美國運通 (AXP) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the American Express fourth quarter 2013 earnings call.

(Operator Instructions)

As a reminder, this conference is being recorded. I'd now like to turn the conference to our host, Mr. Rick Petrino. Please go ahead.

Thanks and welcome. We appreciate everyone joining us for today's call.

The discussion contains certain forward-looking statements about the Company's future financial performance and business prospects which are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release and earnings supplement, which were filed in an 8-K report and in the Company's other reports already on file with the SEC.

The discussion today also contains certain non-GAAP financial measures. Information relating to comparable GAAP financial measures may be found in the fourth quarter 2013 earnings release, earnings supplement, and presentation slides as well as the earnings materials for prior periods that may be discussed. All of which are posted on our website at IR.AmericanExpress.com. We encourage you to review that information in conjunction with today's discussion.

Today's discussion will begin with Jeff Campbell, Executive Vice President and Chief Financial Officer, who will review some key points related to the quarter's earnings through the series of slides included with the earnings documents distributed. Once Jeff completes his remarks, we will move to a Q&A session. With that, let me turn the discussion over to Jeff.

Thanks, Rick, and good afternoon, everyone. I'm pleased to be here this afternoon to discuss the solid results across our businesses that we report today for both the fourth quarter and full year 2013. Our performance in the quarter reflected healthy billed business and hence revenue growth, a continuation of credit metrics being at historic lows, disciplined control of operating expenses, and as a result, solid earnings performance. Since this quarter does mark the end of the full year, I will be discussing our full-year results, which we are also pleased with because they help illustrate some important trends.

During the quarter, we made several significant announcements. In particular, around signing new GNS partnerships and reaching separate settlement agreements with our merchants and regulators.

In addition, we helped support Small Business Saturday for the fourth consecutive year. I will discuss some of these initiatives in more detail later in the call.

I would say that there is some complexity to understanding our financial results this quarter. While the merchant settlement is the most significant new item, we also have a number of previously disclosed items that make the year over year comparisons more complex, including last year's fourth quarter items, the sale of our publishing business at the beginning of October, and a few other specific items which I will walk you through as I discuss our results.

To begin with a summary of our Q4 results, you can see on slide 2 that FX adjusted billed business growth was 9%. Given our spend centric business model, this was then the primary driver of our FX adjusted revenue growth of 6%.

Both of these rates of growth are modestly above our full-year growth levels reflecting the uptick in the economy and our business that we saw as 2013 progressed. This level of revenue growth, combined with our continued strong operating expense controls this year, drove net income to $1.3 billion in the quarter. This was up sharply from the prior year, of course, due to the items we incurred in the fourth quarter of 2012.

Our strong capital position allowed us to continue our share repurchase efforts. Over the last four quarters, we have spent $4 billion buying back shares, which cumulatively resulted in our average shares outstanding declining by 4% versus the prior year.

To more meaningfully review the impact of these solid operating results and our share repurchase efforts on EPS, it's important to realize that year over year comparisons are impacted by the three items recorded during the fourth quarter of last year, as well as this year's merchant settlement. Regarding the settlement, which we announced in late December, it resulted in expenses that lowered fourth-quarter EPS this year by approximately $0.04. Adjusted for this merchant settlement this year and the three items from the prior year, adjusted EPS for the fourth quarter increased from $1.09 to $1.25.

These solid results helped bring ROE for the period -- for the period ending December 31 to 28%. Overall, we feel good about our performance in the quarter, especially considering the continued moderate pace of the economic recovery.

Turning now to the full-year results for 2013 on slide 3. For context, as we entered 2013, there were a number of questions about our ability to grow revenues and earnings per share in a slow growth environment. As you recall, billings and revenue growth had slowed over the second half of 2012, and there were concerns about the impact of tax increases and the macro economic environments on our Card Member base.

In fact, 2013 did turn out to be a year of only modest economic growth. While we are encouraged by the recent strong sequential increase seen in the US GDP growth rates, it is important to remember that the year over year increase in US GDP during the first three quarters of 2013 was just 1.3%, 1.6%, and 2%. It is this year over year increase that relates historically to our billed business growth rates.

Given this challenging economic environment, we were pleased to be able to generate FX adjusted billings growth of 8% over the full year and FX adjusted revenue growth of 5%. Importantly, both of these metrics exhibited improving trends over the second half of 2013.

Another key focus of our organization during 2013 was on disciplined control of our operating expenses. On our fourth-quarter earnings call last year, we disclosed our goal of growing operating expenses, excluding the Q4 2012 restructuring charge, at less than 3% annually during 2013 and 2014. We more than met this goal during 2013. This strong control over operating expenses has enabled us to fund greater investments to grow our business, add resources to meet our growing compliance demands, and to have increased financial flexibility in the face of a slow growth environment.

