美國運通 (AXP) 2008 Q4 法說會逐字稿

Thank you for standing by.

Welcome to the American Express fourth quarter earnings call.

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

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

(Operator Instructions).

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

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

Ron Stovall, please go ahead.

Thank you, Carey, and thank you everyone.

We appreciate you joining us for today's discussion.

It is my job as usual 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 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-K report, already on file with the Securities & Exchange Commission.

In the fourth quarter 2008 earnings release supplement and presentation slides, which are now posted on our website at IR.American Express.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, and 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 the 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 reviews the details, I wanted to say a few words about the economic environment, our results, and the outlook for 2009.

I believe, and I think most of you would agree, that this is one of the the most difficult operating environments we have seen in decades.

The housing market has continued to deteriorate, unemployment has risen significantly, and retailers have seen some of the biggest declines in many years.

Now as we all know, consumer confidence has dropped off the charts, and corporations have acted quickly to pull back on their expenses.

What we have also seen following the bankruptcy of Lehman Brothers in mid-September, the wholesale credit markets came to a virtual standstill, as concerns about the underlying value of troubled assets eroded trust in the banking sector, and spurred a series of new initiatives from Washington.

Now our results for the quarter were significantly impacted by this environment.

Revenues declined as spending by consumers, small businesses, and corporations slowed significantly, and as you have seen from recent headlines, this slowdown was more pronounced among high-end retailers, and throughout the travel sector, as our cardmembers cut back on discretionary spending.

As expected we continued to see rising delinquencies and loan write-offs.

Now these trends, together with the restructuring charge we took to reduce our cost base, drove our earnings decline for the quarter.

Now clearly we are disappointed with our overall results.

Nevertheless, despite the environment, there are a number of developments we can point to that show progress against our near term priorities, which are staying liquid, staying profitable, and investing selectively to strengthen our competitive position over the longer term.

First, we continue to remain solidly profitable in the fourth quarter, and generated $2.8 billion in earnings in 2008.

Next our spending declines while significant compared favorably to major competitors in the industry, particularly in view of the overall cutbacks in travel and discretionary spending in the latter part of 2008.

Now very importantly, average card fees and discount rates, which generate two of our largest revenue streams were virtually unchanged, reflecting the ongoing value that cardmembers and merchants see in working with AMEX.

This is in contrast to the pattern you have seen in much of the retailing industry.

We are not cutting our premium prices in order to generate business volumes, and I believe that this is a very good indication of the underlying strength of our franchise.

We have stepped up reengineering efforts for which we took a significant restructuring charge in the quarter, and we have already begun to reduce operating expenses, which gives us additional flexibility as we move into 2009.

In terms of funding, we have more than satisfied our requirements for the quarter, and we have broadened our sources to include a retail Certificates of Deposit program that we launched in October.

Since then, we have been able to generate $6.2 billion from a standing start, which I think is very strong evidence of the drawing power of the AMEX brand.

For the longer term, we continued to invest selectively in the business, strengthening our partnership with Delta Airlines in the quarter, continuing to build our global business with banks, who issue cards on the AMEX network, and successfully integrating the corporate card business we purchased from GE earlier in the year.

Now beyond these specific business items, as you know, we converted to a bank holding company in the fourth quarter.

This means that we will be regulated by the Federal Reserve, and it aligns us more closely with other financial services companies.

In January, we bolstered our capital position, and we added $3.4 billion as part of the TARP program.

This additional capital will enhance our ability to extend loans to creditworthy cardmembers, thereby helping to spur economic growth in the US.

Now looked at from the perspective of our charge card portfolio, we authorized about $73 billion in spending for consumers, small businesses, and corporate cardmembers in the quarter.

On the lending side, our open credit lines were on par with last year, despite the difficult conditions in the marketplace, and our aim here is to accommodate cardmembers spending needs, while helping to ensure that they don't incur debt levels that are inappropriate for the current environment.

As you know, throughout the past year, we were very cautious about the economic outlook.

That certainly continues to be the case today, and looking ahead we expect difficult economic conditions to continue through 2009.

As we said last quarter, cardmember spending in this environment is likely to remain very soft, and we continue to expect past due loans and write-offs to rise from current levels.

Our strategies for 2009 remain focused on keeping liquid, staying profitable, and investing selectively to strengthen our franchise, and remain in position to capitalize on opportunities when conditions improve.

Now we continue to believe in the long-term growth potential of the payment sector, and that the investments we are making in our business, including the business to business sector, which is less reliant on credit, will help ensure we can capitalize on those opportunities when the environment improves.

With that, let me now turn things over to Dan.

Thanks, Ken.

Let me start on slide 2.

Total revenues net of interest expense was $6.5 billion, 11% down from 2007.

It was negatively affected by foreign exchange.

On a foreign exchange adjusted basis, it would have been down 7%.

Income from continuing operations was $238 million.

Diluted EPS from continuing operations came in as $0.21.

Our ROE was 21.7%.

This is a twelve-month rolling average, and the benefits from the stronger earnings earlier in the year.

All of these top line results reflect the current environment, as well as certain significant items in each period.

If we look at slide 3, we see these significant items.

First, in the fourth quarter of '08 is the reengineering charge of $273 million on a net income basis.

Pre-tax it was $404 million.

When we announced the restructuring reserve in October, we estimated it would be between 370 and $440 million, so we are within the range.

Next relates to Delta.

In signing a new contract with Delta, we agreed to reimburse them at a higher rate for membership rewards points that are converted to Delta miles, and therefore we needed to reprice our reserve.

66 million on after tax basis, 106 million on a pretax basis.

In 2007 the fourth quarter included the Visa litigation settlement of $1.1 billion, as well as additional business building, some litigation costs, as well as a contribution to our charitable foundation.

Net it had a beneficial impact on the fourth quarter of '07 of 534 million.

'07 also included an enhancement in the way we estimate the ultimate redemption rate for membership rewards, and resulted in a charge after tax of 430 million.

In the fourth quarter of '07, we also set up an additional credit related charge, which had the impact of 274 million on the fourth quarter.

