美國運通 (AXP) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the American Express fourth quarter 2014 earnings call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions and instructions will be given at that time.

(Operator Instructions).

As a reminder, this conference is being recorded. I'll now turn the conference over to your host, Rick Petrino. Please go ahead, sir.

Thank you. Welcome and we appreciate everyone joining us for today's call. The discussion today 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 2014 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 CFO, 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. Good afternoon, everyone. Happy to be here to discuss the results that we reported today for both the fourth quarter and full year 2014. We are pleased to see both our fourth quarter and full year EPS growth rates at 15% and 14% respectively, within our on-average and over-time targets.

This solid performance reflected familiar themes across the entire year: higher spending by our card members, modest acceleration in US loan growth, credit indicators at or near historical lows, strong cost controls and a healthy balance sheet that enabled us to return a substantial amount of capital to shareholders in the form of repurchases over the past year. There was some complexity to our results this quarter and year as we took advantage of the Q4 gain on the sale of our investment in Concur Technologies and the Q2 gain on the creation of the Business Travel joint venture to fund incremental initiatives to position the Company for the long term.

This quarter these initiatives included a restructuring, incremental investments in growth initiatives, and an upfront cost related to the renewal of our relationship with Delta Air Lines. Given the increasingly competitive environment for co-brand partnerships, we are excited to have extended our relationship with Delta for the long term. More broadly, we believe all of these incremental initiatives will provide flexibility as we deal proactively with the global, economic, competitive and regulatory environment that continues to be uncertain and rapidly changing.

As I begin with the financial summary on page 2 of the slides, I'll discuss both the quarter and full year results as we believe this helps highlight some of the key performance trends and challenges we face as we enter 2015. Our reported billings growth was 6% during the fourth quarter, but 8% on an FX adjusted basis as we, like many other global companies, have a significant negative impact on our growth rates this quarter from the strengthening US dollar.

For the year, we exceeded $1 trillion of spending on our network for the first time, with billed business up 9% versus last year on an FX adjusted basis. As you can see, we exited the year slightly below our full year FX adjusted growth rate as we did see a modest deceleration in billings growth during the fourth quarter. I'll provide more details on our Q4 billings performance in a few minutes, though clearly the sharp drop in gas prices and soft December retail sales for the industry had an impact on our results.

During the quarter, adjusted for the Concur gain, which is reported in revenue and for the Business Travel revenues in the prior year, adjusted revenue growth was 3% to 5% when you further adjust for FX. The FX adjusted growth rate is consistent with our full year performance, although I'd note that the drag from FX on our revenue and earnings increased over the course of 2014 due to the strengthening of the dollar. Pretax income grew 12% during the quarter and 14% for the year, in part benefiting from our continued disciplined control of operating expenses.

Net income grew more slowly at 11% for the quarter and 10% for the year. We have seen a higher tax rate throughout the course of the year and the tax rate in the fourth quarter of 35% was a bit above the full year level and above what we might expect going forward. Helping us again this year has been our share repurchase activity. Over the last four quarters we have repurchased $4.4 billion of common shares, which has reduced our average shares outstanding by 4% versus the prior year.

Add it all up and during 2014 we delivered fourth quarter EPS of $1.39 and full year EPS of $5.56, which were up 15% and 14% respectively versus the prior year and were within our on-average and over-time target. We were able to generate these earnings with revenue growth that was solid, given the uncertain global economic environment, disciplined expense control and the benefits of our strong capital position. These results also brought our return on equity for the period ending December 31 to 29%, well above our on-average and over-time target of 25%.

Let's now move on to a detailed review of our Q4 results, beginning with the impact of the Concur gain and related incremental initiatives. As you recall, we entered into an operating agreement and made a strategic investment in Concur back in 2008. The partnership has created significant value for both our customers and shareholders. During December, SAP acquired 100% of Concur including our entire investment, triggering a pre-tax gain of $719 million, in line with our previous estimates.

Going forward, our operating agreements with Concur are continuing and we look forward to a continuing partnership with both SAP and Concur. In the quarter, consistent with our previously announced expectations, we took advantage of the gain to fund initiatives that included a restructuring and upfront costs related to our decision to accelerate the renewal of our relationship with Delta and incremental investments in growth initiatives. Given the rapid changes in our industry and the sizable set of economically attractive growth opportunities that our Company has, we believe that these were the right long-term decisions for shareholders.

Starting with the restructuring charge, the actions we are taking will impact over 4,000 people at a cost of $313 million in the quarter. Total employee headcount will decline by a smaller amount as certain of those reductions will be partially offset by jobs created elsewhere in the Company. The actions we are taking largely represent a continuation of our strategy to further increase the overall efficiency of our organization. Our business and industry continue to be transformed by technology, which is increasingly becoming more powerful and less expensive.

