美國運通 (AXP) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the American Express first-quarter 2015 earnings call.

(Operator Instructions)

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

Thank you. Welcome. We appreciate everybody 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 first-quarter 2015 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 it over to Jeff.

Thanks, Rick. Good afternoon, everyone. Overall, Q1 was a solid quarter for the Company, consistent with the framework and financial outlook we presented at Investor Day last month. The quarter reflected solid core underlying performance as well as several discrete impacts including the strengthening of the US dollar and various changes to our co-brand relationships.

As you recall, we discussed at Investor Day our expectations for the first quarter. And, in fact, EPS growth of 11% did come in better than our full-year outlook and even a little better than we thought a few weeks ago, in part due to the timing of our incremental spending on growth initiatives which will ramp up over the course of the year, along with some other timing benefits that we don't expect to repeat as we go through the year. I'll discuss these items in more detail later in my remarks. Importantly, for these reasons our full-year 2015 EPS outlook remains unchanged, as we continue to expect EPS growth to be flat to modestly down.

Looking back to the financial outlook framework from Investor Day, our core underlying performance remained consistent and continued to be driven by solid revenue growth of 5% after adjusting for FX and business travel revenues in the prior year, disciplined cost controls, and a strong balance sheet that enabled us to return a substantial amount of capital to shareholders in the form of repurchases over the past year.

Our results also reflect some of the discrete impacts that we discussed a few weeks ago. In the co-brand space, we are seeing the impact from the termination of our relationship with Costco in Canada, as well as the reset impact from the early renewals we have done with several other co-brand partners, including Delta, Starwood, and Cafe Pacific. In addition, the US dollar continued to strengthen during the first quarter and represented a significant headwind to our quarterly earnings performance.

Importantly, during the quarter we also continued to have strong momentum on key initiatives. Highlights included the expansion of our small merchant coverage through OptBlue, the announcement of the Plenti Loyalty Coalition program in the US, the signing of a new Charles Schwab co-brand along with the renewal of our co-brand relationship with British Airways and Iberia, as well as the announcement just today of our new wearable payments partnership with Jawbone.

We were also very pleased by our strong 2015 CCAR performance which will provide us with the flexibility to increase our dividend and share repurchases going forward. As we discussed at Investor Day, we believe that these developments are indicative of the many attractive opportunities for growth that we have over the longer term.

So that is the quarter in a simple summary. As we get into the details, I will warn you that lapping the impact of 2014's global business travel and Concur transactions, along with the 2015 discrete impacts of FX and our co-brand changes, all combine to make understanding our results this year a bit more complex than usual.

To begin now with our financial results for Q1, as you can see on slide 2, reported billings growth was 3%. Like many other global companies, the strength of the US dollar had a significant impact on our growth rates this quarter. As the dollar continued to strengthen, the magnitude of the FX impact increased and for the first quarter, depressed our growth by nearly 4 percentage points.

As a result, FX adjusted billings growth was 7%, significantly higher than our reported rate. I'll provide more details on our billings performance shortly but lower gas prices in the US and the termination of our relationship with Costco in Canada clearly had an impact on our results.

Reported revenue growth of negative 3% was, of course, also impacted by FX as well as the inclusion of business travel revenues in the prior year. Excluding these items, adjusted revenue growth was 5%, consistent with both the prior quarter and recent trends. Net income grew by 6%, helped by disciplined expense control and lower provision costs, both of which also reflected some timing benefits in the quarter, which helped to offset the discrete impacts of FX and the changes in our co-brand relationships.

Below the net income line we continued to leverage our strong capital position to provide significant returns to our shareholders. Over the past year, we have repurchased 48 million shares which translated to a 4% decline in average shares outstanding. This decline in shares outstanding, along with a modestly lower tax rate, drove the 11% diluted EPS growth that we generated during the first quarter. This performance also resulted in an ROE of 29% for the period ending March 31, well above our on average and overtime target of 25%, and demonstrating the continued strength of our business model.

Let's now move to a more detailed review of our key performance drivers during the first quarter, starting with billed business on slide 3. On an FX-adjusted basis, billings growth slowed modestly from 8% in Q4 to 7% during the quarter.

Looking at the results by segment, in our US consumer and small business segment growth also decelerated slightly to 7% in Q1. This performance was impacted by the more than 30% decline in gas prices year over year, as well as slower retail sales growth, consistent with industry-wide trends in the US.

I would note that in the US, we did not see any material impact on our billings growth from the announced termination next year of our relationship with Costco. As we would have expected, however, we have started to see some slowing of new Costco co-brand card acquisitions which, along with any future customer behavior changes that we may experience, will likely begin to impact our performance somewhat later this year. It's also worth noting on billings that the deceleration in Q1 was more pronounced in our GCS segment where billings were up 4% on an FX adjusted basis, as we seem to see a slowdown in spending across a number of corporate customers, primarily in the US.