Let me take a minute on slide 4, and talk to some of the changes in reporting that you will see on the income statement.

First relates to interest income and interest expense categories.

Historically we showed interest income broken between cardmember lending finance revenue and other interest income.

In the future we will show interest and fees on loans, a second line, interest and dividends on investment securities, and third, deposits with banks and others.

In interest expense, we previously broke interest expense between cardmember lending, and interest on charge card and other.

In the future we will show interest expense based on the source of the funding, so we will show interest on deposits, short term borrowings, long-term borrowings, and other.

In addition to that provision which previously was included in expense, will now be moved up into revenues, although the interest net of interest expense line, and will total to a total revenue net of interest expense after provision for losses.

I would also note that previously we had a line which was marketing promotions and cardmember services.

Many of you will be pleased to know now, that we are going to break this into three lines, which will be marketing and promotions, cardmember rewards, and cardmember services.

In the past, we had called the line item, salaries and benefits, or I guess we called it human resources, which will now be called salaries and benefits.

In addition, there will be an impact on some of our metrics.

It has always been our policy for charge cards to write-off at 360 days.

Bank holding company guidelines require us to write-off at 180 days, so in the fourth quarter we are moving US card services to a 100-day write off.

If you were to look at the tables attached to the press release, pages 14 and 19, you will see write-offs in the fourth quarter totaled 669 million.

That includes 341 million, which has the effect of moving us from 360 up to 180 days.

You can also see that the loss reserve coverage as a percentage of Receivables is 2.5%.

In the third quarter, it was 3%.

We have not gone back and restated prior periods.

If we had continued the 360-day write off, that ratio actually would have been 3.5%, so an increase from the third quarter to fourth quarter, reflecting our metrics in the fourth quarter.

As it relates to international consumer as well as commercial card, we will move those products to 180 days in the future.

There are also a number of credit reserve reclasses, but they have a minor impact on our metrics.

Moving to page 5, and looking at metrics, billed business came in at 160 billion, down 10% from last year, or 5% on an FX adjusted basis.

These results are in-line with the industry.

Given our affluent base, with a higher level of discretionary spending, as well as the amount of T&E within our base, we thought we may in fact come in at a lower amount than competitors, but that was not the case.

Understanding that, billed business has dropped significantly.

On an FX adjusted basis, we actually grew 11% in the first quarter, 10% in the second quarter, 7% in the third quarter, and now have dropped to a decline of 5%, and this reflects the impact of the economy on billed business.

Notwithstanding these lower results compared to last year, if you look at total billed business for the full year, which came in at 683 billion, it is the highest annual amount we have had in our history.

Total cards in force have held up very well, up 7%.

That is 2% growth in our proprietary cards, as well as a 22% increase in network partner cards.

Average spend per cardmember as you can see is down 14%, or 10% on an FX adjusted basis, and this is really the story that has led to the decline in billed business.

Transactions in the United States is basically flat, down 1%, and transactions are actually up 6% internationally, so it reflects cardmembers spending less per transaction.

Loan growth on a managed basis was 7%, down more than our competitors.

This reflects both the economy, the credit actions we are taking, and the fact that we have lower amounts of balance transfer than we have had historically.

Moving to slide 6, discount revenue is down 11%.

On a managed basis it was down 7%, and was also negatively impacted by foreign exchange.

A positive note is that our average discount rate only declined 1%.

As we can see from net card fees, we are up 6%.

This reflects the premiumness of our brand in the marketplace.

Within net interest and securitizations, securitization income was down 39%, with the major impact being credit losses.

Net interest was down 16% on lower loans, and was also impacted by the prime LIBOR dislocation that happened in October.

However, the normal relationship of those two metrics are back to normal levels now in January.

It also reflects the higher cost of liquidity.

Let me move to slide 7, provision for losses.

Here you can see total provision on a reported basis was up 3%.

However, as I noted before, one of the significant items was the provision, additional provision that we made in the fourth quarter of '07.

We added 96 million to the charge provision in '07, 288 million to the lending provision, and 384 to the total provision.

If we were to back those numbers out of the '07 column, provision on lending would have increased 36%, charge would have increased 32%, and the total would have been up 32%.

That higher provisioning reflects the higher credit loss metrics that I will discuss in a few minutes.

Moving to slide 8, I will discuss the metrics within our business units.

In USCS the metrics are very much in-line with total company metrics.

Billed business in the first quarter was up 11%, 8% in the second quarter, 6% in the third quarter, and now down 9%.

That reflects 12% decline in the consumer business, and a 3% decline in small business.

The 2% increase in cards in force reflect the investments we have been making.

Again here billed business is being driven down by average spend.

As I said, transactions in the US were only down 1%.

Average spend was down really across most of the card groups and spending levels.

Cardmember loans are down for the same reason that I cited a few minutes ago.

Moving to slide 9, the metrics for international consumer.

The international consumer actually held up better than the US in the fourth quarter.

While billed business was down 14% on a reported basis, it was actually up 1% on an FX adjusted basis.

If we look across all of the regions on an FX adjusted basis, it was flat in each of the regions.

Again, average cardmember spend is what is the driving force behind the lower billed business.

Cardmember loans were lower by 15% on a reported basis, but up 4% on an FX adjusted basis.

Moving to slide 10, and Global Commercial services metrics, here again we see a drop in the fourth quarter.

On an FX adjusted basis, commercial card billed business at 28 billion, was down 5% in the fourth quarter on an FX adjusted basis compared to actually an increase of 7% in the third quarter.

If we look at the fourth quarter, billed business in the US was down 6%, and internationally on a reported basis was down 18%, but only 3% on an FX adjusted basis.

Cards in force are up 4% as we continue to bring in new customers.

Here we have a similar story as it relates to average cardmember spend, which was down 8% on an FX adjusted basis.

Moving to slide 11, GNMS, here we can see that in total the US billed business was down 8%, and actually was up 3% outside the US on an FX adjusted basis.

Within the US, retail and every day spending declined 6%, and that represents about 74% of US billers.

Travel and entertainment declined 10%.

As I noted before, the average discount rate at 2.53 has held up very well, only down 1 basis point from last year.