Technology is also changing the way our merchants and card members want to interact with us and has created new channels of communication that have increased overall card member satisfaction. As a result of these changes, we have the need and the opportunity to continuously evolve our organization and cost structure, giving us the ability to maintain tight control of operating expenses while still investing for growth. We also used a portion of the Concur gain in conjunction with the renewal of our relationship with Delta Air Lines.

We are excited about the new agreement with Delta, particularly given the increasingly competitive environment for co-brands. We decided to accelerate the Delta renewal as we saw an attractive opportunity to extend a long-term relationship with a key partner. Our new agreement had an upfront of cost of approximately $109 million in Q4 related to the new contract terms around membership rewards including a small impact related to a previously announced cap on point transfers into Delta SkyMiles from membership rewards.

This cap was removed as part of our new agreement, which we believe is good news for our card members. As a reminder, we took a similar upfront charge back in 2008 when we last renewed our partnership with Delta. More generally, often when long-term co-branded partnerships are renewed, the new agreement will reflect shifts in market economics that have evolved over many years.

All things being equal, our renewed co-branded agreement will often provide us with lower economics initially than the prior agreement and will be structured to incent growth and generate additional revenues for both parties over time. The magnitude of this reset can be significant depending on the size of each partnership. Our agreement with Delta is no exception to these market realities. All told, we feel very positive about the potential of the renewed relationship to generate benefits over the longer term.

However, when we think about our near-term outlook, we will need to take into account the impact of the new agreement. Looking at the entire landscape for co-brand products, while the competitive environment has become more intense, we continue to see attractive opportunities. We've been very disciplined and selective in the partners we work with and have focused on the relationships that can offer the best value, the best growth potential, and the best returns over time. In this context, we were also pleased to recently renew our long-term relationship with Starwood.

As with Delta, we believe that this relationship provides attractive value for card members and opportunities for growth going forward. Coming back now to how we leveraged the Concur gain during the quarter, on slide 3 you see that we also made incremental investments in the diverse set of growth opportunities within our Company. These investments were primarily, though not entirely, in marketing and promotion, and were focused on acquisition activities across the strong suite of products we offer to consumers, small businesses and corporations around the world.

I'd remind you that while co-brands are one important component of our business model, we believe that the greater breadth and global nature of our product set provides a significant competitive advantage. Going to the numbers, while there is some subjectivity in determining the level of incremental investments that we made as a result of the Concur gain, it was a significant amount in the quarter, leaving a net gain from Concur of approximately $0.05 to $0.06.

Thinking about our overall results, [from] another way it did clearly have a negative foreign exchange impact from the strengthening US dollar, as well as a slightly higher tax rate in the quarter. Let's turn now to a more detailed view of quarterly performance metrics, starting with billed business on slide 4. During the fourth quarter, billed business growth slowed sequentially from 9% to 6% on a reported basis. The decline was impacted by the recent strengthening of the US dollar as FX adjusted billings grew by 8% during the fourth quarter.

Looking at the results by segment, you can see that growth in our US consumer and small business segments slowed sequentially from 9% to 8% in Q4. The sequential decline was influenced by the large drop in gas prices and relatively soft retail sales industry-wide during the month of December. GNS continues to be our strongest performing segment with FX adjusted growth of 15% during the quarter. And while FX adjusted growth in ICS slowed to 3% during the quarter, we saw very different performance trends by region as you can see by moving to slide 5.

Here you can see that billings in our LACC region dropped more significantly during the fourth quarter due to a decline in spend at Costco Canada. While American Express cards were still accepted at Costco warehouses throughout Canada during the quarter, we began to see billings decline after card acceptance was expanded to include other networks on October 1. I would remind you that beginning January 1, 2015, American Express cards were no longer accepted in Costco warehouses in Canada, which we expect will drive billings growth lower during 2015.

In contrast to the LACC experience, we saw continued improvement in our EMEA billings, which showed their strongest FX adjusted growth since Q2 2011. The increase was driven primarily by strong performance in the UK and improved growth in Germany. All of these results outside the US were impacted by foreign exchange movements, which is why we've added slide 6 this quarter, which is a slide that shows our reported and FX adjusted revenue growth rates for the last eight quarters.

As you can see, during the fourth quarter foreign exchange had a more significant negative impact on our reported results than in prior periods, dragging adjusted revenue growth by approximately 240 basis points. To give you a better sense of the drivers here, we have also provided some background on the major concentrations of our billed business by international currency. The first row at the bottom of the chart shows the approximate range of billed business by card members in each market as a percentage of total Company billed business, while the second row shows the year-over-year change in that foreign currency compared to the US dollar.

