美國運通 (AXP) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the American Express fourth quarter earnings conference call.

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

Later, we will conduct a question-and-answer session.

Instructions will be given at that time.

(Operator instructions).

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

I would now like to turn the conference over to our host, Ron Stovall.

Please go ahead, sir.

Thank you, Gloria, and thanks to all of you for joining us for today's discussion.

As usual, it's my responsibility 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 2008 10-K report already on file with the Securities and Exchange Commission, in the fourth quarter 2009 earnings release and earnings supplement on file with the SEC in an 8-K report, as well as the presentation slides, all of which are now posted on our website at ir.americanexpress.com.

We have provided information that describes the Company's managed spaces and other non-GAAP financial measures, and the comparable GAAP financial information.

We encourage you to review that information in conjunction with today's discussion.

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 remarks.

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 Dan will be available to respond to your questions.

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

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

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

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

Okay.

Thanks, Ron, and I'll start on slide two.

So while revenues and income are well below our pre-recession levels, they are heading in the right direction and represent the highest levels that we've achieved this year.

So, a look at total revenues, that of interest expense, came in at 6.5 billion, about equal with the amount in the fourth quarter of '08.

On an FX adjusted basis, we would be down about 4%.

If you compare this to the third quarter, year-over-year on a reported basis, we were down 16%; so being approximately even with last year is a significant improvement.

Income from continuing operations was $710 million, up 132% from the prior year; but we identified two significant items in last year's result -- a reengineering charge as well as a MR-related item.

And if you were to normalize from those, we're really up modestly about 5% compared to fourth quarter of '08.

Diluted EPS from continuing operations came in at $0.59 and return on equity was 14%.

Moving to slide three, you can see that billed business came in at 172 billion, up 8% on a reported basis and 4% on an FX adjusted basis -- again, comparing it to the growth rates we had in the third quarter.

Reported billed business was down 11% and on an FX adjusted basis, was down 9%.

So, again, a significant improvement compared to the third quarter.

This improvement is really across all business lines, as you'll see in a few minutes, and it's the first positive growth rate that we've had since the third quarter of '08.

Cards In Force came in at 87.9 billion and that's down 5% from last year.

If you normalize to exclude the 3.3 million inactive cards that we canceled this year, we would be down about 1%.

Average basic cardmember spending, if you were -- was up 15%, but if you were to normalize to exclude the inactive cards that I just referred to and adjust for FX, we're up about 5%, which is a strong rebound from the prior quarter.

Managed loans continued to be well below '08 levels.

You can see that it's down 14% on a managed basis, although we did increase sequentially compared to the third quarter by about 2%.

This is based on higher spending in our co-brand portfolio.

Travel sales, while still down, also improved.

They are down 5%.

That compares with 29% in the third quarter.

We move to slide four.

This is more on billings.

If you look at the bars, they represent the dollar amount of monthly billings, and the lines represent the year-over-year growth on both a reported and FX basis.

You can see that in the May to September timeframe of '09, billings stabilized at about 52 billion per month; and billings have now moved higher in October, November and December.

Now, the growth rate is benefiting from easier comparisons as we saw drops in billings in the fourth quarter of '08; but it's also benefiting from higher levels of billed business.

The growth rate comparison actually improved month-by-month in the quarter.

So, the growth rate in November was better than the growth rate in October; and the December growth rate was stronger than what we saw in November.

Now, the month of December '09 was the highest billed business month in AXP history on an FX adjusted basis.

And I point out that Global Commercial Services was particularly strong in December, up 13% on an FX adjusted basis.

Just a little bit about holiday spending.

So, in the month of December, US retail shops was up about 5% year-over-year.

US department stores was flat.

If you look at US online spending, it was up about 11%; and within that, US retail online spend was up about 8%.

So if you compare that to the industry -- which, according to comScore, was up about 4% -- we fared a little bit better than the industry.

So moving to slide five, here we're looking at percentage change on a year-over-year basis on an FX adjusted basis.

So you can see that billed business really across all segments has improved from the third quarter.

USCS and ICS are flat year-over-year, and Global Commercial Services is up about 3% on an FX adjusted basis.

GNS, which is spending on cards issued by our partners, was up about 22%.

Geographically, outside the US, we saw the service growth in Latin America, with JPAA being next.

So, really broad-based improvement across all of our business lines.

If you move to slide six, this is a network perspective.

Now the blue line represents the number of transactions, and the light blue line represents transaction size, and the green line is total spend.

So both the number of transactions and the transaction size had positive growth in the quarter.

Number of transactions grew 3% and transaction size increased by 2%.

Now if you compare that again to the third quarter, transactions in the third quarter were actually down 1% and transactions size was down about 11%.

If you look at it geographically, average rock size in the US was down about 2% and international was up about 14% year-over-year.

Now if you look at the trend in the growth in the number of transactions, for the quarter, as I said, it was up about 3%; October was about flat, and the month of December was actually up about 5%.

So, a good trend.

If we move to slide seven, we're looking at charge card billed business compared to receivable growth.

The solid line represents the growth in billed business; the dotted line in cardmember receivables.

So, charge card billed business and receivable growth continues to move in tandem.

You can see that we have an upward trajectory in billed business, and charge card had positive growth in the quarter of 6%.

And AR was growing in line with billed business.

If we move to slide 11, this is lending billed business versus loan growth.

The solid line is billed business again and the dotted line represents loan growth.

So historically, spending on lending products and loan balances have correlated pretty closely.

However, in the fourth quarter, spending has improved significantly with growth of about 2% year-over-year, driven by our premium lending focus on co-brand cards; but loans, while up sequentially from the third quarter by 1.1 billion, is lower than the fourth quarter of '08 by 14%.

Now some of the contributing factors to this separation is that we are having higher paydown rates, and these statistics are actually based on our trust data.

So the paydown rate in December of '09 was 26.9% and that compares with 23% in December of '08.

Now this is certainly being impacted in part by the change in the mix of the products as we focus on premium lending.

It's also being impacted by the credit actions that we're taking, which are focusing on limiting high balance accounts in the lending portfolio, and this is having an impact on total loans.