GNS continues to be our strongest billings growth segment with FX adjusted growth of 16% during the quarter. This continued strong growth demonstrates the diversity of our business model, given the much higher than Company average returns on equity we achieved in the GNS business.

Finally, ICS FX adjusted growth was 2% during Q1. But, as we began to see last quarter, we saw very different trends by region, as you can see on slide 4. The slowdown in international regions came primarily from LACC where volumes were down 4% versus the prior year driven by a drop off in Canadian billings.

As you recall, we began to see volumes slow in Canada during Q4 when card acceptance at Costco in Canada was expanded to include other networks. Beginning January 1, American Express products were no longer accepted in Costco warehouses in Canada and we are now seeing the full impact from the termination of this relationship, on billed business.

In contrast to LACC, we saw improved growth in the JAPA region which was again the fastest growing region in the quarter, up 16% on an FX adjusted basis. This solid performance continued to be powered by strong growth in China and Japan. In all international regions, you see that, like other US companies with a significant global footprint, our reported results are being significantly impacted by changes in foreign exchange rates.

To provide you with some additional perspective here, on slide 5 we have again included a comparison of our reported and FX-adjusted growth rates for the last eight quarters. As you can see in the trajectory of the blue dotted line on the slide, our adjusted revenue growth remains consistent with recent trends in the 5% range. However, during the first quarter, foreign exchange had a more significant negative impact on our results than in prior periods, dragging adjusted revenue growth down by nearly 4 percentage points. At current FX rates we would expect to see a similar drag in the second quarter.

As you can see in the second row, the bottom of the chart, the dollar has strengthened by 10% to 30% year over year against the currencies that we are most exposed to outside the US. Now, of course this revenue impact is partially offset by the benefit we received from having certain expenses denominated in international currencies, but there is a bottom line impact, especially when rates move this dramatically.

Over the longer term we continue to believe that being a global company that generates revenue in a diverse set of markets around the world is a strength of our business model. As we discussed at Investor Day, however, if the current rates hold, FX will continue to have a significant discrete impact for the balance of the year.

Turning now to loans, you see on slide 6 that worldwide loans were up 4% versus the prior year. Consistent with historical seasonal trends we did see a drop off in loan balances versus year end and a small sequential increase in net interest yield during the first quarter.

In the US, which constitutes the majority of our loan portfolio, growth was relatively consistent with the prior quarter at 7%. On the international side, reported loan balances were down year over year due to the negative impact from FX rates and a decline in loans related to the Costco Canada co-brand portfolio.

Stepping back, our loan growth has consistently been above the industry over the past two years. And we talked at Investor Day about the opportunity to continue this trend by growing share with existing card members, as well as attracting new customers to our franchise.

Having said this, however, I'd also remind you that net interest income this quarter still made up only 18% of our total revenues. And given the expected run-off in loans associated with the Costco US co-brand portfolio next year, even if we continue to grow our core loan portfolio at the higher rates you have seen, our overall business model will remain very spend focused.

So, now putting together our billings and loan performance, you see on slide 7 that revenues declined 3% on a reported basis, but increased by 5% after adjusting for FX and business travel revenues in the prior year. I'll note that revenue growth during the current quarter does reflect a portion of the negative impact from our co-brand partnership early renewals, as well as a larger impact versus Q4 from the termination of our relationship with Costco in Canada. Even with these discrete impacts, however, adjusted revenue growth of 5% is consistent with recent trends, illustrating the ongoing strength of our underlying core business.

The two largest components of revenue are, of course, discount revenue and net interest income. To start with the former, during the first quarter discount revenue grew by 1%, which was approximately 200 basis points below the reported growth in billed business of 3%.

The first driver of this difference was a decline in our reported discount rate which was down 2 basis points versus the prior year. This year-over-year decline is slightly smaller than in recent quarters, in part because the decline in Costco Canada merchant volume, where we earned a much lower discount rate, actually raises the Company average discount rate. The discount rate also reflects continued growth in our OptBlue program as merchant acquirers actively sign up new merchants on to the American Express network.

As Ed discussed at Investor Day, 14 of the top 15 merchant acquirers in the US are now part of OptBlue. Last year when Anre Williams introduced this new program to you at the February financial community meeting, he said that we expect to increase our small merchant acquisition by 50% or more for the next several years starting in 2015. And while this is obviously a multi-year effort, we in fact signed more than 400,000 new small merchants last year in 2014, so we are clearly off to a good start. We are also undertaking similar efforts to improve our small merchant coverage in many other markets around the world.

Also contributing to the gap between discount revenue and billed business growth was faster growth in both GNS volumes and contra revenue items, including cash incentives and certain payments related to our renewed co-brand relationships.

Turning to the other key component of revenue, net interest income, we saw a healthy 8% growth rate driven by our continued efforts to grow our loan portfolio, as well as lower funding costs. As the majority of our loan portfolio is in the US, the impact of FX is smaller on net interest income than on other revenue lines.