When you look at the slide, it is somewhat unusual that the dollar has strengthened significantly against nearly all of the international currencies where we generate a significant amount of revenue. As you know, this revenue impact is partially offset by the benefit we receive from having certain expenses denominated in international currencies. There is a bottom line impact, especially when rates move this dramatically. As you can see in our annual report, we estimate that a 10% strengthening of the dollar against all international currencies in which we do business would cost approximately $200 million in pre-tax income over a one year period.

So clearly, as I mentioned earlier, it was a negative impact to our bottom line in the quarter. Over the long term, we continue to believe that being a global company which generates revenue in a diverse set of markets around the world is a significant benefit of our business model. However, if current trends do continue, FX rates will represent a headwind as we head into 2015. Moving on now to loan growth on slide 7. Loan growth was up 5% versus last year on a reported basis.

We were obviously pleased, though, by our performance in the US, which constitutes the majority of our loans, as growth improved to 7% during Q4 and continues to outpace the industry. I'd note that international loan growth was down year-over-year as performance was negatively impacted by FX rates and also by a decline in loans within the Costco Canada co-brand portfolio. Looking forward, we continue to believe that there are attractive opportunities to gain a greater share of loans from both our existing and new customers without significantly changing the overall risk profile of the Company.

Our efforts here are not about a transformational shift away from our spend-centric model, but still do represent a sizable growth opportunity for our Company. So let's move now to our revenue performance on slide 8 where you see that our reported revenue growth in Q4 was 7%, adjusted however, for the Concur gain, the loss of Business Travel revenues in the prior year and FX, adjusted revenue growth was 5%, which was consistent with our full year performance. I'd note that the Concur gain is reported in other revenue, which drove the large year-over-year increase in that line.

The largest contribution to adjusted revenue growth again came from greater discount revenue from higher billed business volumes. As we saw last quarter, there was a roughly 400 basis point gap between billed business growth and discount revenue growth. The first driver of this difference is the reported discount rate which was down 3 basis points versus the prior year. As a reminder, we provide this reported discount rate calculation to give you some context about our pricing and point of sale with merchants.

This quarter's decline reflects, in part, our ongoing mix shift in volumes towards lower discount rate industries, though this impact was partially offset in the current quarter by the drop in Costco Canada merchant volume where we earned a lower discount rate. This quarter's discount rate was also impacted by the timing of certain merchant contract signings. The quarter's discount rate also reflects a modest but growing impact related to the OptBlue program as merchant acquirers are actively signing new merchants onto the American Express network. We are encouraged by our progress in this multi-year effort.

It does result in some incremental pressure on the reported discount rate as we had previously discussed, but I would remind you that a portion of this decline is offset through reduced operating expenses as OptBlue shifts the impact of certain third party acquisition activities from operating expenses to discount revenue. We continue to believe that OptBlue will bring incremental volumes onto our network over the next several years and provide attractive economics for our business.

Coming back now to the broader relationship between discount revenue and billed business, similar to last quarter the other drivers of the gap between the two are the faster growth we are seeing in both contra-revenue items such as cash incentives and GNS volumes. I would point out here that the relationship between discount revenue and billed business has become more complicated over time, partially due to the impact related to OptBlue I just mentioned, and so interpreting our discount rate metric in isolation has become more complex as our business has evolved.

Now turning to the other revenue line, net interest income was the other primary driver of revenue growth, growing 8% as we continued to benefit year-over-year from both lower funding costs and an increase in average loan balances. Finally, as expected, travel commissions and fees declined significantly this quarter as the revenues associated with business travel were no longer consolidated in our P&L. Turning now to credit performance on slide 9, you can see that our lending credit metrics remain near or at historically low levels.

Worldwide lending write-off rates and delinquency rates declined slightly during the quarter, though overall the rate of improvement in these metrics has slowed in the past year. As a reminder, our objective is not necessarily to have the lowest possible write-off rate, but is instead to achieve profitable growth and earn the best economics on our portfolio. Therefore, while we are not planning to change the overall risk profile of the Company, at some point we would expect that write-off rates will increase somewhat from today's low levels.

In terms of lending reserve coverage levels, slide 10 shows that coverage remained relatively consistent. After considering the impact of the seasonal ramp-up in loan balances on the month's coverage metric, we believe coverage levels remain appropriate given the risk level inherent in the portfolio. Putting together our solid loan growth with these credit metrics, you can see on slide 11 the total provision in Q4 increased significantly versus both last year and the prior quarter. Although credit metrics remain low and write-offs remain a bit below the prior year, the rate of improvement has slowed.

This trend, along with the growth in seasonal uptick in loan balances and some smaller specific reserve builds, are what drove the provision up 22% this quarter. Moving next to total expenses on slide 12. On a reported basis, expenses increased by 3% versus the prior year in Q4 and were flat for the full year, reflecting the decision to reinvest the majority of the Concur gain in Q4 and the [QBT] gain in Q2, partially offset by the loss of our business travel expenses in the prior year. I'll provide more details on our marketing and promotion and operating expenses in a few minutes, but touch first, however, on a few other items on slide 12.