In addition to that, BTs, which used to be a source of growth, are basically at zero; and lending card acquisition is at lower levels, and that also, historically, has contributed to the growth of loans.

Now if we move to slide nine, this is our US Card Services net interest yield on a managed basis.

Now at the bottom of the chart, you can see certain of the factors that are impacting the yield in each quarter.

Now the fourth quarter '09 net interest yield is similar to the two prior quarters, but there really are a number of things that are taking place.

So we have had some increases in pricing, which has a positive impact on yield, but there are various aspects that are reducing yield.

One is the Cardmember Assistance Programs we have, where we forgive interest; that's having a negative impact on yield.

You know we're focused on premium lending, so the revolve rate is dropping, also impacting yield.

And then also the credit actions that we're taking are having an impact.

In addition to that, we're starting to see some of the impacts from the Credit CARD Act affecting yield.

Now we expect that the Credit CARD Act will bring net interest yield down from '09 levels as we move into 2010; so I'm not making a forecast here, but I think in the future, it's likely that we'll move to the historical levels that we saw in the '06 to '08 timeframe, when you look at it on a managed basis.

So moving to slide 10, we're looking at revenue.

So total revenues, as I said, were flat; on an FX adjusted basis, were down about 4%.

So discount revenue was up about 5%.

That's a combination of billed business increasing at 8% and our average discount rate decreasing by 2 basis points year-over-year to 2.51%.

Net card fees continue to be a strong story despite the weak economy.

So clearly, if you have the right value proposition, cardmembers continue to renew on our fee-based products, which is a positive.

If we look at net interest income and securitization, that's down about 7%.

Data interest income decreased by 8%, as average owned loans were down 26%, partially offset by higher yield compared to the fourth quarter of '08.

Securitization income is down 5%, primarily driven by a decrease in interest income.

Other revenues are down 12%, driven primarily by lower delinquency fees, which are a result of lower owned loans and the impact of various customer assistance programs.

Moving to slide 11.

So this is the first in a series of slides on credit.

Provision is significantly lower in the fourth quarter of '09 compared to '08, down 47%.

Both charge card and cardmember lending are making a large contribution.

Charge card improved by 67%, driven by improved write-off rates and lower past-due rates.

Cardmember lending provision decreased by 40%, due to average owned loans decreasing by 22% year-over-year and lower levels of past-due accounts.

I would note that, sequentially, compared to the third quarter, the lending provision decreased by 43%, as write-offs and past-dues improved.

I'll cover this in more detail in a few slides.

So moving to slide 12, looking at our expenses, Marketing and Promotion was up 36% compared to the fourth quarter of '08, and up 41% on a sequential basis, or 200 million compared to the third quarter of '09.

So, the increase in Marketing and Promotion, and other increases in investment spending, has been enabled by the increase in cardmember spending and credit indicators showing further signs of improvement.

Now, M&P is at higher levels really across all of our businesses; and if we now stop and look at rewards, you can see that that's up 8%.

Now, if we exclude a delta-related charge in MR that we had last year, this line is up 18%, and this is being driven by higher cardmember spending as well as higher co-brand expenses in the period.

Now, on this chart, you see that S&B is improved by 28%; but if you exclude net re-engineering costs in both periods, then S&B would decrease by 8%, reflecting the lower employee levels that we have this year compared to last.

Other operating expenses increased, and this reflects higher spending on credit and collections, investment spending in higher technology and related costs, and a charge to exit certain real estate properties this quarter.

Moving to slide 13, if you were looking at Marketing and Promotion expense by quarter, and you can see that the fourth quarter is significantly higher than the other quarters in this past year.

And the Marketing and Promotion is focused on charge card, co-brand products, brand advertising, receptions of coverage, product development, and gift card -- all of these investments are on strategy for us.

So if you move to slide 14, we're looking at charge card write-offs and 30-day past-due rates as it relates to the US Consumer Services segment.

Now, this is really a start of a drill-down on credit that will cover a number of slides, but you can see that USCS write-off rates and past-dues have improved significantly, compared to both the fourth quarter of '08 and the third quarter of this year.

Both are contributing to the lower provision levels that we have, and these metrics are really at historic lows.

If we move to slide 15, and look at charge card net loss rates and 90-day past-dues for our International Consumer business and Global Commercial Services, you can see here that the net loss ratios and the 90-day past-dues are also performing very well.

So, in charge card, really has performed well across all three units, the US Consumer, International Consumer, and Global Commercial Services, have performed well not only in this quarter, but really all year.

So the charge card provision for the full year of 2009 is down 37% compared to the full year 2008, and it's a very good story.

So if we now move to slide 16, charge card reserve coverage -- so, while the provision in the fourth quarter of '09 and for the full year of 2009 are lower than 2008, you can see that the reserve coverage across all of the business units are up slightly, compared to last year.

And reserves, we think, reflect the inherent risk in our portfolio.

Now let me move to lending in slide 17.

So this is lending managed net write-off rates, and this is the second quarter in a row that managed debt write-off rates have improved.

Now, the improvement is being affected by a broad range of credit and business actions, as well as the environment.

These actions include really enhanced credit and collection policies and practices, and in particular, by our efforts to limit the number of high balance lending accounts, which is having a large impact on bringing write-offs down.

Higher write-offs in the second quarter of this year was really contributing to the higher write-offs that we saw in Q2 '09.

It's also benefiting from our focus on premium lending.

So let me move to slide 18.

So this metric is important as we look forward, and you can see that the managed 30-day past-dues are improving in the US Consumer business as well as International Consumer.

And within the US, the states that were hardest hit, such as California and Florida, while still at -- have higher delinquency rates than the average, are improving at a slightly faster rate.

So let me move to slide 19.

This is a slide that we have focused on quite a bit over the last several quarters.

And if we look at the upper left chart, which is current to 30-day past-dues, and you look at the yellow triangles, which are July, August and September, this is what will lead to write-offs in the first quarter of 2010.

And you can see that they are similar to the prior three months, which drove write-offs in the fourth quarter of '09.