Global Network Services continues to be a good story.

Billed business was flat on a reported basis, but grew 11% on an FX adjusted basis.

Cards issued by network partners that write on our network increased 22%.

Moving to slide 12, we will look at expenses.

Here are the significant items that I mentioned on slide 3 are having a notable impact on these line items.

If I were to adjust the items listed on slide 3, if we look at marketing and promotion, and adjusted '07 for the 143 million of incremental spending that we did as a result of the Visa settlement, marketing and promotions would be down 21% year-over-year.

If we look at cardmember rewards, and we adjust for the 106 million of additional provision we made in '08 related to the Delta contract, and we made an adjustment to '07 for the increase related to the enhancement in the ultimate redemption rate estimate of 685 million, cardmember rewards would actually be down 10% in-line with volumes.

If we look at salaries, employee benefits and other operating expenses, if we adjusted 2008 to back out the restructuring impact of 404 million, and the 16 million of reengineering in '07, and we also adjusted for the Visa litigation settlement, as well as the litigation costs and contribution to the charitable foundation, we would actually be down 7%.

If we look at income taxes and the benefit that we have in the period, it is a result of a consistent level of recurring permanent tax benefits, and the impact of that benefit when we have lower pretax income, as well as benefits related to the finalization of our state tax returns.

Moving to slide 13, and looking at charge card net write-off rates, you can see that the results are pretty consistent over the year, and have held up reasonably well.

The fourth quarter on this chart does not include the 341 million write-off, moving from 360-day write-off up to 180-day write-off.

If we move to slide 14, and look at charge card net loss ratio for international consumer, and the global commercial services, you can see that the international consumer net loss is increasing, reflecting somewhat higher loss rates across most companies, most notably Mexico.

Commercial card net loss rates have remained reasonably stable.

Moving to slide 15, the charge card 30-day past due amount, we can see that the charge card in the US past due is increasing slightly, as we continue to control credit losses very well within the charge card portfolio.

If you move to slide 16, charge card 90-day past due for international consumer, and global commercial card, you can see that the write-off rate for 90-day past due is increasing in international, and that is really across all of the international markets, and also increasing somewhat in the global commercial.

Both of these reflect the environment that we are experiencing.

If we move to slide 17, in the middle you can see that the international consumer write-off rate is holding up pretty well, so I will focus on the US lending numbers.

The write-off rate of 6.7% is up dramatically, from the 3.4 rate in the fourth quarter '07.

We have moved from being the lowest rate in the industry to the middle of the pack.

Our write-off rate has grown at about 100 basis points faster than the industry year-over-year.

This reflects what we have discussed before, that we have a higher percentage of small business than the competition, we have more affluent current customers in California and Florida, and we also grew at a faster rate over the past two years.

If we look at this sequentially from the third quarter to the fourth quarter, our increase is very much in-line with the industry.

Now our write-off rate when you look at a comparison to competitors, because we have a decline in loan balances, there is actually a negative impact in our relationship, because as loans go down, it reduces the denominator, and is therefore impacting the write-off calculation.

The last point I would make here is that when we set our higher reserve, or provide an additional reserve in the second quarter of this year, we anticipated that write-off dollars would be higher in the third and fourth quarter, and in fact they have come in and played out very much as we had expected back in June.

Moving to slide 18, lending managed 30 day past due, here you can see that the 30-day past due continued to rise in the fourth quarter in USCS, increasing by 80 basis points, and this was really very much in-line with industry increases.

Based on this increase in 30-day past due, we would expect that the first quarter of '09 write-off will be higher than the fourth quarter of '08, and the second quarter of '09 will be higher than the first quarter of '09.

Moving to slide 19, we can look at capital.

Here for the full year '08 in the right-hand column, you can see that we generated 1.9 billion of capital over the year.

If we look at the fourth quarter, even with the restructuring reserves, we generated sufficient capital to cover our dividends.

Moving to slide 20, these are our capital ratios.

Capital to total managed assets, and total tangible capital to total managed assets.

You can see that these metrics strengthened over the first three quarters.

The drop in the ratio in the fourth quarter, is largely due to a decrease in OCI, or other comprehensive income, within the equity section, due to lower net security valuations and pension valuations.

Each ratio improved at the end of '08 compared to the end of '07.

Moving to slide 21, we are providing the three key bank holding company ratios.

These ratio calculations are preliminary, and have not been reviewed by the regulators.

These ratios are generally comparable to our competitors, and above the well capitalized benchmark.

Historically our capital has been in-line with an A-rated company, based on discussions with the rating agencies and regulators, and endorsed by the marketplace, as we were able to issue long-term debt to fund our business.

Without TARP, we may have needed, or had a desire, to increase our total risk-based capital ratio.

If we had done that, we may have had to constrain the granting of credit.

However, with TARP we do not believe this is the case.

As Ken indicated a good indicator of this is the unused line of credit.

While we have been reducing lines on customers that we viewed as risky, we were also increasing lines to our existing customers who are creditworthy, and we were bringing on new cardmembers.

So in total we think the unused line of credit at the end of this year will be on par with the amounts that we had at the end of last year.

So TARP is enabling us to continue to provide credit to the marketplace.

If we move to slide 22, let me spend a few moments talking about liquidity.

Now this slide is the exact slide that we had in the third quarter call, in that call we had column for six months as well as twelve months, and this is the twelve-month column.

During the fourth quarter we have significantly enhanced our liquidity position.

Now as of the third quarter we were basically looking at short-term liquidity, to help us bridge to our contingent funding sources, such as the $5 billion ABS financing conduit that we had with seven banks, and while it was a very sound plan, it was contingent on drawing upon the facilities that we had in place.

If we actually move to slide 23, and look at the activity that has taken place in the fourth quarter, you can see that we have ending excess cash of $13 billion, and if you include the TARP $3 billion funds that we received on the 9th of January, we would have 16 billion of excess cash, which can be used to help meet the long-term debt that is maturing in 2009.

So we are not relying on contingent sources any longer, we now have excess cash and marketable securities in hand.

How do we get there?