You will recall that at our financial community meeting in February of last year, we laid out several scenarios illustrating our ability to achieve our on average and over time earnings targets in a variety of economic environments. Given the slow growth GDP environment we experienced this year, our strong capital position, and disciplined control of operating expenses were particularly important contributors to our financial performance. We were able to drive full-year EPS of $4.88, which was 25% higher than last year.

Our EPS has now grown at a 13% compound annual growth rate since 2010, in line with our on average and over time target to grow earnings per share by 12% to 15%. Over the same multi-year time period, our revenue CAGR has been 6%. While below our on average and over time target of 8%, we generally feel positive about this performance given the slow growth economic environment.

I would also remind you that back in 2010, there were concerns about the growth potential of our existing card businesses, particularly in an environment with lower levels of consumer spending and borrowing. Since that time, however, our performance has given us greater confidence in the continued growth prospects of our card businesses.

Let's turn now to the more detailed trend starting with billed business on slide 4. Our billings growth rates remains healthy given the economy and improved slightly on a reported basis from 7% in Q3 to 8% in the current quarter. Billed business overall grew by 9% on an FX adjusted basis, which was consistent with the prior quarter.

The USCS segment, which constituted about half of worldwide billed business, saw growth increase from 8% during Q3 to 9% in Q4. Open small business volumes have been a particularly fast growing part of our US business and ended the year having achieved four consecutive quarters of double-digit growth. As many of you know, we will be featuring a discussion on our open business as one of the topics that our upcoming financial community meeting.

We were also pleased to see a modest uptick in growth rates in our GCS segment, from 7% to 8% on an FX adjusted basis. We continued to see particularly strong volumes in GNS, which grew by 16% year over year on an FX adjusted basis. GNS volume growth continues to be highest in the JAPA region, powered by strong growth in China and Japan.

Looking at billed business by geographic region on slide 5, consistent with our focus on expanding our business globally, total international volumes continued to grow at a faster pace than the total Company and were up 11% year over year on an FX adjusted basis. Billed business growth within the US region also improved from 8% to 9% during the current quarter. EMEA continues to be our slowest growth region, given the lower rates of economic growth within Europe.

Moving on to loans, the other key revenue driver, we continue to see steady growth in loan balances as shown on slide 6. Worldwide loans grew by 3% versus the prior year, up from 2% last quarter. Our growth rate in the US was 4%, which is up slightly from Q3 and continues to outpace the industry average.

Putting it all together now, the revenue slide you see on slide 7, the overall revenue growth was 5% on a reported basis and on an FX adjusted basis was 6%. Consistent with our spend centric model, this revenue growth was primarily driven by higher discount revenue from increased spending volumes. Secondarily, revenue growth was aided by net interest income increasing 11% versus the prior year, as we experienced lower funding costs year over year, along with the increase in average loan balances.

The sale of our publishing business depressed the growth rate of other revenue and impacted total revenue growth by approximately 1% during the fourth quarter. For this quarter, this impact on total revenue was largely offset by the greater amount of Card Member reimbursements recorded in the prior year.

Going forward, the loss of publishing revenue, in and of itself, will depress total revenue growth by a similar percentage point or a little less over each of the next three quarters. You see on slide 7 that the two biggest components of our revenues, discount revenue and net interest income, as well as total revenues, were all stronger in the fourth quarter than in the full year, reflecting the modest sequential strengthening we saw in the economy and our business.

Turning now to provision, where overall our credit metrics remain at all time low levels. Looking at the metrics highlighted on slide 8, you can see that worldwide lending write-off rates, which were already at historically low levels, declined further during the fourth quarter and remained best in class. The delinquency rates remained consistent with the prior quarter.

Now, as a reminder, our objective is not necessarily to have the lowest possible write-off rate but is instead, to achieve the best economics when we make investments. Therefore, at some point, we would expect that lending write-off rates will increase from today's historically low levels.

Slide 9 shows that our lending reserve coverage levels also remained relatively consistent with the prior quarter, after considering normal seasonal increase in loan balances. We believe that our coverage levels remain appropriate given the risk level inherent in the portfolio.

Finally, as you can see on slide 10, for the full year, provision increased by 6% as the benefits from reserve releases were smaller during 2013 than they were in 2012. While write-off rates have continued to improve and are at historic lows, the rate of improvement in 2013 was slower than what we experienced during the prior year. In the fourth quarter, provision was lower by 17% this year, which is somewhat out of pattern with the full-year results as we benefited from a modest reserve release in this year's Q4 versus a modest reserve build in the prior year Q4.

Turning now from the revenue side to the expense side on slide 11. The story gets a bit more complex because of the three items we recorded in Q4 2012 and the merchant settlement this quarter. Because of this, I will walk you through each individual line item and subsequent slides.

