美國運通 (AXP) 2017 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the American Express Second Quarter 2017 Earnings Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I'll now turn the conference over to your host, Vice President, Investor Relations, Toby Willard.

Please go ahead, sir.

Thanks, Kathy.

Welcome.

We appreciate all of you joining us for today's call.

The discussion contains certain forward-looking statements about the company's future financial performance and business prospects, which are based on management's current expectations and are subject to risks and uncertainties.

Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's presentation slides and in the company's reports on file with the Securities and Exchange Commission.

The discussion today also contains certain non-GAAP financial measures.

Information relating to comparable GAAP financial measures may be found in the second quarter 2017 earnings release and presentation slides as well as the earnings materials for prior periods that may be discussed, all of which are posted on our website at ir.americanexpress.com.

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

Today's discussion will begin with Jeff Campbell, Executive Vice President and Chief Financial Officer, who will review some key points related to the quarter's results through the series of presentation slides.

Once Jeff completes his remarks, we will move to a Q&A session.

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

Well, thanks, Toby, and good afternoon, everyone.

Earlier today, we published our second quarter results, and with our earnings per share for Q2 at $1.47 and with adjusted revenue growth for Q2 of 8%, we believe that our results continue to reflect solid progress against our priorities laid out again on Slide 2: accelerating revenue growth, optimizing investments and resetting the cost base.

Since early 2015, we have made many changes to the company and have been investing in a broad set of growth opportunities generated by our unique business model.

As we have made these changes, we have always sought to balance the short, medium and long term.

We are certainly encouraged by our current revenue performance and the near-term payoff we are getting from our actions.

But to be clear, we are making decisions aimed at generating sustainable revenue growth, and we remain focused for the years beyond 2017 on the 6% revenue growth scenario that we shared at our Investor Day in March.

In addition, we are clearly seeing the benefits of our cost-reduction efforts and continue to return significant amounts of capital to shareholders through our dividend and share buyback programs.

Our efforts across these areas are driving the simple model we have shared over the last couple of years.

We have a diverse range of growth businesses plus a business model that provides steady operating leverage plus a balance sheet that shows tremendous capital strength, all of which contribute to steady EPS growth.

Now I know our numbers have been difficult to interpret over the past 2 years of repositioning the company, but Q2 does mark the end of the need for the quarterly adjustments we have been sharing with you for comparison purposes since the beginning of 2016.

I know we are all looking forward to next quarter on that front.

Indeed, more broadly, in many ways, the end of the first half 2017 is a milestone for us as we complete the transition from repositioning the company and managing the related volatility to executing plans focused again on delivering steady revenue and earnings growth.

Of course, the environment we operate in is challenging, but we believe we are well positioned to compete effectively across our diverse customer segments and geographies.

With that, let me turn to the detailed results starting with the summary financial performance on Slide 3.

Revenue of $8.3 billion for the second quarter increased 1% versus the prior year, reflecting primarily higher year-over-year net interest income.

Excluding Costco-related revenues from the prior year and the impact of FX, adjusted revenue growth was 8%.

The second quarter also included growth in provision and rewards expense above the growth in loans and billings, respectively, as we would have expected, both of which I will come back to in a few minutes.

Net income of $1.3 billion was down 33% versus the second quarter of 2016 largely due to the $1.1 billion gain recorded last year upon the sale of the Costco cobrand portfolio.

Earnings per share of $1.47 reflects our net income performance and also the benefits of our strong capital position.

Over the last 4 quarters, we have returned $3.2 billion of capital to shareholders through our share repurchase program, which has resulted in a 5% reduction in average shares.

These results brought our ROE for the 12 months ended in June to 22%.

This ROE performance is below our recent performance of approximately 25% primarily due to the uneven quarterly earnings we experienced in 2016.

If you simply look at the math of our expected earnings range for the full year 2017 and our equity position, our ROE should trend back towards our recent performance level as we progress through the year.

So let me move to our metrics starting with billed business performance trends, which you see several different views of on Slides 4 through 7. Worldwide FX-adjusted billings grew 1% in the quarter versus the prior year.

As we move to Slide 5, you can see that Q2 billings growth adjusted for both the impact of Costco and changes in foreign exchange rates remained consistent with Q1 at 8%.

We are encouraged by the continued momentum in billings this quarter, which reflects broad-based growth across our diverse segments and geographies with adjusted U.S. billings steady at 6% and international billings growing in the low double digits.

Turning to the segment perspective.

In GCS, which grew at 5% year-over-year, consistent with Q1, we continue to see healthy performance in the small business and middle-market client segments, which I will refer to as SMEs in my remarks.

Just to remind you, at our Investor Day, we defined SMEs as clients with less than $300 million in annual revenues.

Adjusted volumes from our SME client segment in the U.S. grew in the low double digits in the quarter, and outside the U.S., SME client volume grew in the mid-teens.