So, if the 30-day past-due to write-off rate stays unchanged, and recoveries and bankruptcies remain constant, it would imply that the first quarter of 2010 write-offs will be similar to the fourth quarter of '09.

So this is not a forecast, but if these assumptions were to take place, that's what we would see.

Now if you look at the green triangles, these will write off in the second quarter of 2010.

Now, assuming the same caveats that all the other factors remain the same, it would imply slightly lower 2Q 2010 write-offs than what we saw in the fourth quarter.

But again, this is not a forecast; it's simply based on those assumptions.

You could also see on the right of this chart that bankruptcy filings have remained constant over the past three months.

So let me move to slide 20.

Now this provides a trend by month in the USCS managed lending credit metrics.

So write-offs in the fourth quarter were 7.5%.

If you look at it by month, in October, it was 7.8%; November, it was 7.6%; and December, it was 7.1% -- so, an improving trend.

Now, the 30-day past-due is -- that we signed for the quarter is really a month-end number for December; so that's at 3.7%.

But, again, we have a positive trend in that 30-day past-due at the end of October was 4.1%; end of November was 3.9%; and December was 3.7%.

So we're seeing improvement quarter-over-quarter and really a positive trend within the fourth quarter.

So write-off rates here are still very high on a historic basis and, therefore, they continue to have a negative impact on our P&L.

The forecast is for unemployment to stay at relatively high levels.

And if this were true, it would obviously have an impact on the ability of these credit metrics to improve in the future.

So we need to keep that in mind.

So moving to slide 21, this is lending provision compared to write-offs.

So the dark bars are provision by quarter and the light bars are write-off dollars by quarter.

So, the trend going back to the first quarter of '07, is that the amount of the dollars of provision have been higher than the dollar amounts of write-offs.

So the fourth quarter of '09 is really the first quarter where provision is not higher than the amount of write-offs, and that reflects the lower write-off rates and the improvements that we've seen in the 30-day past-due amounts.

Notwithstanding that, we remain cautious about the environment in that it still remains uncertain.

So let us go to slide 22 and look at our lending reserve coverage.

And here you can see that the US card services and worldwide reserve metrics, and even with provision in the fourth quarter lower than the write-off dollars that we saw on the prior slide, we think that we have an appropriate level of reserve coverage, given the inherent risk in our portfolio.

And you can see that most reserve coverage ratios are either similar or slightly higher than the amounts we had in the third quarter of this year.

So moving to slide 23.

These are our capital ratios compared to regulatory benchmarks.

You can see that the capital ratios are all either the same or slightly higher than the third quarter.

They're all above the well-capitalized current benchmarks.

Both the actuals for the fourth quarter and the pro formas for the fourth quarter, which assume that securitizations -- loans that were securitized came back onto the balance sheet as of the end of December.

And as you know, securitized loans are scheduled to come back onto the balance sheet in the first quarter of next year.

So, again, both on an actual and a pro forma basis, well above the current benchmarks.

And I would point out that our tier 1 common ratio is among the best in the industry.

If we move to slide 24, this is a liquidity snapshot.

And here, as in other quarters, you can see that liquidity continues at a level where we're holding excess cash and marketable securities at a sufficient level to cover the next 12 months of maturities.

So, cash, excess cash and securities are $26 billion and funding maturities over the next 12 months are $20 billion.

Moving to slide 25.

So this is a chart on our retail deposit program.

And as you can see, we continue to grow deposits.

We grew deposits by 2.4 billion in the third quarter.

If you look at the retail CDs that we raised in the fourth quarter, the average duration was 23 months and the average rate was 1.4%.

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

Given the difficult environment over the past year and a half, we have focused on the basics of staying liquid, staying profitable, and investing selectively for growth.

We leveraged the competitive strengths of our diversified business model to deliver on the first two of these of priorities, and have increasingly been shifting to a higher level of investments.

Over the last six months, improved credit trends, the benefits of our re-engineering initiatives, and more recently, somewhat better cardmember spending levels, enabled us to invest in initiatives designed to position the Company for growth over the moderate to long-term.

Areas of focus for these investments include our premium lending products like our Delta, British Airways, Starwood, and Costco co-brands; our more proactive charge card product and marketing efforts; merchant acceptance around the globe; GNS partner-related product launches and signing efforts; corporate service product offerings and expense management services; brand-building initiatives in the US and selected international markets; expanding our data and information management capabilities; and while still in the early stages of forming our enterprise growth unit, last week, we closed the acquisition of Revolution Money, our first initiative within this unit.

Now, certainly, it is too early to say that all the economic challenges are behind us; but we have seen some encouraging signs of progress over the last several months.

We expect the global economy to continue to recover gradually, and the resulting environment to be characterized by billings growth that is more modest than we experienced before the recession, as consumers and businesses remain cautious about their spending.

In addition, unemployment levels are forecasted to remain relatively high.

Without job creation, credit metrics can only improve so far from the still-relatively high current levels.

And lastly, increased regulation could further impact profitability.

In light of these challenges, it is more important than ever to invest in initiatives that will position American Express to sustain growth and continue to differentiate ourselves from our competitors.

As such, our priorities in 2010 are to drive growth, drive efficiency, and deliver superior service.

More specifically, while credit did turn positive for us in 2009, most companies, including us, drove 2009 earnings by reducing expenses.

In 2010 and beyond, it will be important for us to grow revenues as well as earnings.

At the same time, we plan to have a core structure that can help produce good returns and fuel investments, even in a slower growth environment.

And finally, service will be even more important as a differentiator during a time -- during these uncertain times when customers are looking for companies they can trust and rely on.

We believe American Express has the right products and services to be successful in this new economy.

We are confident because our business model comprises a diverse set of activities to span the payments industry; our brand is a unique asset that is recognized and respected around the globe; our premium cardmember base remains a key advantage in retaining [to] capacity to grow spending substantially as the economy improves.

Our global merchant network is positioned to capitalize on many future growth opportunities that are resident within the payments industry.

Our capital planning has anticipated the 2010 consolidation of off-balance sheet receivables, and we're focused on maintaining a capital funding and liquidity profile that is appropriate for these volatile times.