Since we are not relying on short-term assets to bridge us to our contingent facilities, we have reduced short-term obligations by $10 billion.

The big news is that we have been able to raise $9 billion in retail CDs, as well as sweep accounts in the fourth quarter.

Brokered CDs increased by $6 billion.

This is a program that we actually started at the beginning of the quarter, and we increased sweep deposits by $3 billion.

This demonstrates the power of our brand in the marketplace.

We also issued $6 billion under the temporary liquidity guarantee program, so at the end of December '08, we had $21 billion in cash.

So we need about 4 billion of that to meet our working capital needs, and we would need about 9 billion of that to pay off our short-term obligations, so after doing those two things, if we add in our liquidity investment portfolio which is held in Treasuries, we have 13 billion of cash on hand at the end of December, including the 3 billion of TARP that we received early in January.

If you move to the next page, slide 24, you can see that our 2009 long-term debt maturities total about $20 billion.

Now if we were growing volumes and loan balances and AR were increasing, we would have higher funding requirements than the 20 billion.

In a weak economy with lower billed business and lower loan balances, it is likely that we will actually have lower requirements than the 20 billion, and we have 16 billion on hand to address that.

If we move to slide 25, it is our plan as we move into 2009 to use the excess cash that we have in hand.

We will likely issue under the TLG program, and we could issue up to an additional $7 billion, and we plan to continue to grow our retail deposits, and I mentioned that the average maturity on our retail CDs is about 20 months.

I would also note that we have already raised in deposits an additional 1.5 billion in the month of January.

We also plan to launch a new direct deposit program in the second quarter of '09.

Going forward, it is our plan that at the end of each quarter to have excess cash and marketable securities, equal to the next twelve months of maturities.

In addition to that, we still have the commercial paper program, we have access to the Fed TARP, as well as the discount window, and we have our committed bank lines, and if the ABS or unsecured markets were to open, we would access those.

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

Despite the effects of a particularly difficult economic environment, and the restructuring charge, we remain profitable to the fourth quarter and for the full year, generating 2.8 billion of earnings from continuing operations.

While throughout the quarter cardmember spending was under pressure, our declining spending compared relatively well to other major card competitors.

In light of our proportional greater level of corporate and consumer discretionary spend, we feel good about the relative strength of our business activity.

As we expected, credit indicators weakened further during the quarter, against the backdrop of rising unemployment, continued declines in the housing sector, and overall deterioration in global stock market values.

As Ken outlined at the beginning of the call, for 2009 we remain focused on three key corporate goals, to stay liquid, to stay profitable, and to selectively invest in the long-term.

We believe that attaining those goals will best position us to emerge from this downturn as a strong competitor.

Through our fourth quarter funding activities, we more than met our funding needs, and built an excess cash position.

This position reflects our 6 billion issuance under the TLG Program, as well as our success in building our retail deposits, which now total 13.3 billion.

We believe this excess cash position, our additional capacity under the TLG Program, and the potential to further grow our deposit base, will satisfy all of our maturing debt obligations, and fund our normal business operations for an excess of 12 months, even if access to the Capital Markets continues to be disrupted.

We continue to expect that the difficult economic conditions will persist throughout 2009, and further suppress cardmember spending.

In addition, our financial results will reflect continued deterioration in the credit environment, as well as the negative denominator impact of lower overall lending balances.

This decline in balances is a function of the tempered spending environment, as well as our proactive credit actions that we have implemented in 2008.

As a result, we expect US and worldwide write-off rates will be higher in the first quarter of 2008 than we saw in the fourth quarter.

This year's second quarter rates will be higher than the first quarter.

The 1.9 billion reengineering program that we began implementing in the fourth quarter, is an important factor in our ability to address these profitability challenges.

However, we are committed to pursue additional expense initiatives in the event that further reductions are warranted.

Additionally, the various pricing actions that we have implemented, and the antitrust settlement payments expected from Visa/MasterCard, provide us with additional sources of financial flexibility.

As we evaluate our investment decisions throughout this year, we will work to prudently balance the near term performance against long-term profitability and growth.

While the current economic turmoil will negatively impact our results, our goal is to position the Company to generate returns in excess of our dividend levels.

Collectively we believe these strategies appropriately position us for the difficult period that lies ahead, and should enable us to navigate through these conditions in the best possible position, relative to our payment competitors, and the overall industry.

In closing, we remain committed to our business model.

We have strong and defined positions within the payment industry.

Our brand is recognized and respected around the globe.

Our balance sheet is positioned with a capital funding and liquidity profile, that should provide us with the flexibilities in these volatile times.

Of course in all of our businesses, we have instilled a strong focus on the customer.

Some we need to stay close to regardless of the environment.

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

Thank you.

(Operator Instructions).

Our first question comes from Bruce Harting of Barclays Capital.

Please go ahead.

Can you hear me?

Yes.

There we go.

Can you speak in terms of the allowance for loan loss, and I know have you done this on previous calls, but whatever algorithm you use, to bring loans back onto the balance sheet during the course of the year, can you talk about the prospects for the the TALP program, versus bringing them back on balance sheet, and then how we should model provisioning for that?

Thanks.

Okay.

Bruce, your voice was very weak, but I think the got the essence of your question, which is how do we think with the loan loss reserve for credit losses.

So we have a methodology that we have used for many years, which is really a migration analysis using recent historical data, but we also look at what our coverage is of delinquencies, we look at what our coverage is looking backward in terms of write-offs.

and also looking forward in terms of write-offs.

It is also informed by the recent actions we have taken in terms of the cardmembers we are bringing on, what we have done from a credit action perspective as well, and we also are cognizant of what has taken place in the economy.

So it is not just one factor that determines how we set the reserve for credit losses.

It is really a combination of all of those factors that drive our decision, and that is what is reflected in our results for both the year and for the quarter.

In terms of if securitizations come back onto the balance sheet, I think we have about 5 billion of maturing ABS during 2009, if we bring them back on the balance sheet, then we set up credit reserves for those, and those would be reflected in our P&L in 2009, and we bring them back on at a level that we thought was appropriate, based on the conditions that exist in the quarter they come back on.