Moving now to credit performance on slide 8, you can see that our lending credit metrics remain at or near historically low levels, and that our write-off in delinquency rates both remain relatively consistent with recent trends. As you can see on slide 9, despite the steady lending credit performance, provision expense dropped 13% versus the prior year.

Typically, we experience a reserve release during Q1 due to the seasonal decline in loans and receivable balances versus year end. The increase in the reserve release versus the prior year is largely due to charge cards where the prior period included a modest reserve build.

Moving to our lending reserve coverage on slide 10, coverage remained relatively consistent after considering the impact of the seasonal decline in loans and receivables I just mentioned. We believe coverage levels remain appropriate given the risk level inherent in the portfolio.

Thinking about the balance of the year, it is important to note that we would expect reserves to build modestly, in line with loan growth and any changes in credit performance. Therefore, we would expect provision to increase year over year and to represent a head wind to growth for the remainder of 2015. Moreover, as we discussed at Investor Day, we did build into our multi-year financial outlook an assumption that we would see some steady upward tick in write-off rates and a modest build in reserves over the outlook period.

Moving below revenue now to expenses on slide 11, on a reported basis, expenses declined by 5% versus the prior year. Excluding business travel expenses incurred in 2014, adjusted total expenses increased by 1% and also of course benefited somewhat from the strength of the US dollar.

I'll come back to operating expenses and marketing and promotion in a moment. First, however, I'll touch on a few other items on this slide.

Rewards expense grew by 4%, which was relatively consistent with our reported billed business growth. Now, rewards expense in the current quarter does include a portion of the discrete impact from our renewed co-brand relationships. The resultant increase in our rewards cost, however, was partially offset by some timing benefits this quarter related to our membership rewards program.

Next, while it's a relatively small percentage of total expenses, cost of card member services increased significantly year over year by 18%. As background, a portion of the expenses in this line are related to the payments we may provide partners for services such as baggage fees, companion tickets and airport lounge access, which have increased as a result of our renewed co-brand relationships. For the remainder of 2015, given that Q1 of last year also included elevated costs and costs of card member services, we would expect to see an even higher level of growth for this line item.

Last on slide 11, the tax rate during the first quarter was 34%, which was relatively consistent with recent quarters but slightly below the prior year. As we mentioned at Investor Day, our assumption is that the tax rate will remain roughly in line with recent performance during 2015.

Let's turn now to marketing and promotion expenses which account for the majority of our spending on growth initiatives. Slide 12 shows the trend in these costs. And you see that while this quarter's marketing and promotion expenses were 4% higher than the prior year, you'll also notice that these costs have historically been much slower during each year's first quarter.

More broadly as we think about 2015, we continue to evolve our plans around the timing and level of incremental spending on growth initiatives. As we have said, the majority, but not all, of this spending, will occur in marketing promotion. Considering this, we would expect marketing and promotion expenses to be relatively similar with the elevated level of 2014, which you can see on the slide included higher levels of expenses in Q2 when we had the business travel joint venture transaction gain and in Q4 when we had the Concur gain.

While we could have made the decision to reduce investments from their elevated 2014 levels, as we discussed at Investor Day, we believe that the right decision for shareholders to best position the Company for the medium to long term is to keep investments at an elevated level this year in anticipation of the termination of our relationship with Costco in the US during early 2016. As Ken and Steve discussed in detail a few weeks ago, the incremental spending in 2015 will focus on the many growth opportunities that we see across all segments in our Company, including our efforts to capture a meaningful portion of the spend and lend of our Costco card members in the US.

Turning now to operating expense performance on slide 13, our reported results continue to reflect the impact of business travel in the prior year across a number of expense categories, complicating line by line comparisons. That said, excluding business travel expenses incurred in the prior year, adjusted operating expenses in total decreased by 2% in the quarter.

I'll also note that during the quarter we benefited from some specific items in the other net line which we do not expect to repeat going forward. As you think about the balance of the year, I'd also point out that operating expenses have historically been lower during Q1.

Moving to slide 14, adjusted operating expense growth, of course, remained well below our stated 3% growth target. As we discussed at Investor Day, maintaining disciplined control of our expenses, particularly operating expenses, remains a key driver of our earnings performance. As Steve noted that day, however, we are not achieving this disciplined expense control through a cut back in investment levels but rather through ongoing efforts to increase the efficiency of the organization. We continue to make substantial investments within operating expenses to support our growth initiatives.

Now shifting to our capital performance on slide 15, during the current quarter we returned 65% of the capital we generated to shareholders while strengthening our already strong capital ratios. As I mentioned at Investor Day, share repurchases of approximately $750 million for the first quarter were below the amount included in our 2014 CCAR submission due to some nuances in the 2014 CCAR rules associated with the capital generated by employee plans. These rules have evolved for future CCAR periods but did cause our Q1 payout ratio to be somewhat lower than in recent quarters.