I would make the overall comment that a key to our 2013 results was maintaining disciplined control of our expenses, particularly within operating expenses. This allowed us to achieve solid financial results while continuing to invest for both our current and future customers.

The one item I would like to talk about while still on slide 11 is the tax rate. You see there our tax rate during the quarter was 34%, a bit higher than we had been trending and expecting. As we closed the year, the final geographic mix of where we generate income came in a little less favorable than we had been expecting and drove the higher rate for the quarter. This brought the full-year effective tax rate to 32.1%.

Let me now start the more detailed expense discussion with operating expenses since controlling operating expenses to make our business more efficient has been key to providing additional resources for growth initiatives and by any measure, our teams did a great job this year of more than meeting our ambitious operating expense goals. Slide 12 shows you some of the details of our operating expenses during both the quarter and the full year. And clearly, a number of individual lines here were impacted by specific items both this year and last.

So I won't take the time to go into all of those details but I do want to call out two items. First, other net expense in the quarter includes approximately $66 million of expenses related to the merchant settlement I discussed earlier in which we announced on December 19.

As part of the settlement, we agreed to pay reasonable attorney fees up to a maximum total of $75 million plus up to $4 million to notify merchants of the settlement terms. A small portion of these costs were accrued for in prior periods, resulting in a net impact of $66 million in the fourth quarter.

Second, I would note that the sale of our publishing business depressed operating expense growth by a little more than 1% in the quarter. So, putting it all together on slide 13, you see that excluding the Q4 2012 restructuring charge, full year 2013 adjusted operating expenses were flat versus the prior year and remained well below our commitment to grow operating costs at less than 3% annually during 2013. Looking ahead, we remain committed to achieving our goal of having operating expenses grow by less than 3% again during 2014.

So moving to rewards expense, a key source of value for our Card Members. After excluding the cost of the enhancements to the URR or ultimate redemption rate estimation process for US Card Members in the fourth quarter of 2012, adjusted rewards expense grew by 13% during the quarter, as illustrated on slide 14.

This 13% growth rate in adjusted rewards expense is somewhat higher than the volume growth in our MR and co-brand products to predominantly to two items: a benefit in the prior year due to a decline in the weighted average cost per point and an increase in the current year quarter due to an enhancement in the URR estimate process in our largest countries outside the US. With these enhancements, the global URR will remain at 94%.

As a reminder, loyalty and reward programs are one of our major competitive advantages. Based on their success, we have expanded them during the last few years to offer broader opportunities for Card Members to earn and redeem points.

Turning then to slide 14 and our marketing and promotion line, where a significant amount of our investments in growth are, you see expenses up 12% in Q4 as we took advantage of opportunities to invest in the business while still delivering solid EPS growth. We were pleased to be able to invest more in this area as the economy and the business strengthened as the year progressed. We continue to see many attractive opportunities in the marketplace, including those for new customer acquisitions.

During the fourth quarter, we were particularly pleased to support the fourth annual Small Business Saturday. Momentum for this event continues to grow, led by local businesses around the world. During the current year, we supported Small Business Saturday in six countries, including the launch of the event in Australia, Israel, and South Africa.

Importantly, this event helps us build relationships with small businesses across both our merchant network and our Card Member base. This is critical to both the continued strength we see with small business Card Members and our continual efforts to expand small business merchant coverage.

So more broadly, we believe that we continue to have a number of attractive investment opportunities across both our core businesses and from newer initiatives. These opportunities exist across our existing card business and these opportunities -- excuse me, across our existing card businesses include increasing our penetration in B2B, middle market and small business spending continuing to deepen our relationships among affluent customers, continuing to expand our reach to a broader segment of consumers, and expanding our merchant network particularly among smaller merchants.

While all of these areas represent sizable opportunities within the US market, we believe that the long-term potential of these opportunities is even greater internationally, where our relative share position today is still significantly lower than it is in the US. As I mentioned on last quarter's earnings call, we also target a portion of our investments for longer-term opportunities, including many initiatives in the digital space. Over the past several years, we have increasingly focused our efforts on two large initiatives: reloadable prepaid, or products that help you move and manage your money, as well as our loyalty partner rewards coalition program.

Both of these efforts continue to ramp up and we believe that they provide significant opportunities for growth. This growth, however, will occur over a longer period. Last, a common theme across all of these new initiatives is that they improve our ability to reach new customer segments and help make our brand more inclusive.

So, given the breadth and depth of opportunities that we have which are financially sound, one of the challenges we have is how to balance our investments with our performance against our on average and over time financial targets. As I mentioned earlier, you did see us increase our investment spending in the latter half of 2013, as the economy and our business improved.

