payments, we are diversified in a major way in payments.

And if we look at how we have been able to build out B2B, which has a lower credit risk, I think we have been able to demonstrate that there are some very attractive growth opportunities with a lower risk profile.

What I also think is important is, as we look at becoming, if you will, a retail bank, we think there are other things that go with that, that concern us.

And we think that what's critical is that we have a diversity of our business model.

From a deposit standpoint, we are focused on making progress there through the programs that Dan went through.

But I think what is important to understand is the diversity that we have in our payments business model.

Two quick clarifications.

One is, what exactly do you mean by net CP?

Why do you issue CP and then just stick it in cash?

And then, two, are the trust metrics for the lending portfolio affected by the delinquency rate methodology change?

And that's it for me, thanks.

So we, as part of our liquidity plan, we hold cash, which is very important to us because, to the extent that other sources aren't available to us, we want to have sufficient cash so that we can bridge over into selling our treasuries that are part of our liquidity program or bridge into the financing conduit.

So it's really just to give us the flexibility in the short-term to start to utilize the other facilities that we have in place.

That's the reason that we hold cash.

In terms of your next question about -- does the change impact the trust?

The answer to that is no.

Is it on the current basis, or it's on the old basis?

No.

The trust is done consistent with the new basis, which is applying to the older balance where there was the collections that come in after the cycle date.

Okay, so the change you made just made to some of the trust?

Yes.

Craig Maurer, Calyon.

Two questions; one -- could you elaborate on the pricing changes you mentioned?

And, two, regarding the spending behavior you are seeing, you had alluded to spend shift in the States from -- toward more commodity-driven, every day type spending.

Do you think that you are losing spending from your good clients to existing debit cards in their wallet because of the type of spending that a lot of their funds are going toward now?

So the pricing changes -- I think, given the environment that we're facing, we will put pricing changes in.

It will be broad-based, it will be surgical to certain portions of the portfolio.

But we will be putting in some pricing changes that will increase APR's from certain customers by 200 or 300 basis points.

We think it's prudent, given the nature of those products and the economic environment that we face.

As it relates to spending behaviors, I think for many years we have been focused on shifting more and more spend to the everyday category.

We think that has been part of what has enabled us to continue to take market share in the US and certain markets internationally.

We are going to continue to push into those areas because we think it's beneficial to the long-term health of the franchise.

I would say, I think that certainly what we have seen from the major issuers would suggest that we're continuing to have a very strong position with the affluent customer, and we have not seen signs of debit encroaching on share in those categories.

And even though our spending did slow compared to prior quarters, our spend was still stronger than the competition.

So it would appear that we're continuing to take market share.

Can I follow up on the pricing just quickly?

Are you doing anything on the merchant or the issuing bank side, in terms of your pricing, whether it's discount rate related or cross-border fees related?

So, we continue on the merchant side to price based on value.

And as you are aware, our discount rate would normally fall by 200 or 300 basis points a year as we push into more everyday spend categories.

But, because we bring value to certain categories, we have gone back to them and repriced.

So we will continue to use the same philosophy of pricing based on value with our merchants.

I think, at the end of the day, merchants are very focused on driving volume and we have programs that can help them drive that volume in their places of business.

Sanjay Sakhrani, KBW.

Just a question, Dan.

On the higher LIBOR rates, just so I'm clear, how much of your funding is variable rate and subject to LIBOR impact?

About 70% is currently variable rate.

Okay, so basically that's how we should think about the impact in aggregate from a margin standpoint; right?

Well, there's two impacts.

One is, to the extent LIBOR is just higher, it affects all of our funding.

But it's particularly important as it relates to our variable-priced products, because there we are looking for a normal spread between prime and LIBOR, which has historically been about 270 basis points.

To the extent there's compression on that spread, that will affect our profitability and our margins as well.

How much of your assets are variable rate?

40%?

Of our loans, about 60% are variably priced.