I'd also point out that the 2015 CCAR process gives all participants more flexibility on the timing of share repurchases across the five-quarter CCAR approval period. Accordingly, the exact timing and size of our repurchases in 2015 will be driven by many factors, including but not limited to the levels of our earnings and the demand for other capital uses.

Looking at our capital ratios on the bottom of the slide, you see a more significant increase year over year in our Tier 1 capital ratio. This was driven by the $1.6 billion in preferred issuances we executed during the last two quarters.

As a reminder, we will see the EPS impact from the dividend payments associated with these issuances beginning in Q2. These payments will reduce our net income available to common shareholders by approximately $20 million each quarter.

Stepping back from these quarterly results, our strong relative performance in the 2015 CCAR process and the Fed's non-objection to our capital plan clearly illustrate the strength of our capital position and business model. This reinforces our confidence in the Company's ability to generate capital while maintaining its financial strength. And we remain committed to using that capital strength to create value for our shareholders.

Before moving on to your questions, let me make just a few final comments, stepping away from the complexity I just took you through and going back to the key themes in our results. We believe that our core underlying performance this quarter was solid and reflects the continued strength of our business model and the trend we discussed last month at Investor Day.

Earnings per share growth of 11% was better than our full-year 2015 outlook, in part due to some specific benefits in Q1, most notably in provision and operating expenses, and also because we have not yet seen a ramp up in incremental spending on growth initiatives. Clearly, given our 11% EPS growth in Q1, simple math would indicate that EPS growth would have to be negative for the balance of the year to meet our continued outlook for full-year EPS growth to be flat to modestly down.

Looking at the second quarter in particular, I would remind you that you will begin to see the impact from our recent preferred share issuances and that the prior year EPS of $1.43 included a net benefit from the business travel joint venture transaction. Considering this, while it is obviously very early in the quarter, we would expect earnings per share in Q2 to be more significantly down from last year.

All this is consistent with our previous comments that quarterly earnings performance would be more uneven than it has been historically while we go through this transitional period. Given this dynamic, our focus has been on our full-year earnings outlook rather than our performance in any individual quarter. When we consider our Q1 performance and our Q2 comments in the context of the multi-year financial outlook that we reviewed at Investor Day, we believe we are on track and are continuing to do the right things to position the Company for the long term.

With that, I'll turn the call back over to Rick for some details on our Q&A session.

Thanks, Jeff. As a reminder, in order to provide a greater opportunity for more analysts to ask a question during the call, I will ask that those in the queue please limit yourself to just one question. Thanks for your cooperation in this process. And with that, operator, let's open up the lines for questions.

We'll go to the line of Sanjay Sakhrani with KBW.

Thank you. My question will be on Costco Canada. I know you have addressed it throughout the last couple times you've spoken. But now that you have a full quarter's worth of experience at Costco Canada, could you maybe just talk about your ability to retain spending on those customers' cards and how you think it reflects relative to your strategy in the US? Thanks.

Thanks, Sanjay, for the question. Maybe let me start by providing just a little bit of context for Canada because we've given a fairly unusual amount of color around the US where we've pointed out that that relationship consists of about 70% of the co-brand spend being out of store. Also talked about the co-brand of the US accounting for about 8% of global billing. To draw a contrast to Canada, in Canada the Costco co-brand and Costco as a merchant represented a more significant portion of our country total billings in Canada.

The other probably two very important differences to point out to you are that the portion of spend on the Costco Canada co-brand that was in store was much higher. It was about 60% in store. And of course in Canada, there was no sale of the portfolio.

So with all that as context, you are correct that this is the first full quarter since the termination of acceptance of Amex products in Canada on January 1. As you would expect, that means all of the in-store spend goes away. But we, while it's still early, I would say, continue to be pleased, as you've now heard us say in a couple forums, by our efforts to capture the spend and lend of the Canadian Costco card members.

And of course in Canada, we did issue a new cash back card. As you would expect we are very focused on those customers who clearly have an affinity with the American Express brand.

And I'd say there have been significant learnings and we are encouraged by them and we are being very thoughtful about how we will apply them in the US. As you would expect, Sanjay, I probably don't want to provide a lot of color and detail beyond that general statement, but we are encouraged one quarter in.

(Operator Instructions)

The next question will come from Don Fandetti with Citigroup.

Yes, Jeff. I was wondering if you could talk a little bit about how we should think about a potential gain from the Costco sale. Sometimes these portfolios can trade for 15%-plus premiums. Can you talk about some of the offsets and how that may also impact your capital return given that you were able to return more than 100% into CCAR?

A couple comments. I really, in terms of the progress, potential outcome, Don, on any portfolio sale, I can't really comment beyond what we've already said, which is we'll just have to see. There's a process and we'll see how it plays out.

In terms of the financial outlook we have provided, I would remind everyone that we did not include any assumption about a gain on the sale of the portfolio. So any gain would be incremental to the outlook we laid out.