In the large and global GCS client segment, spending volumes were up a bit as compared to last year, though, as we've said for a while now, we expect the large and global client segment to remain slower growth rates as corporations look to manage their travel and entertainment expenses.

In addition, we do not yet see any significant inflection point in macroeconomic trends that has caused a shift in spending patterns for these large and global customers.

In the International Consumer and Network Services segment, the FX-adjusted billings growth rate was 8%, in line with the previous quarter.

Looking at the 2 parts of the segment.

FX-adjusted volumes from proprietary cards grew at 12%, up from 11% in Q1, reflecting continued strength in several international markets.

In GNS, the FX-adjusted growth was 5% in Q2, down modestly versus the prior quarter primarily due to China as well as Australia and the EU, which were impacted by changes related to regulation.

Moving to international in total on Slide 7. Our billings growth rate is down slightly sequentially but remains healthy with double-digit growth in FX-adjusted terms.

As we look at a few key markets, for example, we see continued double-digit FX-adjusted growth in the U.K., up 15%; Mexico, up 12%; and Japan, up 17%.

While we have been showing strong growth across international, the regulatory environment in markets like Europe, Australia and China will continue to evolve, and we will continue to adapt our business model as the regulatory environment unfolds.

Stepping back, we are pleased with the continued strength of our adjusted billings growth rate.

The momentum in the first half of the year reflects the investments we have made in a variety of growth opportunities over the last couple of years.

Although we face intense competition in the U.S. and the regulatory environment is uncertain in many markets around the world, we remain focused on driving more volume onto our network, and we feel good about the diversity of our billings growth.

Turning to our worldwide lending performance now on Slide 8. Our total loans were up 11% versus the prior year, another solid quarterly performance.

We continue to steadily grow loans faster than the industry as we capture the particular opportunity we have to grow loans with existing customers while also adding new customers.

As we look forward, we believe we have a long runway for growth given our existing customer opportunities while maintaining best-in-class credit performance.

Looking at the right-hand side of the slide, you can see that net interest yield is again up significantly year-over-year.

The improvement in yield is driven by a number of factors, including a shift in mix to noncobrand customers who are more likely to revolve, having fewer revolving loans at introductory rates, specific pricing actions taken in recent quarters and a benefit from increases in benchmark interest rates without a similar increase in our overall funding costs.

As a quick reminder, our online deposit program personal savings is a little over $30 billion in size.

In our 10-K interest rate sensitivity analysis, we assume that as benchmark rates increase, a personal savings rate increases with a deposit beta of 1. However, if you look over the last couple of years, the prime rate has increased by 100 basis points, while our own personal savings rate has only increased by 25 basis points.

Now that change to our rates has come in just the last couple of months, and we will continue to adjust our deposit funding rates to stay competitive in the deposit market.

In general though, the personal savings program continues to be a very cost-effective and attractive funding source for us.

Looking out to the balance of the year.

If you consider the list I just went through, many of these drivers will persist.

However, the year-over-year change in yields should not be as pronounced as we move through the coming quarters.

Before turning to provision expense, let me touch on our credit metrics on Slide 9. Again this quarter, delinquency and loss metrics in our portfolio, the best in class.

In the worldwide loan portfolio, you can see that the delinquency rate was consistent with Q1 and up modestly versus the prior year.

Loss rates, as we would have expected, also continue to be modestly higher year-over-year.

Going forward, we continue to expect loss rates to increase gradually due to the seasoning of new accounts and a shift towards noncobrand products, which have slightly higher loss rates but also generate greater yields.

As loss rates gradually move higher and loans continue to grow, the growth rate in provision will exceed the growth rate in loans, which, as you can see on Slide 10, was in fact the case for Q2 as provision increased by 26% while loans grew by 11%.

Turning then to our revenue performance in Slide 11.

FX-adjusted revenues were up 1%, and revenue growth adjusted for both Costco and FX increased by 8%.

Clearly, we are pleased with another quarter of accelerating adjusted revenue growth and, in particular, with the broad-based contributions to that growth from our diverse business segments.

If you take a step back, we have taken clear and different actions across those diverse segments to drive growth.

Let me take you back here for a second to Slide 12, which I first shared in our Investor Day in March.

On this slide, I talked about the growth opportunities we have across our different segments, and I stressed that we have made specific changes in the way we operate to better seize these opportunities.

As I look at our results this quarter and indeed over the last several quarters, I see progress against each of these growth opportunities as we realize the returns on the changes and investments we have been making.

Today, we have a consumer segment generating strong growth internationally and in the U.S., where we have strengthened our product offerings in the premium sector.