Okay, great.

And then just a question on this temporary liquidity guarantee program.

When does it actually kick in?

And is this subject to meeting the criteria for participation?

Have you guys looked into it?

You do qualify, right, I'm assuming, because you've put it in the chart?

So we do qualify.

I think there's still a lot of learnings to be had on exactly how the program will work.

What we've done is looked and seen that, of our unsecured debt, between September 30th of '08 through June 30th of '09, we estimate that $8.8 billion will mature and qualify for this program.

There may be some other aspects that could potentially qualify, but based on our reading we feel pretty certain that the $8.8 billion will be qualifying for the guarantee.

And it will kick in when?

I'm sorry.

So, I think they have to administratively kind of get the program up and running.

I know that the commercial paper program -- they have had discussions with a number of people, including ourselves, and they are actually going to have registration for the commercial paper program starting, I think, on the 27th of October.

And then I think shortly thereafter people will be able to access it.

I don't know the exact timing on when we'll be able to benefit from the liquidity guarantee program.

I think that's all in the process of evolving.

And just one final one, I just want to make sure I understand this.

Is there a P&L impact from the charge-off rate disclosure change, or were you always suppressing revenues?

So there's no impact on the P&L.

It's really just a matter of what line item it flows through on the P&L.

And, regardless of what line item it flows through on the P&L, it really is just a matter of what people include in this write-off calculation.

So we happen to be including principal, interest and fees, and other people are only including principal.

So there's no impact on the bottom line of our income statement.

It just makes it easier to compare.

Yes.

Okay, alright, great, thank you.

David Hochstim, Buckingham Research Group.

Just following up on that, in the quarter was there any effect from increasing the amount of loans that you securitized on provisioning, or is that sort of a longer-term effect?

Well, I think when we do securitizations, when you look at the GAAP P&L, we would be putting up reserves on the GAAP P&L for all owned loans that are on our books, and the impact of credit for the piece that's securitized is running through securitization income, which has always been the case.

Right, so I guess I'm just trying to think about what you show as the lost provision.

If you securitize more, then the loss provision in the current period would be somewhat less?

Yes, on a GAAP basis, that's right.

But we also, in the press release attachments, give you what the provision would be on a managed basis.

So, you can look at it either on a GAAP basis, or you can use the material in the attachment to do a calculation of what it would be on a managed basis.

And then, could you also just help, again, with the change in LIBOR, how much of the $100 million change in evaluation of the I/O was related to interest expense, and how much was credit?

Well, I don't know that we've broken that out.

I think it's both a combination of interest and credit.

But I would say, the credit is the thing that has had the greatest impact on the I/O strip.

And again, just in terms of the sensitivity to LIBOR remaining elevated relative to Fed funds, there's not much I/O left.

So if you didn't have another adjustment on credit, there's not that much more to take as a write-down, [is that it]?

Yes, the I/O strip now stands at $37 million.

Okay.

And just finally, could you or Ken provide some color on the increase in the charge card loss ratios and the, I guess, legacy rates?

And, how much of that is small business, and how much is consumer and sort of what is going on this cycle relative to, say, 2002 or 1992 in terms of the deterioration that you are seeing?

So, yes, we did see a tick up this quarter.

We saw a very modest increase in provision in the second quarter.

Of charge-offs, (inaudible)?

Charge-offs, yes.

The year-over-year number is -- I mean, there's a big increase year over year there.

I mean, it's $72 million increase in provision in charge card, but when you really look at our total Company, our total business, the real impact is coming from lending.

I understand, I'm just trying to understand, though, because historically your charge card business has had lower loss rates, and it's quite low; and international, I guess, even with Mexico and in corporate.

But the ratio is showing pretty significant uptick, and I'm just wondering if you're seeing that in consumer or small business.

But the point is, we have been at historical loans, we are coming off historical lows on charge card.

Okay.

So, is it small business that's accounting for most of that?