When you think about capital implications, obviously if there is a portfolio sale there is a significant reduction in risk-weighted assets since the Costco US loan portfolio, as we previously talked about, constituted about 20% of our global loan portfolio. That in and of itself, depending upon how quickly we ramp our efforts elsewhere to replace that spend, that of course frees up some capital.

And to the extent there is a sale and there is a gain, I think it's fair to say that we'd have to look at the timing and amount of any gain, and think about what portion of it we might want to use to make sure we're fully funding our efforts to capture the future spend and lend of our relationships with the Costco card members and what portion should drop to the bottom line. Clearly we have a very strong balance sheet already, and I think we've demonstrated a very strong and steady commitment to using that balance sheet to return capital to shareholders.

It's also fair to say, though, that the nature and timing of the CCAR process means there's often a lag between big developments that impact capital and our ability to run them through the CCAR process. So we'll have to see how this plays out. But hopefully that gives you a sense, Don, of how we're thinking about the various components.

Our next question will come from David Ho with Deutsche Bank.

Good afternoon. Can we talk about the expense ramp and specifically what areas you're investing, particularly as we start in the second quarter and maybe this quarter as well, and how are they different than some of the areas that you have invested in previous years, in particular like coalition partners? And do you expect the Costco USA build to accelerate towards the end of the year versus the middle part of the year?

Good question, David. Let me make a few comments. One of the reasons why we have continued to talk a little bit about an expectation that you'll see more quarterly unevenness in our earnings is we think the prudent thing here is to be a little flexible around the timing and amounts that we choose to spend around one of the things that we will be ramping our growth spending initiative, or our growth initiative spending on, and that's focusing on capturing the future spend and lend from our relationship with Costco card members.

It's a very complex process between now and 2016 that will play out in that relationship and we need a little bit of flexibility that will determine when we choose to ramp up some of our marketing efforts and when we don't. Certainly, that is one of the elements, though, when you think about what is different this year and potentially next year about the range of things that we do growth spending on. We have a very rich pool of very dedicated American Express card members and we will do our best to capture their future spend and lend.

The second thing I might point out for 2015 is we are very excited about the launch of Plenti, since you brought up the coalition. As you would imagine or as you recall, we have a pretty well-trod track with the loyalty coalition business as we've launched it in other countries for understanding the flow as you go from the first year of launch, which is more of an investment year, and as the program then matures in the coming years.

So I think it's fair to say that we want to make sure this is a really strong launch and we're putting a lot of resource towards that in 2015. And that's probably a little different in terms of the profile that you would have seen last year and a little different than what you will see next year as the program moves beyond the launch phase.

Beyond those two things, I would say, really, that we will be investing in the range of growth opportunities we have across the Company. We tried to do a pretty thorough overview of those at Investor Day. And they really span the Company.

So, you'll see us continue to invest in some of the international markets where we've seen particularly high rates of growth. Lately you'll see us continue to invest around our small business and middle market efforts.

You'll see us continue to invest in some of the areas where we believe expanding the breadth of the demographic that our brand reaches out to is producing new opportunities. And you'll see us continue to do some things that we think will drive the steady growth in lending that you've seen above industry averages. So that's probably how we think about the spending overall.

Our next question comes from Bill Carcache with Nomura Securities.

Thank you. Good evening Jeff. Could you clarify for us what cost of equity or hurdle rate you use when evaluating new investment opportunities? And can you also discuss how your hurdle rates might differ across your different businesses, including, for example, co-brand, particularly since it seems like your GNS and charge card businesses generate structurally higher returns and are a big driver of that 25%-plus return target that you have?

I don't think you guys have discussed that in the past but I do think it could be helpful to the extent you could give some kind of indication, would be helpful for investors to assess the risk that people have been worried about that you could continue to lose future partnerships to competitors who are willing to accept lower returns.

Bill, that's a good and actually very important question. We have a range of businesses across American Express. And, of course, we have a fairly unique business model in our core business.

That range of businesses and that business model produce a tremendous return on equity relative to most of our peers in financial services. And, so, we are thrilled that we have an ROE, which this quarter was 29%, and we have a really strong track record of meeting our more than 25% target. And I think it's a real commentary on the strength of our business model.

But we shouldn't confuse that with hurdle rates for incremental investments or for how we think about bidding for business because, of course, if you really look at our cost of capital, you will of course get to numbers far, far below 25%. And I could spend the rest of the call getting philosophical about exactly how you might calculate our cost of capital. And we look at it, as you would expect, in many ways. But suffice to say it is much below 25% and it is somewhere around the 10% range, depending on which measure you want to look at.

When we're thinking about incremental opportunities in a bidding situation, I don't really believe that we would take a different economic choice based strictly on a hurdle rate. Now, we do make choices based on the next part of your question, though, which is we do have a range of opportunities in our business. And we generate a range of returns on equity and a range of returns on an incremental dollar of expense spending, as well.