Historically, this approach has led to fluctuations in our investment levels over time. For example, during 2010 and 2011, our operating and marketing expenses increased as a result of our strategy to reinvest a portion of the Visa MasterCard settlement gains and the benefits from improving credit performance back into growing the business.

We are completing our planning process for 2014 currently and will, as always, be thoughtful and prioritize which investments we will fund. Of relevance, here, are our plans to create a joint venture to accelerate the transformation of our global business travel division. As an update, the negotiations for the joint venture continue to advance as we had planned.

Our best estimate for a closing date remains the second quarter of 2014. Upon closing, it is expected that our partners will infuse a $700 million to $1 billion capital contribution into the new joint venture. American Express would contribute the assets of our business travel business.

As a result, we would expect to realize a meaningful P&L gain upon the close of the transaction. This could offer us some additional financial flexibility during 2014.

Turning now to capital. Our strong capital position and the sizable amount of new capital we generate through net income each quarter provides significant flexibility. This allows us to balance the capital needs in our businesses, our desire to maintain strong capital ratios, and the potential for significant capital returns to our shareholders.

The benefits of our strong capital position were on display all year, as we returned 81% of capital generated in the year to shareholders. We did this while modestly strengthening our already strong capital ratios year over year, as you can see on slide 16. As is usual, you do see our capital ratios decline slightly, sequentially during the fourth quarter due to the seasonal increase in our loan and receivable balances.

We did, of course, complete our submission for the 2014 CCAR process earlier this month and will expect to hear back from the Fed about our submission in March. Like the rest of the industry, we have worked hard to continue to strengthen aspects of our capital planning processes which support this critical effort. While it is too early to know how this process will play out for 2014, I will say, personally, that going through this planning process for the first time, has furthered my own confidence in the strength of our business model and capital structure.

Part of the strength has been our continuing efforts to evolve the mix of our funding sources, which you can see on slide 17. We have worked hard to improve the diversity of our funding sources by driving a significant increase in the contribution from deposits over the last several years. At this point, we believe our funding mix should be relatively stable going forward. Overall, our liquidity position remains strong and we continue to hold enough cash to cover our next 12 months of funding maturities.

Turning to other events of the last quarter, let me first make just a few more general comments on the two settlement announcements we made, the financial aspects of which I've already touched on. During the quarter, we announced that we agreed to settle two antitrust class actions filed by US merchants that challenged specific provisions in the Company's card acceptance agreements. The settlement agreement, if approved, will address certain merchant concerns while helping to ensure that American Express Card Members are treated fairly at point-of-sale.

We also expect it to limit the Company's exposure to future legal claims and ensure that any credit and charge surcharge on American Express Card transactions would be no more than the surcharge charged on competing credit charge card products. The settlement is presently under review by the court.

Some of the merchants that have cases pending against the Company have objected to the settlement. Any objections or concerns will be considered by the court as it determines whether to approve the settlement.

During the quarter, we also announced that we had reached settlements to resolve previously disclosed reviews of marketing and billing practices related to several discontinued products that were previously offered to Card Members. Marketing of the products included in these settlements was discontinued more than a year ago. Most of the Card Member reimbursements have already taken place, and most of the costs associated with those reimbursements, as well as the fines, were provided for in prior periods.

The regulatory environment has evolved significantly and has heightened the focus that all financial companies must have on their controls and processes. We take our regulatory obligations very seriously. As we have discussed, we continue to scrutinize and improve our card practices.

Regulators want companies to be clear, transparent, and fair to the customers, a goal that is very consistent with our own objective. As previously reported, American Express continues to conduct internal reviews designed to identify issues, correct them, and ensure that our products and practices meet a high standard of quality.

Before I conclude, I wanted to touch on one other item that has been getting a lot of attention, the recent data breach at Target. We continue to work closely with Target and law enforcement on the investigation, and we are closely monitoring the situation as it evolves. We have sophisticated monitoring systems and internal safeguards in place to protect Card Member accounts and to detect fraudulent activity.

We have the appropriate fraud controls in place on affected accounts and are continuing to take targeted actions as needed. We have seen minimal exposure thus far. The closed loop is a big advantage for us, especially in situations like this. Our relationships with Card Members and merchants represent one of the reasons why our fraud rates are the lowest in the industry.

So, in summary, coming back to our financial results, we feel very good about our overall performance in the current economic environment. During the quarter, we saw healthy billings growth and modest growth in loan balances which drove FX adjusted revenue growth of 6%. This revenue growth, combined with historically low credit metrics, disciplined control of operating expenses, and a strong capital position, allowed us to generate a healthy growth in EPS while still investing in the growth opportunities we see in the marketplace.

Looking forward, we continue to believe that the flexibility of our business model enables us to deliver significant value to our shareholders.

With that, I will turn the call back to the operator for your questions. I would ask that you limit yourself to one question with one follow-up, so that we can ensure we give as many people as possible the chance to participate. Operator?