All right.

Thank you.

Our next question is from Mike Mayo of Deutsche Bank.

Please go ahead.

Good afternoon.

Can you comment on the enormous growth in the retail CDs?

I thought you said 9 billion, so I guess the question is how are you getting this?

Who are you getting it from?

What are the deposit rates?

How sticky are these funds?

What is the relative trade-off in pursuing these retail CDs versus other funding?

Okay.

Let me talk first to the retail CDs.

We began that program in the beginning of October in the fourth quarter.

They are retail CDs that are issued through the national brokerage firms.

Customers who want to place money have a choice who they do it with.

They can pick us, or other companies that are issuing offering those rates.

The rates we have offered are market rates.

We are have not paid up in terms of price, but we think there is a flight to quality, and it is really reflective of the power of our brands, so we raised $6 billion in the fourth quarter, and the average maturity of those was 20 months as I mentioned.

That is one source.

For about a year we have had a different program with a different set of institutional companies, where their customers, they actually set the rate, but their customers can pick from a variety of firms that they offer, and we actually increased the amount through those sweep accounts by 3 billion, so we think from a stickiness perspective, that while who the customers are who are accessing the sweep accounts may change, we still think the quality of our name will help the stickiness.

In terms of the stickiness of the retail CDs, as I said, it is 20 months there is only 2 billion of that 6 billion that have maturities under a year, and the other 4 billion have maturities in excess of a year.

So it is our sense that we will have good stickiness, and as I mentioned, we are also going to start a direct deposit program, that will be both online and offline, and we expect to roll that out in the second quarter of 2009.

The average rate I just mentioned to give you a sense on the retail CDs is 3.3%.

Over time we will need to make an evaluation of whether we think deposits should be 20% of our funding base, or 50% of our funding base, but that is a decision we will make over time, and will be based on having a good diversity of funding sources, as well based on price.

I think the point is in a relatively crowded field with a number of people going for deposits, and if you will a late entry, that as a result of the brand and what it represents, we have been able to dramatically grow in a very short period of time.

All right.

Thank you.

Our next question comes from Bob Napoli from Piper Jaffray.

Please go ahead.

Thank you and good afternoon.

I was wondering if you might be able to give a little bit of your feel, I know it is very difficult, but looking at the spending trends in the fourth quarter and the change in loan growth declining in the fourth quarter, if you can try to give some outlook of what you are seeing so far in January versus the fourth quarter, has it deteriorated further?

And what your best guesstimate I guess would be for spending and your loan portfolio for '09?

So I can give you some insight about what has happened so far in January.

Spend levels have been pretty consistent with what we saw in December, so not a further deterioration from there, but consistent with what we saw in December.

The factors that are contributing to the lower loan growth are, really the lower spending is the most impactful, but the credit actions that we have put in place are also having an impact, as we are focused on controlling credit losses in 2009, although we continue to be very careful to balance between controlling credit losses, and wanting to continue to have very good relationships with our customers going forward, so we can benefit from fair spending, both now and in the future when the economy improves.

And I think the third factor is that we are having less balance transfers than we have historically had, so I think all three of those factors are contributing to the lower loan balances.

Do you expect your loans to decline 10% this year, somewhere in that range?

I wouldn't give a forecast, but I would say that there is a correlation clearly between what spending levels are, and where loan balances go.

Thank you.

Thank you.

Our next question comes from Chris Brendler, Stifel Nicolaus.

Please go ahead.

Thanks.

Good afternoon.

Can you give us a little more detail on the thinking in your lending provision and reserve?

A lot of other issuers had pretty big increases in their reserves.

I know you took a big build in the second quarter, but you really saw a pretty material decline in the ratio of reserves to your delinquencies, the fourth quarter economic performance was pretty abysmal across the board.

I think a lot of people are taking a pretty bearish outlook towards '09, and therefore I think the lending provision could have been higher.

Can you talk a little about how your methodology, what you are thinking, any sort of employment rate, unemployment rate that you are benchmarking to as you go through '09, and then also what is the driver of the negative 123 other in the reserve reconciliations?

Thanks.

Okay.

So I think our provisioning methodology is kind of as I outlined in answer to the first question, I guess I would note that our reserves as a percentage of past dues on a loan basis is 137%, and that compares to last year where we were at about 119%.

While it was higher in the second and third quarter, as I mentioned, when we set up the reserve in the second quarter, we were really looking forward, and were anticipating higher levels of write-off, so the reserves as a percentage of past dues at 137%, we were pretty comfortable with.

If you also look at what the increase in write-off rate was, it increased about 75%, and if you look at the percentage of reserves as a percentage of loans, that has also increased a similar percentage.

So as we think about our allowance levels triangulating from a variety of sources, we are comfortable, and I think the levels that we have today, reflect the fact that we set up an additional provision in the second quarter of this year.

As it relates to the second part of your question, in terms of 2009, as we are planning into 2009, where we don't do a forecast of where unemployment is going to be, for planning purposes we are thinking that 2009 unemployment for planning purposes will be around, rise up to about 8.5%, so that is the unemployment that we are thinking about when we are doing our planning for next year.

The 122 million other in the quarter reflects kind of some of the reserve reclasses that I mentioned before.

They are small in totality, but that is really what is affecting, is a part of the 122 million.

The other part is there is some FX translation in there, that is impacting the reconciliation, so it is some reserve reclassification and the impact of foreign exchange is what has generated the 122 million in the quarter.

All right.

Thank you.

And our next question comes from David Hochstim from Buckingham Research Group.

Please go ahead.

I wonder, can you just talk about the trend in net interest yield, and whether there was a lot of liquidity, excess liquidity in the fourth quarter that played into the reduction, or should that continue declining, and then I had two kind of clarification questions.

One, on the delta charge, is that sort of one-time charge, or will you continue to have charges as you have committed to higher costs of rewards, and that is just the amount spent by Delta cardholders this quarter, and how the overall higher costs will show up in the P&L, and then I wasn't clear on the tax rate, or what kind of tax benefit you would expect in 2009?

Okay.

Let me answer the Delta question first.