So I think it's a combination of both.

I think we historically have had and currently have higher loss rates on our small business portfolio than we have on consumer.

But quite frankly, both of them have moved up at relatively similar rates, so there's no unusual disproportionate impact from small business.

Yes, I don't think it's a major difference in the rate movement relative to small business and consumer, but we've seen some, obviously, worsening.

Ken Bruce, Merrill Lynch.

I understand you don't want to be overreactive to the current market environment, but I guess I'd like to better understand your pricing strategy in terms of having surgical price increases on certain parts or certain products within the business franchise.

It's certainly understandable, but it looks like the funding pressure is going to be much more broad-based and is going to have a significant compression in margins overall.

So I'd like to know how you are going to balance between the pressure you are seeing on the funding side of the business with only maybe limited pricing power or a willingness to reprice, and how you are going to balance that for overall profitability, please.

So the funding pressure is going to come -- certainly, if the markets stayed frozen for a protracted period and LIBOR stayed up, it would put tremendous pressure.

I think all the actions that the government is taking are designed to help thaw the freeze that we see in the markets.

If that happens, it would be logical to expect that LIBOR would start to come down.

Now, last week, it was pretty stubborn, and it only came down a limited amount.

But today we saw a pretty big drop in one-month LIBOR rate; I think it was 42 basis points.

So, you are right; if it stays at these levels, 4 plus, that would put tremendous pressure.

I guess I would say it's my expectation that it's not going to go back to the 20-40 basis points above Fed funds but that it will improve significantly from here.

I guess the other thing I would say is the pricing is only a portion of our reengineering.

So our reengineering also has elements that are looking at costs, whether they be the structure that we have currently in terms of our employee contingent or whether it's looking at processes.

So we're going to obtain some benefit in reengineering from pricing, but also a very significant benefit from the other actions that we're going to take on the cost side.

Yes; I think there's a strong focus on expenses, and we also believe that there are opportunities to shift more volume from off-line to online.

And we think there are adjustments that we can make in our expense structure not just to deal with 2009, but in fact, to have a business model that allows us to compete in a more effective way on a multi-year basis.

But this is not just a situation that we're focused on revenues and making changes relative to pricing.

But we, in fact, have gone through an extensive exercise as far as our expenses are concerned.

And that's the piece that you will be taking in the fourth quarter and providing some additional clarity around that?

Yes, absolutely.

I can understand not wanting to react to LIBOR, but spreads are obviously wide as well.

How much of the liquidity backstop in terms of the ABS conduit facility and commercial paper funding facility, is that pricing already established, or is that something you are going to have to go to an at-market type financing relative to LIBOR as well as spreads?

And maybe separately, what's your big picture economic backdrop that you have got in your own forecast, particularly as it relates to unemployment which is here in the US, which is quite important?

On the funding side, based on our understanding for commercial paper, three-month paper, what we can estimate the pricing would be would be about what we would pay today for three-year -- three-month paper.

So we think, on the commercial paper side it will be competitive.

Within the liquidity guarantee, we'll have to see what the market prices are for our rating with a government guarantee.

I don't think that has really played out yet, but I would think that those are going to be at market prices.

And I say we'll have to see how it evolves, but I don't think there will be in the steep premium there in either case.

There is a small fee related to participating in the commercial paper market, but it's relatively modest.

Now, switching over to economic outlook and unemployment, our assumption as we do our planning for next year is that unemployment will increase reasonably substantially in 2009, and we are reflecting that in our thinking in terms of where we think credit losses will be and where billings level will be.

And that I might call pessimistic but probably realistic view of where the economy will be is what caused us as a management team to decide that it was appropriate to do reengineering so that we can, as Ken said, both deal with the short-term but also position ourselves well for when the economy improves.

Great, thank you very much.

Bruce Harting, Barclays Capital.

Can you just give us an update on the ABS market and any plans to try to tap that in the fourth quarter?