So, when we think about opportunities, we're always making sure that anything we do is going to generate incremental value for our shareholders and be above our returns on capital. But we also have to think about the range of opportunities in the financial and managerial resources that we have to allocate across those opportunities. And one of the things you heard us talk a fair amount about, going all the way back to the February 12 investor call that Ken and I had on Costco, is as we thought about where we were with Costco one of the things we really thought about was the range of other opportunities we have, some of the non-financial constraints that a future contract might have entailed. When we baked all of those things together we came to the conclusion that in the long run we would be better off pursuing another path.

But I think it would be a real misnomer for anyone to conclude from that that American Express is never going to pursue a transaction or a piece of business that has a return on equity below 25%, so they're not competitive. Our job is to create value for our shareholders. And of course I'd like to create it at the highest possible ROE, and I'd like to create it in the highest possible parts of our business. But if I can create a new chunk of business at something that is closer to our hurdle rate, we will absolutely, of course, pursue that business if it is the best alternative in the long run for the Company.

And the next question will come from Sameer Gokhale with Janney Montgomery.

Hi, thank you. My question was about your loss provisions and the reserve release. Jeff, you provided a bit of an explanation. I think you talked about the provisioning, the reserve release being more related to charge cards, I think, this quarter, if I heard you correctly. But it just seems like between last quarter and this quarter there seemed to be a lot more volatility than we've seen, I think, at least in recent quarters, recent years between Q4 and Q1. So, were there any changes made to any underlying assumptions that would drive this kind of volatility? If you could just parse that out a little bit that would be helpful.

It a very accurate description, Sameer, I think, of where we are in the last couple quarters. I would have to call this quarter's provision one that is certainly off the normal trend. I talked in my remarks about the fact that of course you have a normal Q4 to Q1 decline in your loan and receivable balances, and that does generally drive a seasonal, therefore, decline in your reserves.

And that happened this year, as it did last year. However, you have a combination of the fact that last year's first quarter had a few various more specific items that happened to drive that number up a little bit. This quarter we had some of the specific adjustments or items that you have every quarter in the provision, that happened to drive it down a little bit. You put those two together and you suddenly get a really big year-over-year difference. Which is why I also in my remarks tried to point people to.

I think the more important thing to think about here is, as we look at the rest of 2015, in the current economic environment we'd expect write-off trends to stay pretty strong. However, we've been steadily growing our loan balances and you'd expect reserves to build along with those loan balances. And some of the specific items that drove the Q1 result we wouldn't necessarily expect to repeat.

So, you put all of that together and I would expect to see provision going up year over year in 2015. And then I'd also just remind you that in terms of what assumptions we made in the financial outlook we've given for 2016 and 2017, we did assume in 2016 and 2017 that you do see some modest uptick in write-off rates and, hence, provision and reserves.

The next question will come from Eric Wasserstrom with Guggenheim Securities.

Thanks very much. Jeff, can you just clarify -- in terms of the 2016 broad guidance that you gave back in February and reiterated at the recent Investor Day, does it contemplate the foregone net interest income from a sale of the Costco portfolio? That's really it, I suppose.

A good question, Eric. And what I would say is that, because we can't be completely sure of the timing and outcome of any potential portfolio sale, we built an outlook for 2016 which we think we can achieve under a range of potential outcomes for the portfolio. And we built an outlook that, to be explicit, does not include any potential gain on a sale. So, we think pretty much no matter what assumption you might want to make about the resolution around the portfolio, we think we have enough levers in our business to hit the outlook we've given you for 2016.

Now, certainly there are some things that could drive you above that. If there is a gain on a sale, for example, that is clearly not in our outlook and would be incremental. But we just don't know enough about the final outcome and the timing of the final outcome to be specific beyond the comments I just made.

The next question will come from Cheryl Pate with Morgan Stanley.

Hi good afternoon. Just wanted to touch upon billed business a little bit and if we can split it up into international and US. On the international side, I'm just wondering if you could maybe spend a minute on how you think about potential hedging strategies to help offset some of the headwinds. And then on the US side, if you could provide a bit of color for how you're thinking about trends as we look at the rest of 2015 on top of that potential to maybe take some share, with OptBlue seemingly tracking a bit ahead of expectations. Thank you.

Let me take those one at a time, Cheryl. On hedging, we do some foreign exchange hedging but it's really about, frankly, helping us have a clear view from a planning perspective within a quarter. It helps us know what the FX impact is going to be. In essence, at the beginning of a quarter we do a bunch of hedging that unwinds as you get to the end of the quarter so you're not further impacted by anything that happens in the quarter.

That obviously has zero impact on our longer-term trend or on the year-over-year declines. And as we think about doing any other kind of strategy longer term to hedge, our conclusion at the end of the day is that we think there's value in the diverse set of global businesses we have. We think in the long run currencies go up and down and tend to equilibrate over time, and that the frictional cost and, frankly, the volatility that the accounting drives for any longer-term hedging strategy has caused us to shy away from it. So, that's how we think about hedging.