The 106 million was a one-time adjustment to the reserve, bringing it up to the pricing we needed to satisfy redemptions in the future that we think will be made through Delta.

Obviously the higher cost on an annual basis, as future spending will be reflected in the cost per point for membership rewards, although I will point out that we have done a very good job in terms of membership rewards cost per point, which has stayed relatively flat over a number of years.

That is the Delta question.

In terms of, go ahead.

The 106 basically reflects your expectation of what people will spend over the life of the program on Delta cards, that is incremental to what you would have been providing as they spend?

What we do is we use the historical average cost per point as an estimate for what our cost per point will be in the future.

We have mixed in, the fact that we think Delta will be a bigger proportion, or the cost will be a bigger proportion, and therefore reflected in cost per point.

That is MR and the Delta?

That is just MR.

And how does the higher cost for the lending product come in?

You are talking about --

The Delta lending credit credit cards (multiple speakers).

We have a programmed card agreement with them, and we agree to reimburse them, based on the spending of customers who use the program card, and as they spend that, we will reflect that in the P&L, as we do today.

Okay.

Thanks.

Moving to net interest income, I guess there are two factors in there.

One is in October there was kind of a dislocation of the normal relationship between prime and LIBOR, and on our variable rate lending products which is about 60% of the lending portfolio, that spread between LIBOR and prime has generally run 170 to 180 basis points.

When LIBOR jumped up, basically the spread between those for a couple of weeks was actually zero.

Now today it has moved back to the normal relationship.

For that month or so where it had moved away, there was a negative impact of that, and I think you are seeing that in the yield at the end of the day.

However, if you are not looking at yield, but you are looking at net interest income to the extent we have moved to a space where our funding and liquidity is stronger, because we are holding cash, there is a cost to carry on that.

The cost that we are going to pay to borrow funds will be higher than the interest income we have for investments, because we plan to invest that in relatively safe instruments, either Treasuries, agencies, or other instruments which are guaranteed by the government, so I think there will be some impact on net interest income of that.

Your last question about tax rate, I think was your last question on tax rate, because these permanent differences have always been there, except their impact on the tax rate has always been smaller when pretax income is very high.

Now that pretax income is lower, the permanent differences haven't changed, but it is having a bigger impact on taxes, and that is why we actually have a benefit in the period.

I don't know if I got all of your questions, David, but I think I tried to cover them.

Thank you.

Thank you.

Our next question is from Don Fandetti of Citigroup, please go ahead.

Good evening.

Wondering if you can talk a little bit about how the regulatory environment and some of the funding issues made, will be changing the way you look at your business near and long-term?

Well, in terms of our funding, I think we have anticipated changes in the marketplace that took place in 2008, early in the year we expanded our liquidity portfolio.

We added the $5 billion conduit facility, we gained access to the Fed window, and now we have moved to actually holding excess cash.

I think we have demonstrated the ability to adapt to the market place, and develop very sound liquidity and funding programs, and however the marketplace evolves, we will be able to continue to adapt to the environment, and fund cleanly as we really have both in the past and in 2008.

In terms of other regulations that may come out as a result of changes in the TARP rules, we will have to wait and adopt to those.

As they now stand, I don't think the regulations that are required for companies who take TARP, will have a negative impact on us.

If new rules come out, then we will have to adopt to those as they come.

Thank you.

Thank you.

Our next question comes from Sanjay Sakhrani from KBW.

Please go ahead.

Thank you.

Dan, I was trying to get a little bit more on which charge card accounting policy change.

So the way to think about it is this is going to increase the run rate in the rate, right, and if yes, can you reconcile that with the reserve coverage decline?

Okay.

So it it is not going to impact our P&L at the end of the day, because when cards were 180 days past due, we had them substantially reserved for, and all we are really doing is changing the time period when we write them off, so instead of writing them off at 360 days, we simply move that up to 180 days.

That is why you see the additional 341 million flowing through the write-off line in the fourth quarter.

Now when they were at 360, obviously we had reserves to cover the vast majority of those historically.

If you looked at reserve coverage as of the third quarter, it was 3%.

As you look at the table, I think on page 14 and 19 of the attachment to the press release, that dropped down to 2.5%.

That is not a reduction in reserve coverage.

What it really is is reflective of the fact that we are now not holding receivables on our books that are past 180 days.

If you made that calculation for the fourth quarter, if we had not changed to the 180-day write-off, it stayed at 360, that percentage coverage would have gone from 3% up to 3.5%, so it is actually a strengthening in the reserves in the fourth quarter, but because of this change in write-offs to 180 days, it drops the calculation down to 2.5%.

So it is actually a stronger reserve now, than what we had in the third quarter.

So the rate won't change much?

Obviously all else equal is what I am saying.

All else equal this should have no effect on our P&L going forward.

Our P&L will be driven by what the loss experience is in the future.

I have a follow-up.

I guess when we think about capital adequacy, I understand regulatory capital is pretty strong.

But when we look at the tangible capital, is there a minimum that you guys are looking at from a tangible capital to managed assets standpoint?

And then maybe you can just tie that into some comments on the FAS 140 issues, what do you guys think about the implementation?

Do you think it will be implemented or not?

And that is it.

Okay.

Let me answer the second part of your question first.

FAS 140, right now I guess the rules have not been passed as yet.

There is an exposure draft out there.

If the Receivables come back on balance sheet at the exposure draft dates, it would be the first quarter of 2010, and we would just bring all of the assets back onto the balance sheet, as well as the reserves, we don't think that will have any impact on our business model, or on our ability to do business going forward.

Remind me what the first part of that question was?

One moment, please.

The implications, and then just take that into your expectations for that tangible capital to managed assets ratio, is there a specific minimum level that you guys are looking to maintain?

Yes.

We don't have a specific minimum that we would want to maintain.

I think our tangible capital ratio is pretty strong, certainly compared to our competitors, but we don't have a floor that we set for ourselves.

I think we act prudently in terms of if we took on additional intangibles, that after that we have an appropriate level of ratio of intangible equity to assets.

Thank you.

Our next question is from Bill Carcache of Fox Pitt.

Please go ahead.