And then when I look at the long-term funding in the American Express Bank FSB and Centurion Bank, can you just remind us what charters you have there?

And as part of restructuring, when you talk about that, is that inclusive of debt restructuring?

You said don't need a retail bank, but just if you could remind us how flexible are those bank charters and the ability to continue to fund longer-term through those, and at what cost?

So, since mid-September, I think we did an issuance in the second week of September, I don't think in the last four weeks, any major financial institution has done any long-term funding.

I think maybe Caterpillar did a small offering somewhere in late September.

But basically, both the secured and unsecured markets are frozen and unavailable to either us or anyone else in financial services.

No one has ventured into those markets.

Certainly, I think many people are hopeful that the actions that the government is taking are designed to directly help thaw that freeze, and if the markets are open, we will access those markets.

I think you could look in the early part of 2008.

When many people were not able to fund, we were able to fund, and we funded ratably over the quarters based on our funding plan, even though we needed to pay up in terms of spread.

So if the markets open, we think we'll be one of the first people who have access.

And if they are open, we will access them.

In terms of our banks' charters, we have an ILC in Utah which we've had for many years.

We also have a federal savings bank, FSB.

So those are our two banks.

The FDIC regulates the ILC in Utah, and the OTS regulates the Federal Savings Bank.

Both are well established institutions that have been with us for some time that enables us to fund our loan book.

Kevin Stiroh, Sanford Bernstein.

Hi, thanks for taking my call.

The ongoing credit crisis continues to move in unpredictable ways.

I was hoping you could give a few specific examples about how you are responding differently during this economic downturn than you might have in previous ones.

And then I have a follow-up, please.

So I think our sophistication as a Company is certainly light-years better than it was in the early '90s and is substantially more sophisticated today than it was in 2001.

One of the -- each downturn is different in nature, and this downturn has had a lot to do with housing.

So we have substantially improved our ability to integrate housing data, whether it be who you have your mortgage with or what geography you live in, are things that we have built into credit scoring.

We also look at what industry you're in.

So if you're in an industry that's healthier, we may deal with you in a different way than if you're in an industry such as construction that is being impacted to a greater degree.

We also, obviously, use all information that's available to us at credit bureaus, so we are very focused on not only what type of utilization you have on your line with us, but the utilization you have with other institutions.

From there, we can see whether you are seeking additional credit.

So we look to integrate as many factors as we can.

And what we've found is, depending on the type of product you have, the level of spending you have, there could be different factors which are the most important to look at to help predict the probability of default.

So we have very sophisticated models that are building in current information on a continuous basis, but we're also keenly aware of what's happening in the marketplace and building that into the decisioning at the same time.

And, we are trying to balance the short-term in terms of what our credit losses are, but we're also very focused on the long-term and we want to interact with our customers in a way so that we don't turn away customers who will be excellent, profitable customers in the long-term.

So we try to work that delicate balance.

I think one of the important things is the microsegmentation that we're engaged in.

I think in the early '90s we were new to the lending business with Optima.

We had a very limited product.

If you look at how we have been able to diversify our product line and also the fact that we have, particularly in the US, dramatically expanded our merchant coverage.

So you had a situation in early '90s that, because of the limited merchant acceptance and the fact that we had a limited product line, we did not necessarily get some of the best customers.

Now, the value propositions have substantially improved.

We have improved our merchant coverage.

The competitive positioning of our products is quite strong, and I think that that helps us in this environment.

But I think what's critical is, with the range of products in customer segments that we have, is to take all that Dan said and really, then, to bring it down to a micro segment level so that we are not just putting in actions that cover the entire card base.

We are really focused on microsegmentation.

Thanks, and then a follow-up.

On page 5 of your slide deck, you show managed Cardmember loans up 5% and owned loans down 9% year over year.

Could you walk through the economics of what determined the distinction in those growth rates?

Sure.

The managed growth is the growth of our entire portfolio, 5%, which is very consistent with our growth in spending.