And lastly, we believe we have a set of winning strategies which position us to both capitalize on our core business opportunities today, and evolve toward the emerging payments opportunities of the future.

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

(Operator Instructions).

Craig Maurer, CLSA.

Yes, good evening.

I had a couple of questions.

The first was -- could you comment on what you've seen through January in terms of spending on a year-over-year basis?

Have the gains that you saw in the fourth quarter held through January?

While I know, seasonally, it's down month-on-month, but year-on-year, how does that look?

The year-over-year growth that we've seen for the first 20 days in January are comparable to what we saw (technical difficulties) [in the fourth quarter].

It's hard to hear you.

I don't know if that was my phone.

Okay.

So, what I said is the year-over-year growth that we've seen through the 20th of January is similar to what we saw in the fourth quarter.

Okay.

And in terms of the marketing spend, you know, if you look at the total cost of Marketing and Promotion, cardmember awards and cardmember services, you know as a percentage of revenue in the fourth quarter, it was much higher than it's been -- that I've seen at any other point in your history, basically.

You know, I was wondering if you can give us sort of your outlook for the marketing spend and the cardmember rewards?

In '010, should we expect to see marketing being materially higher?

What type of run rate should we expect?

And will there be additional marketing costs around the Olympics?

So, what I would say is when we get to a steady state, which I don't think is going to be 2010, but sometime beyond that, I would think marketing expenditures would be a similar percentage.

I don't know of any reason for that not to be the case.

Although I would say in a period where we are seeing improvements in billings and improvement in credit, we're going to be very focused on using those dollars really to invest for the medium to long-term.

In a very similar way that we did back in 2001 and 2002, we view this as really an opportunity to grow the business.

So we'll continue, I would think, in this year -- or in 2010 to invest heavily to support that future growth.

Okay.

And around the Olympics, will there be any kind of pull forward?

So, I don't see us doing anything beyond what we would normally do around that time.

I guess the other thing that I would want to point out, though, that investment spending is not just marketing and promotion.

You know when we invest to grow Global Commercial Services, most of those investments will not be on the M&P line.

The same is true in merchant services.

And it's certainly true to the extent we're investing in building capability.

So, Marketing and Promotion is a line that gives you an idea what we're doing investing, but you'll see our investments come through in other lines, including other operating expense.

And when you decide on that marketing budget, what's the timeframe you're looking at in terms of return, whether it's through billed business or whatever metric you're using to gauge that?

So, each type of investment has a different timeframe in terms of their return, but certainly, the investments we make are driven generally to look at the lifetime profitability of either bringing on a set of consumers, a small set of small businesses, or investing in sales force to enable our commercial services or our merchant business.

So it's really a lifetime payback that we're looking at for the investments that we make each year.

Okay.

Thanks, Dan.

Sanjay Sakhrani, KBW.

Good evening.

Just a quick question, Dan, on the net interest margin.

You mentioned we could expect it to -- the margin to kind of revert back to '06, '08 levels, I believe.

Just so I'm thinking about this correct, come February 22nd when the CARD Act is implemented, we should see a down draft in the margin, right?

Is there a rough estimate you could kind of help us think about, as far as the margin implications at that point in time?

So I think it will be a down draft that probably takes several quarters, because some aspects of the CARD Act come into effect in February; others come into effect later in the year.

And actually, by referring you back to '06 and '08, I was trying to give you an idea of where we might migrate to.

But it will be -- the impact of the CARD Act on yields will actually take place over a couple quarters.

Okay, because -- just so I understand it, so, come February 22nd, there would be people that go delinquent that you can't reprice for 105 days, right?

Correct.

Okay.

All right.

And then the other question I had just thought, it was on capital management.

Is there a point in time that we could start to see the share buyback program be implemented again?

And what would you need to see?

So I think one thing we would like to have a bit of sense on is just where regulators are going to be coming out, in terms of where they want to set capital levels.

Now, to the extent we get guidance of that sometime in the near-term, then that will be useful.

If it's going to take longer-term, then we're going to have to kind of pick a spot for ourselves and I would say we'll see what earnings are like.

I wouldn't say that share buybacks are in the imminent future; but at some point in the future, we'll have to make a decision about the level of capital we want to hold.

So we want to hold capital to kind of move it to the higher levels that we're expecting from a regulatory purpose.

We also want to support the growth in our business, but I think we also want to have the capacity to do bolt-on acquisitions, which are smaller acquisitions, to help achieve our strategy.

Okay, thank you very much.

Bob Napoli, Piper Jaffray.

I'd like to chew on a little bit more on the cardmember rewards line.

If you look at cardmember rewards over the long-term, as long as you've given us that data, it's generally been running around 30% -- 29%, 30% of the discount revenue jumped way up there this quarter.

Is there anything unusual in that items?

Is there -- you know, I see -- I mean, you market a lot of triple points and things like that.

Is there some special marketing in there?

Is -- or have you adjusted your marketing?

Are the redemptions higher?

What's going on there and is -- you know, the 32% the right number long-term or is the historical 29% more correct?

So I would say that there are a couple of small items in there that are unique to the quarter, but I would also say that as co-brands become more of a focus, they do have a higher rewards cost than membership rewards.

I'd also point out that in fourth quarter of last year, we bumped up our membership rewards reserve as a result of our contract with Delta.

So that fourth quarter adjustment was to true up our reserve, but on an ongoing basis, there's a higher cost related to that.

So I think it's a combination of a few small unique items in the quarter as well as some higher rewards costs that we'll see on a go-forward basis.

Okay.

I mean, obviously, you were marketing -- you're marketing a lot more than you were.

I mean, it's hard to turn on the TV and not see an Express commercial.

But now, historically, we would expect to see relatively quickly an effect on the card growth.

I mean, that historically, has been a very good measure of the effectiveness of your marketing, the card growth and the spending per card.

But your cards are still -- total cards outstanding are still declining.

What do you expect on -- in that regard and should we not be judging the success of your marketing by cards outstanding at this point?

Yes, so I think -- I have this observation.

Certainly, to the extent we're doing brand advertising, we think there's a real benefit to that.