(Operator Instructions)

Mark DeVries with Barclays.

So, with the stock having traded up a fair amount recently and also revenue growth still kind of below target, does this increase your interest at all in using excess capital to do acquisitions versus buying back stock here?

Well, I think when you look at the Company's history, we have selectively used acquisitions over the years when we see an opportunity to either enhance our capabilities, or build upon an existing strength of the Company in an area. Certainly, as we think about our long-term strategies, we are always looking for opportunities to do that. You know, all that said, when you think about our policies on using our capital, well, on average and over time we've said we will return about 50% of our capital to shareholders in the form of share repurchase and of use the other 50% for other growth initiatives or acquisitions.

Now, acquisitions are the kinds of things that you can't really predict. They -- and you really need to be very thoughtful about when you find the right opportunity. When we don't have those opportunities, we are very committed to returning capital to shareholders and that's what you saw us do in 2013. And so, when you think about the future, it's very hard to predict. I think our commitment is to be thoughtful about anything we do on the acquisition side and be very consistent in returning capital to shareholders when there are not opportunities that we think are great opportunities on the acquisition side.

Okay. Got it. Then, just a follow-up. I was hoping I could get you to quantify what you meant by meaningful P&L gain from the closing of the JV and comment on whether you included that in your capital plan submission?

So, two separate questions there. The size of the gain, I will tell you, beyond saying it will be a material gain, there are still so many moving pieces as we work through the last part of this, that I'm probably not comfortable giving you a number. I would point out that if you think about the math, it's pretty simple if the other partner puts in $700 million to $1 billion for 50% ownership and we contribute our assets, that will define the value, if you will, of what the joint venture will be worth. Then, what gain will drop out will be a function of what is on our books as we contribute business travel enterprise to the joint venture. So, it will be a material gain. I can't really give you a range today.

As we thought about our CCAR submission, what I would say to you is that what we convinced ourselves of and made a point of to the Fed in the submission, is that in any circumstance, even though there is still a range of outcomes here, we would see that the transaction will be accretive or positive to our capital ratios. So, while we can't quantify it, it's all upside and then we built our CCAR submission on an assumption that it would be neutral to positive. But we didn't, the way these things work, want to build a share repurchase plan based on the certainty that it would happen.

Got it. Thank you.

Sanjay Sakhrani with KBW.

Following up on that last comment, I guess when we think about your CCAR submission, are you anticipating keeping -- targeting a flat capital ratio and basically paying out consistent with what you did in 2013? Could you have built in a contingency that upon the sale, if it were to happen, you would use that excess capital towards capital management activities?

I guess, secondly, just on the tax rate. Could you just tell us how we should think about the levels going forward? Thank you.

Yes. So, on CCAR, I would say we certainly did not build in a contingency. I don't think that really fits with the way the CCAR process has evolved thus far as run by the Fed. More broadly, when we think about our CCAR submission, we clearly do a tremendous amount of work internally and have a tremendous amount of discussion and debate amongst the Management team and with our Board of Directors. It's really all aimed at trying to balance the views of our regulators, the views of our shareholders, and our own views about the strength of our capital structure and our future performance.

You know, I think that leads you to what we submitted and I don't want to get into the details of what we submitted. But, I think our history would show that we are pretty committed to consistently being shareholder friendly. We believe that our capital structure is strong and within that set of thoughts, we submitted what we thought was a very balanced submission and we will see how it goes.

On the tax rate, geographic mix does vary a little bit. If you look over the last few years, our tax rate has consistently been in the low 30%s but it's varied a little bit between about 30% to 32% on a full annual basis. We don't necessarily see anything that we learned this year that suggests we will be outside that historical range. Beyond that, it's always a little hard to predict exactly what will happen in terms of the mix and other items next year.

All right. Great. Thank you.

Ken Bruce with Bank of America Merrill Lynch.

Could you spend a little time and maybe discuss some of the seasonal factors that impact the discount rate? You've had several fourth quarters where you had a significant reduction in discount rate. It tends to snap back in the first quarter. Can you just remind us what those seasonal factors are? If you can quantify them, that would be helpful, as well.

Yes. It's probably tough to specifically quantify but the basic trend is pretty simple if you think about the fourth quarter. You have a little spurt upwards in retail spend and a little decline in some of the more business oriented spend. That mix shift is quite consistent each year and drives the discount rate down very, very modestly and that's why you see it pop back up in Q1.

Are there any other just either pricing or deal related factors that are more first quarter seasonal or fourth quarter seasonal that impact that?

No. It's really just simple mix shift.

Lastly, you had mentioned that you are going to balance out, essentially, the gain that may be taken from the sale of the business travel. I just want to make sure I understand this right. So basically, you are going to look to keep your investments at an elevated level in terms of just driving future growth, but you are possibly going to have some of that fall the bottom line. Is that the way to think about the balancing act that you've got to look at there?