On the US, obviously we'll have to see where the economy goes as we get into the rest of the year. I think it's fair to say from our experience in the first quarter, we haven't started to see yet estimates of GDP growth in the US or elsewhere. But I think when we look at our own experience and some of the external data around retail sales, and when we look at what's happening to gas prices, when we look at some of the admittedly somewhat anecdotal stories we hear in our corporate card business, it suggests to us that it was certainly not the most robust of quarters for economic growth. So, really, in that environment, for us, once you adjust for FX and last year's business travel and get to 5% revenue growth we actually feel pretty good about it.

When you think about the rest of the year, you are correct, we're upbeat about OptBlue. It is a multi-year effort. I want to be clear that when Anre Williams on our team first talked about it at the February financial community meeting last year, we talked about it in the context of 2015 to 2017.

In that vein, we are encouraged that we actually signed up 400,000 merchants in 2014, and that was before we told you we'd started to ramp the program much. So, we do think as we get into the latter part of 2015 that we should begin to see a meaningful benefit from OptBlue, and we remain very encouraged by it.

We obviously remain very encouraged by lots of other things in the market. Our steady growth in the US and growing our lend portfolio, we expect to be able to continue, and we think we are doing that without materially changing the risk profile of the Company by really focusing on capturing a fairer share of our card member spend.

We're excited about our continued efforts around broadening the reach of the brand with things like the EveryDay card. And we're excited about things like Plenti. If you haven't focused on it, I'll point out to you we are going to launch a Plenti co-brand, which we think will be a very interesting play as just one more step on our pathway of broadening the demographic reach of the brand and the franchise.

So we'll have to see where the economy goes and what the environment does but those are probably some of the things we're thinking about as we look at the rest of the year.

Our next question will come from Craig Maurer with Autonomous.

Good evening. Just a fast question. The sharp decline or the slowing in commercial card spend, if you could first tell us where or in what parts of the economy you're seeing that weakness most clearly.

And, secondly, historically, in talking to Amex we've discussed corporate spend trends leading consumer spend trends by about six months. Do you still think of that as a good relationship, that the slowdown in commercial could be forecasting a slowdown in consumer toward the back half of the year? Thanks.

Good question, Craig. Let me just remind everyone of the facts. I think it does to us, as well, strike us is that in the corporate card segment you saw a sequential slowing from 8% in Q4 to 4% in Q1. And that's clearly a much sharper sequential slowing than you've seen elsewhere. As we have dug into that a little bit it is primarily driven by the US and seems to be a little bit more striking in our larger accounts in the US.

In terms of what this means for the broader economy six months from now, I guess I'd be cautious. If you look at corporate spending, it tends to be a little bit more volatile than some of our other segments because companies have gotten pretty good over the years at turning on and off their travel spend and other T&E spend in response to their own business challenges and the economic environment.

I think in any part of our business we're always cautious about saying does one quarter make a trend. So we'll have to see. I'd say it's a note of caution for us but I wouldn't want to read too much into it at this point in time.

Our next question will come from Rick Shane with JPMorgan.

Hi guys, thanks. Craig actually just asked my question but I would love to get a little bit more of a specific answer. You defined where the slowdown was in terms of size of the customer, but I think what I'm interested in, and I suspect Craig was, as well, is is there any industry that we can specifically look to. I think everybody is wondering about oil and gas. And also any category of spend where you saw it particularly.

Those are good questions, Rick, and ones, believe me, we've been asking ourselves. Maybe I'll even take this opportunity to step back a little bit. Certainly we are watching very closely across our global portfolio for any impact, both billings and credit, arising from the rather dramatic drop in oil prices.

And what I would tell you for now is certainly we see the billings impact of a drop in oil prices. Remember, it's 2% to 3% of our billings, so a 30% drop costs about 1 point of billings growth. We do see some drop in spend from some of the oil services companies in the grand scheme of our overall billings. However, that did not total up to anything that is significant for us.

We have not seen any significant deterioration in credit yet, either by industry or parts of the US or parts of the globe that are particularly driven by an oil economy. But, believe me, we are watching all of that like a hawk.

It's also difficult for us to say whether, are people taking their money, their savings from slightly lower oil prices and using it to spur more spending elsewhere. That's tough for us to see. I'm not saying it's not happening but I'm not sure we can really see any of it.

So, to come all the way back to the origin of your question, which is what's driving the sharper sequential decline in corporate card, I think we've done enough work to say it doesn't appear to be isolated to oil services, it doesn't appear to be isolated to any particular industry or geography with any finer point than it is primarily US, not in other parts of the world.

Our next question comes from Ryan Nash with Goldman Sachs.

Good afternoon, Jeff. I just wanted to ask you one quick question regarding loan growth. You made the comment that you could have some slower growth related to Costco. Your growth has been running in the 4% to 5% range. Just want to get a sense, given the efforts that you're putting into this from a growth perspective, we've seen some across the industry have accelerating growth rates, and I was just wondering, given the focus here, should we expect that we could actually start to see growth rates across the lending area accelerating? Or do you think the offsets from the run-off in Costco are going to overtake the incremental growth that you're seeing in the rest of the portfolio?