And you've probably noticed that during the first two or three quarters of this year, we had that at a very low level, so we wanted to bring that back.

And I think there's some sustained level you want to have over time and there's a real benefit to that.

On the other hand, there's not a specific change in Cards In Force.

I guess the other point that I would make out -- the extent we are more focused on premium lending and charge card, you're going to not see the same kind of pop in Cards In Force when we bring up marketing that you would have seen if we were bringing in proprietary lending cards.

So, to acquire higher spenders, it costs a lot more dollars and you get fewer cards, but they have a good long-term benefit and they're very much in line with our strategy.

So you may see a different correlation in terms of the growth in Cards In Force to our marketing dollars.

We also are using a fair amount of our marketing dollars to invest in some of our other businesses, whether it be Global Commercial Services or our Merchant business.

So I think you just need to think of calibrate -- you're thinking a little bit based on the strategy that we're employing as we go forward here.

Okay.

Last question.

I just wonder if you can give a little bit of a comment on Revolution Money?

I mean, it seems -- most items -- and I haven't seen any clear financials for Revolution Money, but indications are that there was technology there, but not a lot of P&L income statement.

And it seems like you paid a lot relative to what you got initially.

Can you give us a little more color on your thoughts around Revolution Money?

And what are the key drivers?

And how can we get some feel for how your -- what kind of success you're having with that investment?

Okay.

So, let me just do an addendum to my prior answer, which I think is relevant.

So while we haven't seen, out of our marketing dollars, a pop in Cards In Force, we did see very good growth in billed business.

So that marketing and the stimulation we did paid off, and I think our growth in billed business is really differentiated from the competition.

So I think we are getting good returns on the increase in Marketing and Promotion that we did.

As it relates to Revolution Money, we only closed last week.

All right?

So it's a little early to talk about what's actually taking place.

But to your point, it is a capability in large measure that we were acquiring as opposed to a large revenue and income stream; but we think they have terrific capabilities that we can build upon.

And I think it's important for us to continue to look at alternative payments, because while they may not be large next quarter, over time, we think it's an area where we need to continue to invest, because over time, we do think it's going to be relevant in the payments market.

Thank you.

Bill Carcache (multiple speakers).

Hello, can you hear me?

Yes, I can.

Okay, great.

Can you talk a little bit -- if you could just help us dissect the billed business number a bit more?

I mean, we saw some evidence during the fourth quarter of some high-end retailers experiencing some stronger year-over-year sales growth versus some lower-end retailers.

Can you help us understand the extent to which the growth in billed business is really being driven by the affluent customer base versus lower spending customers?

Can you just give us some color on that?

Yes.

So I think, as we pointed out in the slides, the improvement was really across all our business lines, which I think is very positive.

And geographically, it was broad-based as well; so I think that's a positive as well.

I think Ed Gilligan at the Financial Community meeting is going to drill down on exactly where we saw some of the spending benefits; so, I think you'll get more details at that juncture.

But my sense is that by different spend levels of customers, we saw, again, a broad-based improvement in spending across all the categories.

As I said, I think Ed Gilligan will give more detail at the Financial Community meeting.

Okay.

And you also mentioned that you continue to see both your consumers and businesses kind of hold back a bit on spending; but is there any sign at all or you see any kind of early signs within corporate spending, of whether some of the scaling back that businesses had done on travel and things like that, where there may be some early signs of that kind of turning the corner a bit?

Yes.

So, you know, corporate card commercial services has historically functioned more of as a V.

It usually holds on longer in a slowdown, drops more sharply, and then comes up sharper than the rest of the business.

And, you know, you could see that on slide five, I think -- you could see it on slide four in terms of totality, and by business on slide five.

But again, this time, I think we're seeing the same thing.

I think commercial services came back sharper than the rest of the businesses.

As I pointed out, in December, their FX adjusted growth was actually 13%.

So you are seeing good improvement in the month of December in spending by corporations.

Okay.

And then finally, could you comment on the American Express Business Insights Group and on just developments there and what we can expect from that, in terms of your growth expectations going forward?

Yes, I think, as we talked about looking for new revenue sources to help drive revenues and profits, we think this is an area that has a lot of opportunity.

I think we actually launched it -- Bill Glenn did last week, with a presentation -- last week, last month, with a presentation.

But really, I think it's building on our closed loop.

It's building on our data management capabilities, in terms of providing insights to merchants, in terms of their marketing and other business decisions that they need to make.

So we actually think this is something that will be one of those new revenue sources which will help in the future growth of the Company.

Okay, thanks very much.

Meredith Whitney, Meredith Whitney Advisors.

Hi, Dan.

Hi, Ron.

My questions all relate to credit.

And I'm trying to figure the turn in credit, how and what your specific guidance on credit is.

So, given the fact that you said a couple of things -- that your credit metrics are clearly improving, but the persistent unemployment will weigh on that.

So how do you reconcile both?

So, do you need an improvement in -- a pickup in employment?

If employment worsens, what happens to credit?

Can you sort of map that out more?

And then a general question, which is, why do you think credit is improving with such a persistently high unemployment rate?

Is it burn-out?

What could lead to an improvement in credit or another leg down in credit, beyond unemployment?

And should we be just looking at initial claims?

Okay.

So, I think we have certainly outpaced the industry here in terms of credit performance over the last two quarters.

We think that is a result of actions that we have taken.

We have been very focused on enhancing our credit and collection practices, which are helping quite a bit.

So within that, because we are providing assistance to some customers and waiving some fees, we're seeing the impact of that in our yield numbers; but you're also seeing that, a benefit of that, within the metrics of write-offs and delinquencies.

We think that's a smaller part.

We really think it's the other credit and collection activities we have, which are having a larger impact.

The other significant thing that we have done is we are very focused on high balance accounts.

So, in the early part of this year where our write-off rate was really moving up and really moving from being best-in-class to being the middle-of-the-pack, a major factor that was affecting that is that the average write-off amount had grown, and we've been very focused to bring that down.

And we think that's having a real positive impact in the write-off rate in both the third quarter and the fourth quarter.