Well, yes. I want to be a little careful because this is a potential joint venture. I think the point I was trying to make in my prepared remarks is we have a long track record of being very thoughtful about how we balance our on average and over time financial targets with steadily investing in the many growth opportunities that we see.

It is certainly possible that as we get into 2013 and as we -- excuse me, 2014 and as we execute on the business travel joint venture, you may see an elevated level of investments depending on how all the final economics work out. We will be, as we always are, thoughtful about making those investments in things that are going to produce very good returns for our shareholders and we'll be very transparent about what we're doing and why.

Good. Thank you.

Craig Maurer with CLSA.

A couple questions. First, the Target breach. Do you think this is a potential accelerator to EMV adoption and could you see regulatory involvement in pushing that along?

Well, I think it's early for anyone to know exactly what all of the impacts of the Target breach will be. Although, there's obviously already a line of regulators and other oversight authorities who have expressed interest in understanding what's going on. I think from our perspective, we have a tremendous dedication to the security of everything that goes on between our merchants and our Card Members. We have the lowest fraud rates in the industry. Our closed loop gives us some real advantages here in helping to manage things.

There are many things we can do with our merchant partners, frankly, that help lower fraud rates. Moving towards new technologies like EMV is one of those things. But frankly, there are many others and they all have different costs and different trade-offs. Certainly, it has long been our goal to work ever more closely with our merchant partners to lower rates of fraud. We think that this may spur greater interest in doing that. The exact form it takes, I think, is probably anyone's guess at this point.

Secondly, thinking about the Card Member services expense line. It's been in the press that the American Airlines lounge relationship has left American Express and I was wondering if we are going to see any type of either adjustment lower for that for the end of that relationship, or a ratchet up in spending to account for replacing that service, whether that's through Centurion Lounge construction or other things?

Well, I think we probably start by thinking about this from the customer or Card Member's perspective, and we have a long track record of doing lots of things that make all of our products valuable propositions for the customer. In the specific case of the Platinum Card, that is a card really targeted at people who travel a lot. There is a wide range of benefits that people get from the Platinum Card. Including, I would point out, even post -- once the American Airlines announcement goes into effect, which I believe is March, we will have access to three different sets of lounges, Delta, as a well as two others, Priority Pass and Airspace.

We have a variety of credits that we offer to customers on a cost of global entry and other airline fees. You are correct that we are experimenting with building our own lounges and they've met quite a rousing reception thus far in the two that we've opened in Las Vegas and Dallas and we've announced plans already to open a couple others at LaGuardia in New York and in San Francisco.

So, we see, and we also feel that we remain very competitive. If you think about it, with consolidation in the airline industry, you know, and I would remind you that as someone who was the CFO of American Airlines 12 years ago, there were a lot more airlines when I was the CFO there. As the airlines have consolidated, you are really left today, with no card is going to give you access to any broader set of lounges than what our Platinum Card does. That's sort of what airline consolidation has done.

So, we feel very good about the customer proposition. We think we have a long track record of being innovative about how we continually evolve that proposition so it is a great value to customers. That is -- that will drive all of our thinking. Ultimately, yes, that will fall into our P&L and have an impact on the Card Member services line. But, frankly, the best way to think about that is, I would not expect this to have any material impact one way or the other as we continually find ways to provide value to our customers.

Thank you.

James Friedman with SIG.

I wanted to ask about an update on the Wells and US Bank partnership. Jeff, how should we think about sizing that in the year ahead, in terms of cards in force?

Well, so, we are very excited about both the Wells Fargo and US Bank relationships. We see it as a really great commentary on the many things we can bring to our partners in these kinds of relationships. Now, it is a long and complex thing for large institutions to launch new products. The first thing I do want to point out, while Wells has begun to launch a few small tests in a few small test markets, these deals will actually take several years to fully roll out and reach some level of maturity.

We are clearly very excited about the longer-term potential of both of these partnerships and we think for both of those institutions, we can really help them achieve many of the business goals they have and further their penetration, particularly amongst their own customer bases and help them grow their card businesses to be more commensurate, frankly, with the broader size of those two institutions. But, this will play out over a longer time period and so, I probably don't want to size it beyond those general comments.

Okay. Then, if I could follow-up on with regard to Serve and Bluebird, if you could talk in general terms about what we should expect with the revenue mix between fee and transaction revenue over time? How does the Company think about the revenue generation from those products?

Well, clearly, on the prepaid product, you have both a range of fee revenue, although I would point out to you that we have worked very hard going back to -- in some ways my comments about the Platinum Card -- we have worked very hard to start with the customer proposition and I think you would find that we have two of the lowest fee products in the market with the widest range of functionality and features for the consumer. That's exactly where we want to be on the continuum here.