Rewards expense grew by 10% in Q4 in part due to the $109 million impact from our renewed agreement with Delta. On a full year basis, rewards expense growth of 7% was relatively consistent with our reported proprietary billings growth. Also on slide 12, the tax rate in the quarter was 35%, slightly above what we have seen in the past couple quarters, as it was impacted by the resolution of certain prior year items. Prior to this quarter, we had been trending at a tax rate of approximately 34%, and while in any given quarter discrete items could impact the effective rate, we generally think 34% is more indicative of our underlying run rate.

Moving to marketing and promotion expenses on slide 13, as I've discussed, the two sizable gains we recognized in 2014 allowed us to invest in a number of attractive growth opportunities and we believe this is the right decision to create value for shareholders. As a result, marketing and promotion expenses, where the majority of our incremental investments and growth initiatives were recorded, increased sequentially and grew 13% versus Q4 2013 and 9% on a full year basis. For the year, much of this spending focused on acquiring card members across our diverse set of card portfolios.

These initiatives included acquisition efforts for our proprietary charge in lending products as well as opportunities in the co-brand space. Additionally, we were focused on expanding our merchant network, capturing a greater share of our card members' lending, building out our GNS business and growing our newer digital businesses. One example of how we build relationships with small businesses across both our merchant network and our card member base was our support this past quarter of the Small Business Saturday.

This initiative now takes place across six countries and is a great example of how our closed loop enables us to partner and provide value to both our small business merchants and our existing card member base. Turning now to operating expense performance for Q4 on slide 14, our reported results continue to reflect the impact of business travel operations in the prior year across a number of expense categories, complicating line by line comparisons. Additionally, the impact of our restructuring charge this quarter had a substantial impact on salaries and benefits.

That said, adjusting for last year's QBT operations and this year's restructuring charge, operating expenses decreased 1% in the quarter on a reported basis and increased by 1% when adjusting for FX. Turning to the full year, our adjusted operating expense growth remains well contained and came in well below our 3% grow target for the year as you can see on slide 15. We continue to demonstrate disciplined control of our operating expenses and this marked the second consecutive year that operating expense growth was significantly below the growth target that we set on our fourth quarter 2012 earnings call.

This discipline around operating expenses allowed us to continue investing for growth and provided increased financial flexibility in an economy that remains uncertain. As we look ahead, the restructuring actions that we are taking are one part of what will allow us to remain disciplined about operating expense growth. Now shifting our focus towards capital. On slide 16 the benefits of our strong capital discipline were on display all year as we returned 86% of the capital generated in the year while modestly strengthening our already strong capital ratios.

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. A portion of the year-over-year increase in our Tier 1 capital ratio was driven by the preferred issuance we executed during the fourth quarter and we plan to follow this with another issuance in Q1. As I discussed on the last earnings call, these issuances represent the most cost-effective way to meet our evolving capital requirements and were part of the capital plan in our 2014 CCAR submission.

We did, of course, complete our submission for the 2015 CCAR process earlier this month and we expect to hear back from the Fed about our submission in March. We continue to believe that our ability to return a high level of capital to our shareholders over the past several years while continuing to increase our capital ratios illustrates the strength of both our balance sheet and our business model. We have also worked hard to satisfy the quantitative and qualitative aspects of the Fed's guidelines and continue to strengthen aspects of our capital planning processes to support this critical effort.

So coming back to our full year results, we are pleased with our performance in the current economic and competitive environment. For the full year, we had earnings per share growth of 14%, which is within our on-average and over-time target, while leveraging the gains provided by the Business Travel joint venture and the sale of our investment in Concur to better position the Company for the future. Looking forward to 2015, we do face a number of increasing challenges including global economic growth that is forecast to remain below long-term averages, foreign exchange headwinds from a strengthening US dollar, intense competition in the co-brand space and a heightened regulatory environment, particularly in the EU.

Of course, many of these issues are not new and we face these challenges from a strong position with many growth opportunities and assets that will give us a competitive advantage. We remain confident that our business model provides the opportunity to deliver significant value to our shareholders over the longer term. With that, I'll turn the call back over to Rick for some details on our Q&A session.

Thanks, Jeff. Just before we start the Q&A, I do want to say that in response to feedback we have been receiving, we're going to try to provide a better opportunity for more analysts to ask a question today. So considering that, I do want to ask that everyone in the queue please limit yourself to just one question, seriously. Thanks for your cooperation with that. We can now turn it over and start the Q&A, operator.

Thank you.

(Operator Instructions).

Our first question will come from Ken Bruce with Bank of America. Go ahead, please.