Hi.

Just a couple of quick questions.

One on the roll forward of the reserve on page 14.

Can you just comment on what is driving the difference between the net write-offs, or I am sorry, the provision being down 3% on an owned basis, versus up 17% on a managed basis, and then finally if you could also comment on potential implications of some of the talk on bankruptcy law changes, and cramdowns, and related issues?

That would be great.

Thanks.

Okay.

So I think the major change is if you look at managed basis, Receivables went from 75 billion in the third quarter to 72 billion in the fourth quarter.

If you look at the owned, while it is 3 billion, it is on a smaller base so it is a higher percentage.

I think the difference is largely being driven by the fact that the percentage decrease in owned Receivables, is larger than the percentage decrease in the managed Receivables.

Switching to your second question about bankruptcy law, I know there has been a lot of discussion about modifying mortgages, and loans, and the like, but I am not aware of conversation about the bankruptcy laws, or judges changing or impacting how credit card companies are interfacing with their customers.

Now we are very focused on credit as we have talked about many times, and we are very focused on controlling credit losses, but at the same time we do have care programs for customers that are having temporary difficulty, and we work with them to see if we can accomplish something that both meets our needs and their needs, so we continue to focus on credit, not only from a controlling expense and losses, but we also focus on seeing that we have ways we can help customers, where we think they are only in temporary difficulty.

Thank you.

Our next question comes from Rick Shane of Jefferies & Co.

Please go ahead.

Thanks guys, for taking my question.

I apologize I am going to ask, too, I can't resist.

Can you tell us in the context of the deposit growth, where your programs were versus national average for the quarter, so that we can get some sense of how much of this is being driven by brand versus pricing?

Okay.

So the answer to that question I think the CDs as I said have an average maturity of 20 months, and the average rate that we paid was 3.3.

So I don't have here exactly what the national averages are, but we were pricing consistent with the market.

We were not paying up.

We are not paying up to bring in deposits, so I think you will see that those are pretty consistent with the rates that were offered in the quarter.

Okay.

Thank you.

And then the second question is looking at the numbers, the capital generated matched the dividend exactly, would there have been any implication in terms of covenants, or related to TARP, in your ability to pay the dividend, if those two numbers hadn't been equal?

With we have a very strong capital position.

I am not aware of any contractual restrictions that we would have, based on other agreements that we have in place.

We would have been able to pay the dividend, and I am not aware, the TARP does prohibit you from doing repurchases, it does prohibit you from increasing the dividends while it is outstanding, but I am not aware of any provisions of TARP that would prevent you from paying a common dividend, even if you generated less capital in the quarter than the dividends you were paying in the quarter.

So there is no income test related to the dividend from TARP?

Not that I am aware of.

Thank you, guys.

Our next question comes from Michael Taiano from Sandler O'Neill.

Please go ahead.

Thanks.

Good afternoon.

I have a question on discount rate pricing.

As you guys renew contracts with the merchants, or have over the past six months or so, could you give us a sense of the degree of pushback that you are getting from merchants, given the premium pricing, if at all, and could you maybe just remind us what sort of the average duration of contracts that you have with merchants?

As always the case when you are dealing with a merchant, or in any other business when you are negotiating, the person who is paying that always like to have a lower rate, and as we have said in the normal course, just based on the great continuing shift to every day spend merchants, in the normal course our discount rate if we took note of the actions, would decline at 2 or 3 basis points a year, but as you see over the last couple of years, we have been actually been able to go back to certain merchants where we are bringing greater value, have a discussion with them about that, and they agree to pay a higher price.

This is not us just dominating them and forcing up the price.

It is really based on the value we bring to the merchant, and they have agreed to in some cases pay a higher price.

A combination of that shift to every day spend, and us going to merchants where we are bringing significant value, has enabled us really to only have a 1% decline this year in the discount rate, which I think is really a testimony to our brand.

I would say, this is Ken.

The other points I would make is, the reality is we don't have a monopoly position with any merchant, and the reality is they have choice.

What is critical in these times is we have invested as we told you through the years, in programs, improving our information management capabilities, our marketing capabilities, and our targeting capabilities.

So very frankly a number of our conversations over the last several months have been with merchants saying, we want to do more with you on your marketing program, so that we can build volume, because people are really obviously trying to generate sales, and this is where our marketing skills, and some of the rewards capabilities we have in bringing in business to the merchants is valuable.

So I think that what it represents is a strategy that we have had in place over the last four or five years, that has allowed us to maintain in a pretty narrow range our discount rate, which has made a pretty important difference for us.

Okay, that is helpful.

And on the duration of the average contracts, can you share that with us?

So I don't have that in my fingertips right now.

Generally they are multi-year contracts.

Yes.

I would speculate, say probably two or three years is the average length of a contract.

I would say on two levels they are multi-year contracts, and what we have also concentrated in doing, with a number of what I call marquee merchants, we in fact over the last six or seven years, have focused on signing even longer term contracts, and that has been a very effective strategy for us.

Great.

Thanks very much.

Our next question comes from Robert [Parusi] with UBS.

Please go ahead.

Hi.

Thanks for taking my call.

On page 20 in discussing your capital position, you discussed the change in OCI as a driver of the reduction in your tangible capital ratios.

Just wondering if you can size that on a dollar basis, and maybe talk a little about the types of securities that are driving that?

I think it is on the securities side, it is really the B&C traunches that relate to our securitization is what is driving that piece.

I think it was about 300, between 300 and $400 million was the impact from that reduction in valuation on the B&C traunch, and the other piece was the pension valuation, and I think that was somewhat of a similar number, and the two of them together is what really had the impact on the capital ratios.

Thank you.

Second, with regards to the restructuring charges, I am wondering can we use the allocation of those restructuring charges, as kind of indicative as to where the expense reductions are going to occur on a segment basis?

I think it would be indicative, I guess I would also point out that employees who are part of our service delivery network are actually accounting-wise held at corporate, and then allocated out from an expense perspective, so the restructuring charge related to those employees is actually in the corporate segment.

Beyond that, your assertion is right, although the benefit of that lower number of employees that relate to the service center, will get passed through the P&L over time in the segments.