When you think about the economics, you have a range of both revenues from fees as well as, of course, the point of sale or discount revenue. You also have to think about it in the broader context of the family of products and the many different customer segments that American Express targets and reaches. So, we look at all of those things as we look at the economic model for Serve and for Bluebird. We are still in the early stages. I would point out to we just we just relaunched the Serve product, for example, a few months ago. But, we are encouraged by the early signs and we think this is a market that over the years will grow to be a very significant market.

Thank you so much.

Bill Carcache with Nomura Securities.

For my first question, I was hoping to revisit the points that were raised regarding the closing of the JV. Just to put bounds around the potential magnitude of a gain, if hypothetically there was a zero book value to the assets on AmEx's books, then since this is a 50/50 JV and the partner's contribution is valued at somewhere between $700 million to $1 billion, then presumably AmEx's contribution would be valued at the same level. So at zero book value, then the maximum theoretical gain would be between $700 million to $1 billion.

And then I guess if we looked at it in terms of let's say the book value was not zero but if the book value was $500 million, then would that suggest the maximum gain is $200 million to $500 million? And I thinking about that the right way?

Yes. You are thinking about it exactly the right way. The two things I would remind you about are, these kinds of quite complex transactions do not come without a tremendous amount of effort and cost by both internal and external resources. And then I'd also remind you that our business travel business is a highly global business which produces a very complex structure and will produce a very complex tax outcome, which is part of what we are still working through. But, with those two additions, yes, it really is as simple as what you just took us through.

Great. Thank you. And then for my follow-up question, if I may, it has two parts. The first part on revenues, the second part on expenses. On the revenue part, I was hoping that you could touch on the 4.5 times multiplier effect that AmEx has historically enjoyed relative to GDP and billings growth, relative to that relationship. Is that something you still believe in? In other words, I am just wondering if there is any reason to believe that that 4.5 times multiplier effect would continue to hold?

And then finally, on the expense portion of that, it was good to hear you guys reaffirm your commitment to keeping the operating expense growth below 3%. I guess, separate from that, was wondering -- your expense ratio, I believe, was at 70% this quarter. Should we still expect that ratio to continue to work its way down towards the more normal 2007 levels that you guys have talked about of 67%?

So, on the 4.5, the interesting thing, if you look actually at the data we have this year -- we don't have GDP data, of course, for Q4. The 4.5 historical relationship still seems like a pretty good metric when you look at the most recent quarters. Just to make sure everyone on the call is clear, that is applying that 4.5 ratio to year-over-year real GDP. Had to train myself a little bit since I joined Americans Express six months ago, much of the media talks about sequential rates of GDP growth, but what we are talking is the year-over-year number. I would say, we are not saying -- we are not necessarily actually trying to make any commentary on correlation but we are saying, when you just look at the math, that historical relationship has existed.

To go to the operating expense ratio, you are right. I think it's for the full year of 2013. We ended at 70%. I believe we were at 71% last year if you exclude the restructuring and other charges. You know, the point I would make is we are very committed to the operating expense goals that we have laid out very publicly for over a year now. And that is keeping our operating expense growth in 2014 to less than 3%, as we did in 2013.

Beyond that, I would say we want to be a little cautious about driving to other expense ratios because what we are always trying to do is meet our bottom line on average over time targets, particularly around EPS, while still being really thoughtful about how we can most productively and with the highest returns, invest in growth opportunities for our shareholders. Those growth opportunities come in different forms.

Sometimes, it takes just traditional advertising and promotional spend. Other times, it means hiring salespeople who run through operating expense and you get different impacts depending on which ratio you want to manage. So, I would say our real commitment is to working towards continuing to meet our on average and over time bottom line targets and for 2014, meeting that operating expense target.

Thank you.

Chris Donat with Sandler O'Neill.

I wanted to just explore one other point on the JV and I respect the complexity here. But trying to understand the cost basis. Is it safe to think about this as parts of the cost basis have really been in place for decades? So, it would come at a pretty low book value, but other parts like newer technology are much more modern? Is that sort of wide parameters for thinking about it?

I will tell you, the complexity of this is great because -- you are correct. There are some parts of this business that are quite old. I would also tell you, they are very, very intertwined because these -- for more of our long history in the travel business, run it in a pretty integrated fashion with other parts of our Company that we will retain. I'd remind you that over the years we have done a number of acquisitions, which adds complexity. It is a highly global business.

So, maybe this goes a little bit to the point I made in response to the earlier question about there are deal costs here or transaction costs and part of them go to just sorting through how do we really cleanly create a separate entity and how do we make sure that we understand all of the financial and legal and tax implications. I will stop there because I don't want to sound overly apologetic. For all of those reasons, it's just difficult to give you a better estimate at this point.