Thank you. Good afternoon. Could you possibly gives us some more details around what the benefits from the restructuring charge will be in terms of -- you mentioned the reduced headcount, but over what period of time should we really be thinking about the net benefits from that restructuring please?

That's a good question, Ken. We, of course, have been on a steady journey here for a number of years to continually evolve our business, how we operate, how we interact with our card members and our merchants, take advantage of evolving technologies, make sure we have the right footprint. This is really a continuation of that strategy. Now, some of these moves are complicated and it will really take us the course of calendar 2015 to execute on pretty much all of the things that are in the restructuring charge that you see us taking in Q4.

So there will be some benefits in 2015. The full run rate benefits of all the actions we're taking, however, you will see as we get into 2016. I think as we look at the actions we're taking, we see it as something that will be helpful to us in 2015 to continue the kind of strong discipline you've seen us have on operating expenses and frankly, we're also positioned to get some further help in 2016 incrementally as the initiatives take full effect.

Thank you. I'll honor the one question rule.

Thanks, Ken. Great example.

We'll go next to Sanjay Sakhrani with KBW. Please go ahead.

Thank you. Maybe along the same lines as what Ken was asking, could you just talk about how we should think about the core operating efficiency ratio of the enterprise? You guys have been making a series of re-engineering and restructuring or taking up a bunch of re-engineering and restructuring initiatives. I would assume that that would take that core run rate lower, but the last update we got on that was kind of high 60s. Could you talk about that a little bit? Thanks.

I think, Sanjay, it's a good question. We're a little cautious about setting a specific target because the way we run the business evolves over time and we don't want to either set too high a target, which doesn't take advantage of all the opportunities we may have to become more efficient. And frankly, there are other times when there are things that we think can help drive long-term growth in the business that may run through various parts of our P&L and various parts of the expense structure that we think are the right things to do and we don't want to preclude ourselves from spending.

I think the way we think about it is as you go forward and you think, to put your and Ken's question together, about the restructuring we're just doing, we're not setting a new operating expense target publicly for now, but you're certainly not going to see us grow above 3% and you've seen us come in pretty flat the last two years, well below the 3% target we set. Certainly that's been an important part of our business model in providing the opportunity to spend on the growth opportunities we have and you're going to see us very focused on continuing that discipline. I just want to be a little cautious about setting an exact operating efficiency ratio target.

Okay. Great. Thank you.

Thank you. And next we have Don Fandetti with Citigroup. Please go ahead.

Yes, Jeff, I was wondering if you could give us your thoughts on when we might hear on the Costco US deal and if you could talk a little bit around that, how you balance what appear to be lighter economics on these co-brand deals with the potential lumpiness of a loss of a deal, how you think through that.

Well, I appreciate the question. Costco is a very important and long-term partner of ours. Our US relationship goes back to the 1990s. We think we've been great partners and have created a lot of value for their members, our card members and for both companies. I would point out to you that I don't think we've said anything about any ongoing discussions we're having with Costco. Obviously, with very important partners we are always working every day to evolve the relationship to make it better and frankly, to make sure it's working for both parties.

You can presume we're doing that with Costco as we're doing it with all of our partners at any time and if and when we have any news as we did with Delta, which we chose to renew early, we would certainly tell you. In terms of thinking about the economics of these things, you've certainly heard a number of us, both Ken and I and some of our colleagues talk about the competitive environment for co-brands in recent months and quarters and that's true. I think you have to balance those comments with the fact that these are still one of many good economic growth opportunities we have as a Company.

And while yes, the environment has become competitive and certainly there are cases where we conclude, because we're pretty selective, that we think we're better off not either getting into or proceeding with certain kinds of co-brand partnerships because we have so many other opportunities in our proprietary business, as a general matter these still are attractive and important parts of our overall business model. And when we have great partners where our interests are really aligned, and I'll go back to the recent renewals with Delta and Starwood, we think we can create great value together and for all parties involved.

Thank you.

Thank you. Our next question is from Cheryl Pate with Morgan Stanley. Please go ahead.

Hi, good afternoon. Question on US billed business and clearly, lower gas prices have been a bit of a headwind in terms of reduced spend. Just wondering if you can help think through some of the offsets as to the opportunity clearly with OptBlue and higher merchant acceptance and also if you're seeing consumer willingness to increase spend in other non-gas related categories as potential offsets as well.

Couple things, Cheryl. For us, gas is a relatively modest portion of spend. It's probably 3% or so or a little under 3% of our spend. If the you look at the quarter, it was probably down around 10%. There's some impact on our overall billings. It's fairly modest. I think given the size of that in the context of our Company, it's probably premature or early for us to try to say whether or not there is an offset as consumers and companies take the savings they're getting and spend elsewhere.