The owned amount is managed loans less what we have securitizes.

So we have securitized more receivables in 2008, and as a result it's actually causing owned loans to be lower this year than last year.

So the managed number is reflective of the entire business.

The owned is just a matter of the fact that we have done more securitization, as I mentioned before, during '08 because it's what was available, and that's causing owned loan growth to be down.

From an economic point of view, whether receivables are owned or securitized, 100% of the economics related to those loans accrue to American Express.

So, on an economic basis, there's effectively no difference between the owned and managed loans that we (multiple speakers) --

Fine, thank you.

So, I was wondering if you could talk a little bit about what the factors were that led you to securitize the larger fraction and why that was in your best interest in this scenario, in this environment.

So, for many years, many of our competitors have securitized at much higher levels.

We have always decided to keep our securitization levels down around 35%.

The reason for that is that we thought, in stress situations, secured lending would be more available at better prices than unsecured lending.

So now, we are in a stress situations, and so we decided to execute it against that basic plan and avail ourselves of the fact that we had more capacity to do securitizations.

So this year, instead of doing one-third securitization and two-thirds unsecured, we did it 50-50.

Great, thanks very much.

Scott Valentin, FBR Capital Markets.

Just referring to slide 18, the liquidity update -- and thank you very much for providing that color -- how much flexibility is there in determining -- this is based on next six months, 12 months -- but, how much control do you have over the demand that you'll have for liquidity?

In other words, if utilization rates go up on credit cards or, for some reason, spending goes up, et cetera, how much control do you have over the amount of liquidity you have to fund over the next six to 12 months?

We obviously can control through authorizations and by bringing in new card members what our volumes would be.

Certainly, we will continue to invest and we want to continue to bring in card members where we'll have good economic returns.

This obviously will be calibrated based on what's taking place in the environment.

If it's more robust, we want to invest more.

If the economy slows down, then we want to make sure that we're making investments that are getting the proper returns and therefore may moderate our investments.

What you see here is what we need to meet the maturities that we have on the balance sheet.

To the extent we're having good spend growth and good loan growth, then I think in all likelihood, in that situation, there's going to be access to the credit markets.

Yes.

I think, if we're going to have good spend growth, that would mean that the overall economic environment is improving.

I would certainly take that trade.

Now, to your point, though, that you could have greater utilization on lines, but as we've discussed, we are very focused on line size.

In the past year, we have had many more reductions in line size than we have in the past, and the number of line increases have been more moderate.

So we think we are being very active and thoughtful about how we are controlling spending, and therefore loan balances.

And I would point out, we really have not seen any change in paydown rates, which is another thing that could affect it.

So we think that we have the ability to calibrate our business, based on the environment, and wouldn't see that causing any undue stress beyond the funding needs that you see on slide 18.

Just one follow-up regarding capital.

Prudently, you have let the capital ratio rise as the economy has gotten, or the environment, has gotten worse.

Do you see a level where you feel comfortable that you have enough capital and you'll beginning returning more capital to shareholders?

So I think we think we have sufficient capital today.

However, given that the economy is slowing, we will continue to retain capital, quite frankly, until we see the economy turn.

And at that point, I think we will go back to a process where we'll be returning capital to shareholders.

We haven't changed our 65% on average in over time target.

For many years, when we were in a robust environment, we were returning more than 65%.

So, in a period of stress or slowdown, we'll return less than 65%.

But on average and over time, we have not decided to change that 65% target.

In this economic environment, we want to be cautious.

Thank you very much.

Bob Napoli, Piper Jaffray.

A quick one on the tax rate.

In this type of an environment, US card is the business that's under the most stress.

What would be a reasonable tax rate?

Could you give us a little help on that?

I guess we have said that around 30%-ish is, in normal circumstances, would be a tax rate to think about.

Since the US is the highest -- has the highest tax rate within our mix, to the extent earnings there are lower, we will see an impact.