So I think we'll continue to be focused on that as we go forward.

So those are some of the things that we've done that I think has enabled us to distinguish ourselves from the industry.

And as I pointed out, if you follow the chart with the triangles, you know, give some insight about what's going to take place next year, but I do want to be very clear that what's going to happen longer-term -- and even what's going to happen in the first and second quarter of next year -- is going to be driven what takes place in the economy broadly, but particularly, in unemployment.

And you really do need, at some point, to have job creation here to really help credit metrics improve over a longer period and really get back to the historic levels that we've seen.

Okay.

If I could just ask a follow-up.

I forget which investor presentation it was; I think it was the summer of 2007 where you really honed in on limiting credit to certain states which were impacted the most by declines in housing.

What are the variables on credit that are the guide post for you making line decisions, et cetera, today?

So I think it's -- it is the combination of factors we've always looked at; but only the last 18 months, we've also been very focused on integrating additional information into our models to help us make better decisions; also, increasing the frequency with which we update the information in the models.

So, we're constantly striving to improve and enhance how we can identify people who are going to default in the future.

So it's really a -- it's an ongoing process that we think we've made good progress on recently and we'll continue to strive to make further progress on.

Now, next time there's a slowdown, whether housing is a big factor or not, we'll have to wait and see.

And the other thing I'd say is it's not reading all the factors exactly the same for every group of customers.

For charge card high spenders, there may be certain aspects that get higher rating than for customers that are, say, spend at a lower level.

So we actually have this refined by product and by spend level, as we constantly strive to enhance the accuracy of our predictions.

Okay.

Can I just follow-up with one last question?

I promise it's my last one.

I know you went through the number of transactions, but are you finding that a smaller group of your customers are spending more and using the card more?

Or is it broad-based within your entire customer base?

So we think it's broad-based, not only by segment, but also within consumer, we think it's broad-based across different spending levels as well; and so, broad-based geographically.

Okay.

Alright, thanks so much, Dan.

Jason Arnold, RBC Capital Markets.

Good afternoon, Dan.

Just a follow-up on Meredith's question.

On credit, do you believe that the more traditional correlations, then, between charge-offs and unemployment will be the trend we should expect here ahead, versus the continued divergence in trends?

Yes.

So -- and we've talked about correlations.

We've always talked about how there's a pretty tight correlation between GDP and billings.

But when you try to correlate credit and unemployment, historically, they've kind of moved in directionally, over time, the same direction.

The correlation has not been nearly as tight.

And I think if you went back to either '91 or 2001, the improvement in unemployment actually lagged the improvement in industry write-off rates by about three quarters.

So, it's -- there's a correlation, but it's not nearly as tight as we see in other areas.

Okay, great.

And then just, I guess, one quick follow-up.

Now that we've moved further through the downturn here and signs of stability in your business are more or less emerging here, I was wondering if you could give us a bit of an update on your outlook for return on equity?

I think the last guide was above 20%.

But maybe when we get into 2011, 2012, do you kind of have something in your mind to update us with?

So we've been holding off in setting new ROE targets until we've had a better sense of what regulatory requirements would be for capital levels.

And if we get that guidance within the next quarter or two, we'll quickly set our ROE target.

So I guess I'd also commit that even if we don't get that guidance, we'll make an assumption and come out with guidance by, say, the middle of the year.

Okay, terrific.

Thank you.

Mike Taiano, Sandler O'Neill.

Just looking at slide four.

A little surprised US consumer billed business wasn't a little stronger, but it looks like, through the course of the quarter, the gap between the reported number on the FX adjusted narrowed.

Was that driven more by the FX rate?

Or they -- a little bit of the strengthening in the dollar in December?

Or did the US consumer start to pick up more in December?

So I don't have a specific knowledge about what FX did in November versus December, although I would say it was coming in a little bit, so that was probably helping to close that gap somewhat.

And as I said before, I think we saw a greater strength in December -- greater strength than the average for the quarter.

So I think it was probably a combination of both.

Okay.

And the driver behind the big jump in growth in the GNS segment.

Was there anything specific behind that?

Well, I think GNS has really been strong throughout the last five or six quarters; has constantly performed better than the rest of the businesses, which I think reflects the fact that our partners see value in putting cards that run on our network out to their customers.

So I think this is probably a continuation of that.

It's also probably benefiting by the fact that we're putting new products out in the marketplace.

So a combination of all those activities are probably helping us.

Okay.

Thanks very much.

Chris Brendler, Stifel.

Just wondering if you could spend a little more time on the lending margins?

I noticed that you -- it was a little bit -- it was up a little bit in the quarter and you referenced the Cardmember Assistance Program.

I think you did some repricing in the quarter as well.

I would have thought with the charge-off rate coming down so significantly that you would have seen the Cardmember Assistance Program -- while it's still a drag, actually drag less on the margin in the fourth quarter.

And then you reference also the CARD Act, and I think what you're referencing there is just the inability to do default rate repricing without giving 45 days notice to customers.

I wasn't sure if you had any ability to quantify any of those impacts and just what do you think?

You know, you're giving a pretty broad range here for the margin '06 to '08.

I think it was a lot higher in '06 than it was in '08.

So, just give me a little more color on what you saw in the quarter.

I would think you'd see some upper pressure on the margins that didn't materialize this quarter.

I'm a little bit concerned that maybe default rate repricing was a bigger impact than I estimated?

Thanks.

Okay.

So, first of all, this is net yield, so write-offs are not part of this calculation.

This is the finance charge revenue that we're getting from customers, less our cost of funds.

So I guess there are a number of things that are taking place.

So, first, there was pricing that took place in the quarter, but it only impacted a portion of the quarter.

So the full effect of the pricing you'll see in the first quarter, we're only getting a piece of it in the fourth quarter.

So if you put pricing in place in November, you only get one month's worth of that benefit in the quarter.

The other things that were having an impact is the extent we are -- have programs that are providing assistance to cardmembers that have temporary liquidity issues.

We're forgiving interest, okay, so that's obviously having the impact of bringing yields down.

And the Credit CARD Act is negatively affecting it.