It would probably just be hard for us to see, given the magnitude of our overall network versus what the spend on gas is. On OptBlue, we've been really pleased since we rolled the plan out early last year with the great acceptance it's gotten in the merchant acquirer world. We've been very pleased with the progress those acquirers have then made in signing up new merchants. I would just remind people that as we laid out the plan early last year, this is a multi-year effort and we are proceeding really nicely and are right on track to make very significant strides in merchant coverage over the next couple years.

There's a process of you have to expand the coverage, then you have to create awareness with card members and that's why we've always talked about this as a multi-year effort. We're really pleased by all the early signs on. But it's not something that in the fourth quarter I would have expected to have a particularly material impact on the overall billings.

Thank you.

Thank you. Our next question is from Sameer Gokhale with Janney Capital Markets. Go ahead, please.

Hi, thank you. The question I had was around your provisions for the quarter and Jeff, you talked about that a little bit, the provisions being a little bit higher than where they've been at and you also talked about some specific provisioning there. But I'd like to get your view as far as what's going on with the underlying consumer and provisioning trends going forward. Because you had the lower gas prices, presumably they helped consumers a little bit.

I know you target affluent consumers so there's maybe less of a benefit. You look at the charge-off rate improvement, the size of the provisioning, seems like we should expect some pretty hefty growth in provisioning looking into 2015. So if you could parse the provisioning for us a little bit and your outlook there, that would be helpful. Thank you.

Sameer, when you look at our credit metrics, actually are down year-over-year and what we are seeing in write-offs and delinquencies, there's really no sign of a tick upwards. I only of course joined the Company about a year and a half ago and I think I've said on every single earnings call that I've done beginning in July of 2013 that while write-off rates have to eventually go up, that they have not. With the provision this quarter, there's really three things going on. Number one, remember we're growing loans 7%.

You also just have a seasonal phenomenon because the balances always go up in the December quarter, we do -- just the way the rules work -- we do set the reserves up for those balances and often the pattern would be that a little bit of that would roll off as you get into the beginning of next year. We also just had a few specific reserve items which come and go. So it's not necessarily indicative of the future going forward. And we are relative to where we were, say a year ago, two years ago, at a point where we're not further improving the metrics much. They're fairly flat, although they are improved a little bit.

So it's really those phenomenon that drove this quarter, what was a sizable increase in provision at 22%, increase in provision. But I think I'd be cautious about concluding from that that all else being equal, without other changes in the environment, that you should expect a big jump-up in provision next year. We'll have to see how the economy develops. We'll have to see how our metrics develop. But certainly we don't see in our metrics any sign of a weakening consumer credit environment and when you look at unemployment rates continuing to go down, I don't think that should surprise any of us.

Okay. Thank you.

Thank you. We'll go now to Bill Carcache with Nomura Security. Go ahead, please.

Thank you. Good evening. Jeff, can you talk about how the existence of the preferred debt you guys have issued, I think you did $750 million in the third quarter, better positions you for CCAR this year? And the degree to which you think of it as replacing equity, particularly since the preferred's capable of absorbing losses under the severely adverse scenario.

Good question, Bill. I think I explained, but probably not for quite some time. When you look at the evolving capital rules, it used to be that the Tier 1 capital minimums were actually below the Tier 1 common minimums. We moved into a world where the Tier 1 capital minimums are about 150 basis points above your Tier 1 common. So if you're going to try to run the Company efficiently and be governed by, to your point on the Fed, to your scenario, what are you going to [trip], you've got to find the most cost efficient way, if you will, to fill that 150 basis point difference between the Tier 1 common and the Tier 1 ratio.

And the preferred is clearly it for us and for many other banks. You've seen quite a surge of issuance of these kinds of securities. That's why we put it into our CCAR 2014 submission last year. It's why you will see us do another issuance in the first quarter or this quarter and that will bring us about to where we want to be to provide that 150 basis point buffer. Certainly, this is one component among several that we think makes our CCAR submission this year even stronger.

We have built, over the past 12 months, capital even though we returned a very significant amount of capital to shareholders. We have issued this preferred. We continue to work on all of the qualitative processes, which we think are getting better in providing more insights to us. So we feel really good about our submission. All that said, we're not the judge. The Fed is and we'll have to see where we come out probably towards the latter part of March.

Thank you.

Thank you. Our next question is from Brad Ball with Evercore ISI. Please go ahead.

Thanks. Jeff, you mentioned the heightened regulatory challenges and it looks like the EU is close to finalizing its card payment fee caps. Could you talk about how these new rules will impact your business in Europe and how you plan to adjust AmEx's business there to reflect the changes in the economics of the business?

Well, as we've commented on for a while, we are very, very, very actively engaged of course with lots of parties across the EU in the ongoing process that will ultimately lead to a finalization of all the new rules. I think one thing we've learned is we want to be a little bit cautious until the final, final rules are out and all the details spelled out in making any comments on the ultimate impact to us. All that said, I'd make a few general points. One, any regulation, even regulation targeted more at the two dominant networks tends to put some pressure, even if it's indirect, on our business model.