We have lending efforts that have broadened our Card Member relationships and successfully balanced growth with strong credit quality and industry-leading presence with SMEs who use our cards for an expanding portion of their payment needs, a larger merchant network that accommodates a greater share of our Card Member spending, a card acquisition engine that has successfully been redesigned for the digital age and a more agile technology infrastructure that brings customized products and services to market more quickly and efficiently.

All of these are driving our performance as we come back now to the components of revenue on Slide 13.

First, discount revenue was flat year-over-year and grew by 7% on an adjusted basis.

The discount rate in Q2 was 2.44%, up 1 basis point from the prior year due to lower rate volumes coming off the network.

As we stated at Investor Day, once we move to the second half of 2017, you will see the discount rate trend shift back to down year-over-year due to the ongoing impact of merchant negotiations, particularly in regulated markets like Australia and Europe and the continued rollout of OptBlue.

Of course, as always, the mix of our billings across industries and geographies will also impact the rate year-over-year as we go forward.

I know many of you also focus on the ratio of discount revenue to billed business, which in addition to the reported discount rate, also includes the impact of certain contra revenue items and also how we account for our GNS business.

In the quarter, this ratio was flat year-over-year at 1.79% as growth in corporate client incentives and cobrand partner payments and the shift in our billings mix towards GNS were offset by a year-over-year decline in cash rebate payments.

Net card fees grew by 8% in the quarter, driven by continued strength in the U.S. Platinum and Delta portfolio as well as growth in Mexico and Japan.

Given the competitive environment, especially in the U.S. consumer segment, we view steady growth in card fees as indicative of our Card Members recognizing the breadth and strength of the value propositions we offer on our products.

In addition, I would remind you that the increased Platinum fee for existing U.S. consumer Card Members does not start to contribute to card fee growth until September of this year.

Other fees and commissions grew 7% in the second quarter, while other revenues declined by 19%.

The decline in other revenues was primarily driven by a contractual payment from a network services partner in the prior year's second quarter and the sale of a small business in Q4 of last year.

Net interest income grew by 6% and, on an unadjusted basis, grew by 24% as the higher net interest yield I described earlier and higher adjusted loan balances combined to drive significant growth in net interest income.

Turning now to expenses on Slide 14.

Performance varied across the lines, and I'll discuss the changes to marketing and promotion, rewards and Card Member services expenses when I come back to Card Member engagement spending in just a minute, but first, our operating expenses.

Total operating costs during the quarter were up 39% versus the prior year.

Excluding from the prior year the $1.1 billion gain from the Costco cobrand portfolio sale, which was treated as a contra expense, and a $232 million restructuring charge, adjusted operating expenses were down 4%.

And this marks the fourth consecutive quarter that adjusted operating expenses have declined year-over-year.

We continue to make solid progress on our cost-reduction initiatives, and we are confident that we will remove $1 billion from the company's cost base on a run-rate basis by the end of 2017.

We are steadily executing on our plans to improve our efficiency and get costs out.

This progress, along with our revenue performance to-date, is allowing us to selectively reinvest some of those savings in areas that will help drive continued revenue growth going forward.

Our effective tax rate during the quarter was 31.2% compared to 33.2% in the same period last year, reflecting both discrete items and proportionally higher earnings from lower tax rate international markets than in the prior year.

We now expect the full year tax rate to come in slightly below our previously stated range of 33% to 34%.

Moving to the summary of our Card Member engagement spending on Slide 15.

Total engagement spending in Q2 was $3.1 billion or 10% higher than the prior year in the quarter and up 7% year-to-date.

Looking at the components of that spending.

In the first half of the year, M&P was up 1% versus 2016.

As a reminder, coming into 2017, we expected marketing and promotion to be down significantly from 2016 levels as we found efficiencies in our marketing spend and moved past some of the unique investment opportunities we had in 2016.

And you will see that year-over-year reduction in the second half of this year.

I would also remind you that consistent with our historical practice, we will continue to evaluate investment opportunities and monitor our business performance and saving initiatives to balance our financial commitments with driving long-term value.

As we look at the effectiveness of our marketing spend, we continue to see good traction in attracting new customers to the franchise.

In the quarter, we added 2.7 million new proprietary customers globally, and in our global consumer business, close to 2/3 of new-customer acquisition came through digital channels and 35% of new customers were millennials.

Rewards expense increased 9% in Q2 despite a small decline in proprietary billing volumes versus the prior year.

Excluding the Costco cobrand volumes in the prior year, adjusted rewards expense would have increased in the quarter by 20%, while adjusted proprietary billings grew by 6%.

This growth in rewards resulted in a ratio of rewards cost to proprietary billings of 86 basis points, roughly in line with the prior quarter.

The greater year-over-year increase in rewards expense during the quarter reflects the impact of the enhancements to our U.S. Platinum products that we implemented at the beginning of Q4 '16 as well as continued strong growth in our Delta cobrand portfolio.