You shouldn't be thinking about 20%, though; it will be something lower than 30%.

But I wouldn't give you a precise calculation.

Your marketing spend was -- I thought you might -- one of the levers that you've talked about in the past in a tough environment to pull back on is marketing spend.

But the marketing spend was stronger than I thought it might be this quarter.

I was wondering if you could give some feel for that.

Are you pulling back some levers on marketing spend, given your outlook?

Yes.

So, I would point out, the vast majority of the 7% increase that we saw in the quarter on the Marketing and Rewards line was coming from Rewards.

Marketing we held flat to '07 levels.

We thought there were sufficient opportunities to invest, whether it be in our merchant business or in certain markets internationally, than it warranted keeping investment levels at a constant level.

As we go forward, we will be calibrating that -- what amount of marketing that we want to have, which will be driven in part by how robust the environment is.

We'll continue to see rewards grow in line with the growth in spending.

Our Rewards programs are really the thing that power our business, and we think it's a benefit that will help us, whether it's a robust economy or a slow economy.

Okay, and just one more time, on your net exposure to LIBOR.

The net effect on the Company from the elevation in LIBOR -- if you could maybe go through that one more time.

I'm not sure I was quite as clear on the effect on both assets and liabilities.

So on our LIBOR, if rates go up, it will affect our cost of funds related to charge card, right, where we have no interest rate, or as a relates to our fixed-rate lending products.

Okay?

Fixed-rate lending products make up 40% of our loans.

Okay?

Now, if you look at the 60% of loans that are variably priced, we actually want to lock in a spread.

So, whether interest rates go up or down, we would be indifferent; we would be looking for that locked-in spread.

There's no effect to --

No, no, no.

However, that locked-in spread is dependent on LIBOR staying with historic levels as it relates to Fed funds.

So usually, LIBOR has been 20 to 40 basis points above Fed funds.

Since we have priced to our customers off of prime, and prime is driven by Fed funds, to the extent LIBOR increases beyond that historic level of 20 to 40 basis points above Fed funds, that creates compression on our spread and will affect our P&L.

So it's very important for us to have LIBOR at those historic relationships.

So it's 100% of the fundings against the charge card?

You also have to take into consideration that 30% of our funding is fixed-rate, and you also have to take into consideration that we don't fund receivables from charge or loans from lending products 100% with debt.

Part of it is funded with capital, and part of it is funded with non-interest-bearing liabilities that we have on our books, like the Rewards liability.

So you have to factor all those aspects in, in terms of calculating the impact.

Sanjay Sakhrani, KBW.

I guess my question was on the tax rate, too, which you kind of answered prior to that.

But maybe just try this question another time -- from the deposit gathering, franchiser standpoint, would you guys consider the right acquisition opportunity if it was presented to you guys?

And are you guys actively looking for anything?

Ken, maybe you can answer that one.

No.

I think the reality -- and my position has been pretty consistent here.

If an acquisition will accelerate our progress and improve our business model, we are open to it.

But I think the important thing about the focus on retail deposits is it also comes with a lot of other stuff.

And the question is -- what are the economics, what's the growth going forward, and how are we positioned relative to the other opportunities we have to generate growth?

And what we think is that we are evolving a funding strategy that will allow us to navigate through these challenging times, and we also think the way we have diversified the Company to increasingly build our business in those areas that are not as reliant on credit balance the Company's growth and risk as we go forward.

And so I think what is important, and I often give this example in the Company, is to do a deal where, in fact, 10% of that deal is going to have an impact on your business, and 90% of it is really not core to driving it and the economics are not that good, we have to be very careful.

So my point is that we are open to a range of opportunities, but what I'm going to be very focused on is, will it generate the type of economics we need to drive our Company, and will it in fact accelerate our growth?

Sanjay Sakhrani Thank you.

Thanks, everybody, for joining the call.

Take care.

Thank you.

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