Two, we do have a flexible business model and the closed loop gives us some unique ability to operate in a number of ways in response to evolving, not just regulatory, but competitive and other environments and you've seen us do some of those things in other parts of the world. Sometimes it takes us some time to evolve the business model. We'll have to see where the final EU rules come out. Three, I would say there are already some things happening in Europe that are going to have an impact on us even in the near term, even though the final payments directive has not been issued.

And there are some changes in the rules around cross-border acquiring that we think are already and even more so in 2015 will begin to put some pressure on our discount rate in Europe. That's just one of the many challenges that I talked about as I reflected overall on the challenges we have for 2015. On the broader, overall impact of the payments directive, we'll just have to see what the final language shows.

Thank you. Very helpful.

Thank you. Our next question is from David Hochstim with Buckingham Research. Go ahead, please.

Since you mentioned your Starwood and Delta co-brands, could you give us an update on how large they are as a percentage of loans and/or billed business and could you expand on the negative financial impact that the renewal of those contracts might have?

Well, we don't, David, as you know, tend to call out the specific size of any of our portfolios and I would probably include Starwood.

You did several years ago provide those, so I didn't know if you'd be willing to update that.

Yes, I don't think at this point. Obviously, there's also sense sensitivity with our partners so it's not something, David that I want to do on a casual basis. You are correct, from time to time, usually at an investor presentation kind of format we have provided a few numbers that we fully vet with the partners. We're not prepared to do that today. Clearly, the fact that we have just re-signed with Starwood tells you about how pleased we are and I think how pleased they are with the relationship and the growth potential it has going forward.

When you talk about the impact, what I was very much trying to communicate in my comments earlier is that we are in these co-brand relationships for the long term, just like we run the Company for the long term. Often, these partnerships only get renewed every quite a number of years. These are not exactly annual renewals. So when normal market economics have evolved for quite a number of years, when you renew the contract you can sometimes have a significant reset and we always structure these things so both parties have tremendous incentives to continue to grow the value.

And we're pretty pleased overall with the role that all these partners have played in our financial performance over the years. So these latest renewals fall into all of those general fits of experience I just gave you. No one portfolio that's the size of Starwood is going to have that material an impact on us, but it's one of the many, many factors we look at as we think about both our near term and our longer term financial performance.

Would it be reasonable to expect higher reward costs prospectively with Delta?

Well, our relationship with Delta is very, very complex. You've got a co-brand partnership. You have their participation in membership rewards. They're a very, very significant merchant for us. We have a lounge agreement with them. We are a huge -- I'd remind you, we are still 50% owner of the largest business travel operation in the country. So there are a lot, lot, lot of moving economic pieces to our relationship with Delta.

That's why it's such an important relationship to them. It's why it's such an important relationship to us. And that's why we think it's so important to get it back in a status where it's been renewed for the longer term and that's where we are now and now we're both just focused on growing the relationship. I don't want to comment on any specific terms in any one of the many areas because of course we both look at this relationship and try to balance it across all the many different components.

Thank you. Our next question will come from Bob Napoli with William Blair. Please go ahead.

Good afternoon. Was hoping to get a little bit of an update on a couple of your growth initiatives: the loyalty partners, and if that was getting to a point where it's material enough to possibly break out for us. We've been hearing around the market that American Express is getting more active in small business lending and I was wondering if you could talk about that at all, those two growth initiatives.

Well, we continue to be very pleased by the growth in loyalty partner. As you recall, we launched in Italy early last year. It is well into a very mature state in a number of other countries: Germany, Mexico, et cetera. The growth rates for that business overall are in the high double digits and we're very pleased and I think you can continue to expect us to expand to new countries. In terms of breaking it out, I think we're still a ways from that.

We will, probably somewhat similar to the answer I gave earlier in response to things like Starwood metrics, we will from time to time, usually in an Investor Day kind of setting, give people a few metrics. But we're really pleased with the business. I think it's also fair to say we're also learning, because it is a relatively new business for us, how to better optimize some of the synergies with our core card business and we're pleased with our progress there.

In fact, I talked in my earlier remarks about strong growth in a number of European countries including Germany and one of the factors helping us in Germany are some of the synergies we're beginning to see between our core card business and loyalty partner. On small business lending, we obviously have a tremendous franchise with small businesses.

And we were certainly the first to create an organization within the Company extremely focused on just trying to figure out how do we help drive success across our small business partners and it's given us a tremendous position in the marketplace. Small Business Saturday has been a tremendous add to the overall range of the things we do with small business partners and growing our lending efforts in small business we would see as one of the many opportunities we have to do a little bit more lending than you have seen us do the last few years.