But it's, again, to the issue that you said -- it's really our inability to reprice immediately.

We actually have to give customers 45 days notice, so we're starting to -- we're seeing the impact of that in the quarter.

But the more significant impacts, as you're aware, of the Credit CARD Act, will come to us in the first and second quarter of next year.

So it's really a variety of things moving in here.

Now it's also being impacted by the fact that to the extent we are more focused on premium lending, some of those customers tend to act more like transactors.

And so that's going to reduce our revolve rate, which is also having an impact on yield.

So all of these things are happening at the same time.

Some are full quarter impacts, some are partial quarter impacts.

Now I guess the other thing that I'd say just in terms of the guidance I was giving, if you look at kind of the '06 to '08 timeframe on a managed basis, that averaged about 9%.

And that was really the direction and guidance I was looking to give.

Again, this is not a forecast, but, in terms of trying to be helpful, in terms of how you might think about it over the long-term, I think that's a pretty reasonable period to look at.

Okay, and one quick follow-up, if I may?

I didn't quite catch if you said anything about lending balance growth.

It's obviously turned around a little bit this quarter, seasonally, I'm sure.

But do you expect to grow the lending book in 2010?

So, I think you're right.

I mean, the sequential growth of $1.1 billion in the fourth quarter compared to the third was driven by seasonal spend and just higher spending levels year-over-year, which was positive.

As you can see from one of the slides, there really was a breakaway in terms of spending from the loan balance.

I think I went through the factors I thought were contributing to that, including just our strategy focused on premium lending.

So my sense is, over time, the correlation between loan balance and spending growth will probably come back more in-line; but it wouldn't surprise me if it took several quarters for that to actually take place.

Okay.

Thank you.

Don Fandetti, Citigroup.

Our understanding that the CARD Act, there's a clause to effectively look back at these rate increases from the issuers.

And I was just curious if this could have any impact and how do you think the Fed might look at that?

Will they just look at broadly all repricing?

Or would it just be the really high risk?

If there's any comments there.

Yes.

So I'm not aware that the law actually has a provision to do a look-back, but certainly, there have been conversations in different forums of people alluding to whether that should be something that's considered.

So we'll have to wait and see how that evolves over time.

But to my knowledge, there's no -- it's not in the law or in the regulations, but it's something that people are thinking is something that may be an aspect that should be considered.

Okay.

That's all I had.

Thank you.

John McDonald, Sanford Bernstein.

Hi, Dan.

Just one more question around the messaging, around the investment spend and trying to understand the ramp-up messaging.

So, is it fair to think of it as you stepped up the investment spend in the third quarter and the fourth quarter, as provision expense came down?

And perhaps at a new run rate, but the idea is it's going to go up further, kind of depending on the billed business recovery and credit -- further credit improvement?

I think we're at a run rate now that's higher, but you're still going to look to invest more?

Well, it's going to be very correlated to what takes place in billings and credit, right?

To the extent billings really moves up and credit improves, then we could well spend above the levels we had in fourth quarter; but if you look at fourth quarter compared to historical levels, it was at some pretty high levels.

So we're not committing we're going to go higher or committing that it's going to come down.

I think we're going to try and invest at a healthy rate in 2010, so that we can build momentum as we go into 2011.

But exactly where it comes out will be very calibrated by both billings and credit, as it unfolds in 2010.

Okay.

And then the decline in discount rate by about 3 basis points was partly due to seasonality and partly merchant mix shift.

Any more color on how much is seasonality versus the shift?

Yes, so it certainly was seasonality.

From the third quarter to the fourth quarter, it always drops because of holiday spending.

Now, in most quarters over the last year or two, we've been dropping about 1 basis point year-over-year.

This quarter, if you compare the fourth quarter of '09 to fourth quarter of '08, it dropped 2 basis points.

But we got to the point where there's some rounding involved, so it was actually like one-point-something that actually tipped us over to 2 basis points.

So I don't think there's anything unusual about the trend that's being driven by us, emphasizing everyday spend and moving into certain merchant categories where -- which are at the lower end of the discount rate scale.

As we look into next year, I mean, the primary driver will be kind of the mix of billed business and what's driving the billed business recovery?

Yes, it will continue to be the mix of business as well as our value recapture initiatives to increase rates for those categories, where we can clearly demonstrate we are providing increased value to the merchants.

Okay, thank you.

Scott Valentin, FBR Capital Markets.

Good evening.

Thanks for taking my question.

You mention the modification program.

I was just wondering -- you'll disclose absolute levels, but I was wondering about recidivism rates, if you've seen any type of -- once you've modified borrowers, do you see them falling delinquent again, if you have any type of information around that?

Right.

So we are very, very focused on anyone who has received assistance and we are closely tracking.

Now, we assume that some of those customers, once we help them out, will be able to stay in the franchise and be customers for a long time.

We also clearly recognize that some of those customers will not be able to comply with the agreement we have with them and will re-age out.

Now, they're performing very much in line or better than our expectations when we started the program.

You can be sure that we're tracking them closely and we, in fact, have set up special reserves for this group of customers, because they're clearly more risky than the broader set of customers.

So, they haven't gone into delinquency in some cases or write-off, but we have higher levels of reserves set against this group of customers.

Okay, that's helpful.

Thanks.

And then on the repricing initiatives, I mean, a lot of your peers are repricing as well, but have you noticed any attrition?

On the accounts that get repriced, you're seeing a higher level of attrition there?

You know, we -- you know, you would've thought because of the difficult economy that, particularly on our fee-based products, that you would've seen a real jump up in attrition, among credit attrition.

And we really haven't seen it.

It's really been very modest, which we think is a great sign for the franchise because people really see the value in the product, even though they're paying a fee.

So the answer is we haven't really seen it, either because of the economy, and we really haven't seen it due to repricing initiatives that we did either earlier in the year.

Certainly, the repricing we've done more recently, we wouldn't see it yet, but we did repricing earlier in the year and we really didn't see any notable uptick in attrition.

Okay, final question.

The flip side of that, marketing spend is up; I assume solicitations are up.

Are you seeing a better response rate to solicitations?