Understood. Trying to appreciate what all is involved here. Then, to shift gears on to the settlement announced on December 19. I was a little surprised that the word surcharge appeared as frequently as it did in the summary of the terms. Is the right way to look at this as sort of an abundance of legal caution for an outcome in the United States that has more surcharging? Or is this saying that we are going to be in a world where surcharging is more common? I'm just trying to put this in the right context.

Well, I certainly would quickly say we do not expect the outcome you had at the end of your statement there, so let me step back for a minute and make a few points. I might almost start with -- look, we are out there every single day working to build relationships with our merchant partners and we are really all about helping them grow their businesses. We are not about being in litigation with them.

So, part of what we are trying to do here is find a way to put this litigation behind us and begin to work more productively with all of our merchant partners. What we get out of the agreement is a clear commitment that our Card Members will be treated fairly, relative to other credit and charge card customers of any other institution. That is very important to us. I think there's tremendous value there.

We also believe, and we are long on public record about this, that surcharging is a very consumer and customer unfriendly practice. I'd remind you that surcharging is outlawed in a number of states in the US. I'd also remind you that there are many countries all around the globe, of course, where we do business, which have many different regulatory regimes, and in those where surcharging has been allowed, it has not become a rampant practice, we think because merchants recognize that it's just not a customer friendly practice.

So, when all is said and done, we thought this settlement was a good thing for our shareholders, was a good thing for our merchant partners, and allows us to get back to running the business and building relationships.

Got it. Thank you.

Don Fandetti with Citi.

Jeff, you had mentioned in your commentary about China benefiting your GNS business. I was just curious if that's just normal growth or if you are gaining market share? It would seem like there could be a good opportunity to sign up with other banks. I was wondering if you could talk a little bit about that and just confirm if the economics are generally the same from region to region on GNS.

Yes. Well, I do think it is important to be very clear about what I said about China. So, our China growth in billings has been tremendous and has been a significant, though not the only, part of why you see particularly high growth rates when we break out billed business for you either by segment, because it's in the GNS segment, or by region, where you see it in the JAPA region. We are very pleased by that billings growth.

But, I would remind you that in China, as you would really see for all foreign payments players, today, we earn very little revenue on the domestic spend within China, and then we do much better on what we would call the outbound spend. That's just due to the regulatory environment in China.

So longer term, we think it's really important that we establish as large a presence as we can in China. We have a number of different business things that we're doing in China, one of which is reflected in the great growth in billed business that you see. I just want to be a little cautious in saying that that billed business does not today generate particularly material amounts of revenue or earnings.

I understand that. I was just curious if on your cross-border out of China, you know, if you feel like there is room to sign up further banks to grow that business. Are the economics similar to what you would see in another region, even though knowing it's a small contribution to revenue?

Well, we are continually exploring different opportunities in China. I certainly don't want to get into exactly who we are talking to and what our strategies are in China. Let me just say that we see it as a very exciting long-term market. We think our brand carries into China very well. The billing growth that you are seeing demonstrates that and we think that is creating a number of interesting opportunities for us. But I really don't want to comment beyond that.

Okay. Thanks.

We probably have time for about one more question, operator.

Bob Napoli with William Blair.

Thank you, and good afternoon. The spending growth accelerated nicely in the US in the fourth quarter. A small acceleration but important.

I was wondering if you could give a little more color on that. If the online spending growth, which I think is about 20% of your spend, if that -- there was an outsized acceleration in online spend? Then, just related to that, I mean, you seem to think that the economy was helpful. What is American Express' view on the economy going into 2014? Thank you.

Well, so, let me maybe answer those in reverse. Certainly, in terms of the economy, we don't profess to have any greater insights. Our business is not necessarily a leading indicator.

So, I would tell you we build our internal plans around a consensus economist forecast of what GDP in the US and many other markets around the globe is going to be. I think we are pretty transparent about our sensitivity to what economic growth actually ends up to be. So, we hope that it turns out to be, frankly, as strong as some of the consensing economists are saying.

When you look at Q4, certainly, like all payment forms, we see tremendously high growth rates in online spend. We are not going to provide today any specific numbers about Q4. I would just make the obvious point that like other players, the growth rates in online spend are quite high. It's still remains a more modest piece of the total.

I think the most important thing, though, for us, as we think about trends and what we saw over the course of 2013, does come back to the point I made earlier, that we are pleased by the fact that when you look at the back half of the year, you saw an acceleration across billings and across revenues versus what you saw in the first half. So, we think that's a good trend as we head into 2014, whatever the economic environment may be.

Great. Thank you.

So, I'd like to thank you all for your time and operator, I think we are done. Thanks for your interest in American Express.

Thank you. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may disconnect.