I want to emphasize here that we're a long, long ways from doing anything that changes our spend centric focus. On the other hand, with our existing customer base, within our existing risk profile, with your example of small business as a really good example, we think we are really well positioned to accelerate growth rates from where we are today and we're very focused on doing it.

Thank you.

Thank you. Our next question is from Mike Taiano with Burke and Quick. Go ahead, please.

Great. Thank you. Just want to go back to the energy question, the drop in oil prices, the deceleration that you saw in billed business volume in the fourth quarter, if there was anything that was noticeable related to any of the states that are more energy centric like Texas in the fourth quarter.

And then looking forward, how you plan on managing the credit risk of some of those states. I know back when the housing crisis that you guys were very proactive in trying to rein in credit lines for those that you thought might be more exposed to housing. Just was curious on your thoughts on that.

That's a great question, Mike. I think in terms of the impact in Q4 on billings by geography, billings by industry type, as we've begun to scrub through the numbers, you really don't see anything that jumps out at you in terms of a pattern, but frankly that's not surprising to us because it's still pretty new when you think about Q4. I think we'll all have to see how things develop in 2015.

I think that also really points to the importance of your second question. Believe me, as you would expect us to be, we are being very thoughtful and very focused on both industry and geographic concentrations and trying to be well ahead of anything that does start to appear in terms of how we're managing our credit profile across our business.

Great. Thank you.

Thank you. We'll go next to Moshe Orenbuch with Credit Suisse. Go ahead, please.

Back on the Delta, you've said that it's -- Delta said that they were going to double the benefits from that relationship with American Express to them as part of the new contract. Is there any way you could size what percentage of your rewards costs relate to that, both across the co-brand and the purchase of MR points?

I must admit, Moshe, I missed their double comment but maybe --

They did an Investor Day a couple of weeks back at which they said that.

But look, they're a great partner for us and as I explained earlier, we have a really broad relationship with Delta that cuts across so many parts of both of our companies. It's generated tremendous value for us and it's generated tremendous value for them. We last renewed it in 2008 and it's now locked in for quite some period of time and we're really pleased with that and we're both very focused on growing the very mutual interest we have in a common card member and flier base.

All that said, they're a good partner and I think we've been pretty clear that in general there's a reset often when you do these kinds of renewals after a long time and I said on my earlier remarks, Delta is no exception. You do see the one piece of the economics in the charges we took in Q4. And that is that there is an impact that caused us to re-price the bank of MR points, so that basically tells you we're going to pay Delta a little bit more money when a membership rewards member transfers MR points to redeem a flight on Delta.

That's actually very similar to something we did back in 2008, in fact the charge is almost the same size as something that we took back in 2008. So that's not new. I think it's just sort of a standard part of the reset. Beyond that, I don't want to try to size the overall economics of a specific agreement as we have with Delta and there's many, many ways that they may think about the value so I actually couldn't tell you how they might have gotten to the --

Is it fair then just to add to that the fact that you've got 5% of your spending volume in the co-brand? Because that's not part of the MR program, right? That's a disclosure you made in the 10-K, about 5% of your spend is the Delta co-brand.

Yes, you're correct. And of course we spell that out in the 10-K because it rises to a level that, from an SEC perspective, we should disclose.

Got it. Thank you.

Thank you. And next we have James Friedman with Susquehanna. Go ahead, please.

I won't ask you about Delta.

Jamie, you can ask about whatever you like.

I was going to ask about GCS. If you could share with us your perspective about the general competitive environment for corporate cards and then in the sale of Concur, does that change your advantage in that it's no longer a consolidated asset?

Remember, our ownership stake in Concur was about 13% or so. And back in 2008, we thought putting in place a series of operating agreements, taking that minority stake, we did put Ed Gilligan on the board. It was really a good way to both make sure we captured the operating synergies between the two companies. We've been very successful over the years in helping each other grow while, frankly, letting Concur operate as an independent company to really grow and create the value that they've really done a rather remarkable job of with the purchase by SAP.

We are very excited, frankly, to take that long-standing partnership with Concur and continue it, but frankly expand it as they become part of SAP and we think that's going to open up even more avenues of working together and we've even, as you would expect, before the acquisition was announced, had a number of discussions along those lines. And so we're, if anything, more excited than we were about the ability to continue to work together to help drive both of our businesses forward.

I think we're out of time, operator. I want to thank everybody for joining us on today's call and participating in the Q&A. We are, to summarize, pleased with the solid performance we showed for the full year of 2014. We do face increasing challenges in 2015, but we face the challenges from a strong position with many growth opportunities and a real focus on making sure we're making the right decisions to position the Company for the long term. So with that, I wish you all a good evening. Thanks for your continued interest in American Express.

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