You know, I think -- you know, we have many different channels that we use from [Mel] to Internet to other methods.

So, I don't think we're seeing any more increase in response rates, but certainly, the response rates we have on our investments are such that they are good economic investments.

So as we think about marketing investments, over time -- you know, over time, we want to -- when we get to a more normal period, we want to get to marketing levels that are similar to what we had historically, when you had an economy that was more normal.

Thanks very much.

Bruce Harting, Barclays.

On your page 24, Dan, the maturities, will you -- can you just rank the relative cost of money now as securitizations mature?

Can you go back to that market?

You know, either based on a cost advantage?

Or would you probably replace -- you're showing here what your resources are, but are you more likely to fund any growth with deposits or securitizations?

And then can you just remind us where long-term unsecured debt costs are for you, if you've tried to go to market?

Thanks.

So we want to have a balance between unsecured, securitization, and deposits, over time.

We think it's prudent to have as diverse a set of sources as we can have.

When we get back to more normal markets and more normal spreads, I think we will probably move between those three categories based on whatever's the most cost-effective at that moment in time.

But I think we will always endeavor to have a substantial amount of funding coming out of all three of those.

We had a slide in, I think, the August Financial Community meeting, where we said, gee, if rates were the average that we've seen over the last, I think, three years -- including the very high rates that we have had recently -- and we had to replace all the debt that matured between now and 2012 at that rate, that it would increase our interest expense by, I think, either 120 million or 140 million; I don't remember exactly.

So it would be slightly higher, but certainly not dramatically higher than where we are.

But to your point, I think seeing how the unsecured markets and the securitization markets come back would be very important, in terms of the spread that we have to pay above benchmark.

But it's our intent to really use all three markets.

And certainly, recently, we've seen our CDS spreads come in pretty dramatically over the last several months.

So we'll see how long it takes to kind of get back to a more normal level, but we would plan to use all three funding sources.

And on page 23 where you show pro forma, what's your new allowance?

The allowance increased by more than the reduction in capital, correct?

I think we think that the increase in the reserve will be about 2.5 billion and have about a 1.7 billion impact in reducing equity -- approximately.

Okay, thanks.

Did you comment on -- just one last thing -- did you comment on the administration tax, if that applies to you?

Or is it just too early to say?

Yes, so, it's certainly early to say.

And we'll have to wait and see whether, in fact, ever it's passed by Congress or not.

But if it passed in the form that was described, where you take your assets and you subtract deposits, and you subtract Tier 1 capital, the amount we would have to pay based on the December 31 balance sheet, would be about 175 million on an annual basis.

You know, some people have put estimates out there that are lower than that, so you have to take into consideration bringing the securitized assets that are off-balance sheet onto balance sheet.

And that's a -- the 175 million is a pretax amount.

Okay.

Thank you.

Ken Bruce, Bank of America.

So, after this, we'll just take one more question.

Go ahead, Ken.

Good evening.

I slid under the wire.

Could you remind us on how you're thinking about reserve methodology?

Obviously, you had a release this quarter.

You look still very well-reserved relative to where credit is trending; but, at some point, I expect you'll need to normalize that.

Can you give us some sense as to how you're thinking about that, please?

Sure.

So we have a methodology that we constantly look at and look to refine periodically.

But basically, it's looking at historical information to help us form a view of the inherent risk in the overall portfolio.

Then we always step back and say, are there certain aspects of the portfolio where we may need a specific reserve?

And what I described before related to re-aged accounts is a perfect example of that.

We'll identify that and look at additional specific reserve.

And then we're also very mindful of changes in either our strategy or the environment that we want to factor in, in terms of setting reserves.

So, at this juncture, we still are concerned about the uncertainty in the environment and so we continue to be cautious in terms of how we set reserves.

But at the end of the day, we're looking to set reserves that reflect the inherent risk in the portfolio.

And, well, just as a follow-up, recognizing you don't want to give ROE we guidance, just based on uncertain capital, would you be willing to give us an ROA target?

So I think, as I said, I'm committed to, even if we don't get regulatory guidance, that by the middle of this year, we'll come out with guidance in terms of an ROE target.

(inaudible), Dan.

(multiple speakers) Okay, thank you.

All right.

Our final question will come from Bob Napoli with Piper Jaffray.

Please go ahead.

Thank you.

And I just want -- I mean, this is pretty basic -- sorry, last question -- but given the -- putting the loans back on the balance sheet and your [FAS-1] in the first quarter, if I think about the P&L effect, is it, I mean, as simple as it seems?

You put the loans on and you now are recognizing the interest income and expense?

I mean, it seems like it would be provisions within a declining credit loss environment that probably is accretive to your earnings.

I mean, you get -- no longer, obviously, get securitization income.

Right.

So your basic point is exactly right.

We would expect to have no difference in pretax earnings, but by bringing them back on, we'll be recognizing net interest income.

We'll be recognizing provision.

And so, really, we'd just be taking these and spreading what's now netted on securitization income and put them back on the natural line items.

But there's no change to the bottom line.

Just -- on late fees, I guess, that's one piece of that people are still waiting for and kind of guidance on what's a reasonable late fee?

Do you have any feel for what to expect out of Washington in that regard?

So in regard -- from Washington in regard -- I didn't hear the first part of that sentence.

The late fees.

What is a reasonable late fee guidance from the regulators?

So we really -- so the answer to that question is, no, we don't have any sense of whether we'll get any guidance or if we do, what it will be.

So they certainly have passed a fair amount of legislation already that we're working hard to enable through our systems.

And if they come out with future guidance, we'll deal with it when it comes.

But at this juncture, we don't have any sense of any kinds about late fees.

Do you have any feel for timing on when you will hear -- we will hear something?

At this junction, we really don't have any sense of what will come or of the timing of when it will come, or if it will come.

Okay.

And then the last thing, the charge you took on real estate this quarter --

Yes.

-- was how much?

$63 million.

Pretax?

Pretax, yes.

Okay.

Thank you.

Okay.

Alright, thanks, everybody, for joining the call and have a good evening.

Ladies and gentlemen, that does conclude our conference for today.

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