Okay.

Thank you.

Our next question is from Scott Valentin for FBR Capital Markets.

Please go ahead.

Good evening.

Thanks for taking my question.

As you guys pursue deposit growth, any change in bank acquisition?

I know you have been fairly negative on acquiring a bank, but any change there?

I think we have always said that we will always evaluate every opportunity, but generally if you were going to acquire deposits by acquiring existing banks, the vast majority of the time you will also acquire the assets of that bank, and we would have to be very satisfied that the assets of that bank, would be ones that we would be comfortable, with from an exposure perspective as it relates to our shareholders.

So we found that pursuing this path of deposits, retail CD deposits through brokers, the sweep account, and then also having the direct deposit business, is a way that is very prudent of gathering deposits, without having to be focused on acquiring assets that we may not otherwise want.

Thank you very much.

Thank you.

Our next question comes from Moshe Orenbuch from Credit Suisse.

Please go ahead.

Thanks.

I was wondering if you could talk a little bit, since you said the decline in kind of the reserve relative to delinquencies in the quarter was because the reserve had been built in the past.

What I guess level of metrics would cause to you actually have to raise that back up again?

I think we would look at the actual experience that we had in the quarter, and the impact that it had on the reserve.

Also if we became significantly more pessimistic about how, of the inherent risk in the portfolio, based on our outlook and the economy, I think both current period economics, as well as our perspective of the inherent risk.

Other that could impact it is if we were going to bring on customers that were riskier, you would have to increase the reserve, or if you were actually tightening on credit, that actually would be a basis for reducing the reserve, so I think we include all of those factors in evaluating whether at some point in the future we thought we needed to have have an additional reserve.

What would be the best way for us from the outside to be able to measure that?

I think you probably do it the same way we do.

We look at a variety of factors, not just one factor, and we obviously have visibility into the credit actions we are taking, the customers we are bringing on, that you don't have, and we also have visibility into our migration analysis, which is not public, but you can certainly triangulate against delinquency coverage that we have, you can look at the increase in loans compared to the increase in write-off rates.

I think it is the normal thing to look at, in terms of evaluating that.

I think the other point, Dan, that you mentioned is, the reserve we took in the second quarter was projecting out several quarters, and I think as you said, that the performance was within the estimates we had set, so that goes back to have you balance off the different factors.

I don't think we ever want to lock into just one metric, and keep it at that level forever, so I don't think we ever want to say, we want to have a past due coverage of 130%, and no matter what keep it there.

In some cases you might be overreserving, in some cases you might be underreserving.

I really do think from my perspective, looking at a wide variety of factors including our base methodology, is a thoughtful way of approaching provisioning, and where the allowance should be set at the end of each quarter.

Great.

Thank you.

Our next question comes from John Stilmar.

Please state your company.

This is John Stilmar from Suntrust.

Thank you for allowing me to get on the call.

As I look at the changes in actual card dollar, or number of card issuance this quarter, it seems like there was about a 1% decline in the US, a smaller decline internationally, just over 1% in cards in the GCS business.

Can you talk about it seems like there was a relative preference for investment of domestic versus international and commercial?

Can you talk about whether that is true, and what I should be inferring from that, and then secondly, with regards to reserve, and I hate to bring this topic back up again tonight, but how should we be looking at the reserve, as it relates to the amount of balance that you expect in future periods, because clearly one is expectations of loss, and the second is the absolute balance that should be outstanding, so I was wondering if you can provide a little clarity on that as well?

Thank you.

Okay.

So just in the first question in terms of where we invest, we don't have a preference of one business unit over another on a universal basis.

I think we look every quarter to see what business opportunities present themselves.

If we think there is an opportunity to invest in commercial card that provides us with a greater return than we would have in our next incremental investment say in consumer card, we will place the investment there.

So I think we are always looking at what's going to create the greatest economic return over the life of the customer, and that is what really drives our business decisions, in terms of where we put investments, and how much we put into US consumer, and how much we put into international consumer, and how much we put in global commercial card, and what we invest in the network.

As you know, there are always investments that you can make that will get you immediate metrics, and then there are investments you need to make in your capabilities and infrastructure that you need to make over time, so we try to balance all of those things as we make quarterly investment decisions.

I think the important point is the optionality and the flexibility we have in our card acquisition approach, relative to other business models, because we have a choice of a range of consumer products, charge card, revolving, GNS, our bank partnership, obviously has limited risk, and in these times that is something we obviously balance and look at, and then when we look at the economics of our corporate card business, and the penetration opportunities that we see both in the US and around the world, that is attractive, and so this is something we are constantly calibrating, but I think the key point is we have a range of options based on both the returns and the risks that we see out there in the marketplace.

As it relates to your second question, we are setting reserves based on the inherent risk in the balance sheet as of the balance sheet date, so as of December 31st.

We are not taking into consideration whether the balance sheet, actual loan balances will go up, or whether they will go down in the future.

What we do look to the future as, is what do we think is happening in the economy, and that is one of many factors that will integrate into our thinking, in terms of establishing our reserve balance.

From here, we will just take one more question.

Our next question comes from John Williams from Macquarie Capital.

Please go ahead.

Dan, how are you?

I am fine.

Just wanted to ask with regard to behavioral changes that you have seen within the rewards expense line, have you seen people change how they are treating rewards, have you seen an uptick in redemptions of reward points over the last few months, or even into January?

We have had this question from a fair number of analysts, thinking that the economy would cause people to utilize membership rewards to a significantly greater degree, and quite frankly to date we have not seen that.

People continue to do redemptions.

They continue to value the program.

We have not seen a notable uptick in redemptions, as a result of the slowdown in the economy.

I think we provide a wide variety of choices, people know we are going to innovate, and they know we are going to be around.

Let me just close with a reminder that we will be hosting our Financial Community Meeting on February the 4th at 2:30 here at our Company's headquarters.

At this meeting, we will provide additional details on our results, and our business strategies, focusing on our goal to stay liquid, stay profitable, and to selectively invest for the long-term.

Thank you all for joining us.

Thank you.

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