I think I might break the answer, Ryan, into three components, so we think about this. Talk a little bit about US, talk a little bit about international, and then separately talk about Costco.

because in the US, in fact our loan growth this quarter was 7%, and has been running up at the 6% to 7% rate for the last couple quarters. And I would say that if you look at the kinds of things that Ed in particular talked about at Investor Day, this is an area where we think we could run that number up a little higher than that in the current industry environment without any material change in our risk profile by continuing to build from a marketing perspective, new customers as well as with existing customers, both bring in or borrowing-focused customers, as well as capture more of our fair share of the borrowing behavior of our existing customers. We're pretty upbeat about that and think it's a real opportunity for the Company.

Internationally, we have a much smaller loan portfolio. We do think we can achieve steady growth. That's masked right now by the very significant foreign exchange impacts you see and the fact that -- and this goes to, now, our third point -- there was a loan portfolio associated with Costco Canada. We didn't sell the portfolio, as you would expect, because, as I said earlier in response to a question, 60% of the spend on the Canadian Costco co-brand was in store. As that spend went away January 1, you see a more rapid decline in some of the loan balances, as well, so, that will dragon the international piece a little bit.

The third component to think about is Costco in the US. We can't be sure of the outcome of any potential sale of the portfolio. But that portfolio, if it were to be sold, represents 20% of our loans.

So you could accelerate your growth excluding that by a significant amount from 7%. It's still going to take you a long time, frankly, to get back to even where we are today in terms of the overall loan portfolio and what that means for the spendtricity, if you will, of our overall income statement.

Long-winded answer to your question but I think you do have to think about loan growth in the context of those three categories. I think we have time for one last question, operator.

Thank you. That will come from the line of Bob Napoli with William Blair.

Thank you. I just wanted to focus a little more on small business, maybe how the lending growth in small business and OptBlue, how that's tying together. Every merchant acquirer talks positively about OptBlue and one of them talked about moving it into Canada. You said, Jeff, earlier that you're moving in something similar in related markets. At the investor meeting you had you showed the merchant loan portfolio growing from almost nothing to $500 million over the last couple of years.

How is that tying together? Do you expect to grow the loan portfolio along with OptBlue? Is that part of the strategy? And will that be not only in the US but in other markets? And is there any way to quantify in some way the incremental effect that you think it will have on spend growth or loan growth?

That's a series of questions, Bob. And in some ways, I think the way I would tie together my answer is to say, remember, one of the aspects of our unique closed-loop model is we work extremely hard every day not just to generate value for our card members but we work extremely hard every day to figure out how we generate more value for our merchants.

We're very excited about the OptBlue program and we think it is making it easier for smaller merchants to work with us. We think it's going to expand their business opportunities, and we're very excited about what it will do for merchant coverage over the next few years. We do lots of things to try to help small businesses operate better.

When you look at our open business, which on the issuing side targets small businesses, it's really all about helping drive the success of those businesses and getting them access to spend capacity that our business model and our charge card model really is able to fairly uniquely provide them. And we really try to use that and have used it over the years to drive to a very significant position in small businesses. Things we do, like Small Business Saturday, are another example of what we do to help drive value and support our merchants.

Merchant financing in that context is just another extension of the same drive we have to constantly work at how do we find new ways to add value to merchants. Very excited about merchant financing and we think it is not only a good opportunity for us to, in a very thoughtful, measured, risk profile centered way grow our financing portfolio, we think it's a real value add for our partners, particularly some of our smaller business partners.

So hopefully that strategy all fits together. It's really part of what we have to do every day.

With that, I would like to thank you all for joining tonight's call and participating in the Q&A session. I would summarize by coming back to the fact that we think our results in the first quarter reflect solid core underlying performance. When you think about our Q1 performance and what I said today about Q2, and when you think about it in the context of the multi-year financial outlook that we reviewed at Investor Day, we think we're on track. We're continuing to do the right things to position the Company for the long term.

So, with that, I'll wish all of you a good evening. And I'm going to and turn it back to Rick who is going to provide a brief overview of the investor conferences we plan to participate in during the second quarter. Rick?

Thanks, Jeff. Yes, before we close I just want to mention that we are speaking at a number of conferences this quarter. First, our CEO, Ken Chenault, will be participating in the Bernstein Strategic Decisions Conference in New York on May 28. Then the President of our Global Network and International Card Services business, Doug Buckminster, will be at the William Blair Growth Conference in Chicago on June 9. And then on June 10, American Express President Ed Gilligan will be at the Morgan Stanley financial Conference here in New York.

Live audio webcasts of each of these events will be made available to the general public through the American Express investor relations website at ir.americanexpress.com. Thanks again for joining tonight's call. And thank you for your continued interest in American Express.

That does conclude the conference for today. Thanks for your participation and for using AT&T conference service. You may now disconnect.