Cost of Card Member services in the quarter increased 24%, reflecting higher engagement levels across our premium travel services, including airport lounge access and cobrand benefits, such as First Bag Free on Delta as well as usage of the new Uber benefit on Platinum.

We continue to believe that this is an area where we can offer differentiated benefits, and we will continue to invest in Card Member services.

To focus for just a moment on U.S. Platinum, you already know we have made a series of changes to our U.S. consumer and Small Business Platinum product offerings over the last several months, both in rewards and other more experiential benefits.

The early results from these changes look good, and we are seeing both increased engagement from our existing U.S. Platinum Card Members as well as higher rates of new-customer acquisition since the introduction of the new benefits.

Turning now to Slide 16 and touching on capital.

We continue to use our strong balance sheet to return a significant amount of capital to shareholders.

Over the last 4 quarters, we have returned 94% of the capital we have generated.

I think this shows the commitment we have over time to leveraging our business model and capital position to steadily create shareholder value.

As you all know, we have recently received a notice of nonobjection from the Federal Reserve on our 2017 adjusted CCAR submission.

We have both increased the dividend payout for the next 4 quarters as well as significantly increased the share buyback versus the prior CCAR authorization.

We remain confident in the strength of our business model and our ability to drive shareholder value through capital returns.

Of course, we also use capital to support business building activities, such as growth in our loan balances and potential M&A activity in addition to returning capital through dividends and share buybacks.

Stepping back now in conclusion.

Over the past several years, we've embarked on a series of initiatives to reposition the company and drive sustainable and consistent revenue and earnings growth.

These efforts have been targeted at providing a mix of returns over the short, medium and longer term.

Looking forward, we are encouraged with the trends that we have seen in our business metrics and revenue growth and believe that these initiatives are driving real momentum across our diverse business segments.

Given the revenue performance of the first 2 quarters, we now expect full year adjusted revenue growth to be above the top end of the 5% to 6% range I discussed at our Investor Day in March.

While this is clearly a positive development, would remind you that our recent revenue growth is benefiting from certain drivers that are likely to stabilize somewhat in future quarters, such as growth in yield and increased customer engagement, particularly on the Platinum Card.

In addition, as is our historical practice, we will continue to balance delivering earnings to the bottom line and investing for the moderate to long term.

I would also say that as we move to the back half of 2017, the uneven year-over-year comparisons from the last few years of discontinued partnerships, large restructuring charges and portfolio sales will be behind us.

And results in the second half of this year should therefore provide a clearer picture for all of us of the progress we have made towards producing steady and consistent results.

Against the backdrop of all these moving pieces and given that we are at the midpoint of the year, we are confident that we will deliver full year earnings per share between $5.60 and $5.80.

With that, let me turn it back over to Toby as we move to Q&A.

Thank you, Jeff.

(Operator Instructions) Thank you for your cooperation, and with that, the operator will now open up the line for questions.

Kathy?

(Operator Instructions) And our first question will come from Ken Bruce with Bank of America.

A little clarification if I could, and it relates to card fees and some of the value prop stuff that's already in the market.

I guess, you had mentioned that you've got card fees.

They were up nicely in the quarter, but that is not benefiting from the increase in Platinum Card fees, which is later this year.

Are we looking at some of the costs already being included in the expense side of the equation related to that?

I guess, I just want to make sure we understand the timing of the revenues versus expenses on that particular platform.

Yes.

It's a good question, Ken.

So to remind everyone, on the business and consumer Platinum products, we made some changes in the latter part of 2016, and then on the consumer product, we offered a further range of benefit enhancements that went in at the end of the first quarter of this year.

So all of the costs associated with the significantly higher Card Member engagement that those changes are driving are what you see reflected in our results, Ken, really, the last 2 quarters and are a key part of what is driving a little higher rewards cost and a little higher Card Member services cost.

As I said in my remarks, on the consumer card where we did include a fee increase, existing Card Members don't actually pay that until renewals begin in September.

So the increase in fee revenue will [lag] , to your point, the increase in costs.

We think that's an important way to do this.

So customers have a sense of what the enhanced values are at the time that they see the higher fees.

As you know, we have a long track record of every couple years with all of our products doing these kinds of upgrades and changes to the value propositions, which are often accompanied by a fee increase.

So we think we have a pretty thoughtful approach to this.

I guess, the last comment I would make is we've not only been pleased with the increased engagement with our existing Card Members, but with both the business product and the consumer product, we've been very pleased with the significant increase in new Card Member acquisitions.

And on the consumer side, those new Card Members, of course, do pay the higher fee right from day one.

So hopefully, Ken, that helps clear up exactly what's in and not in the results so far.

Our next question will come from Ryan Nash with Goldman Sachs.

Jeff, I'm just wondering, maybe 2 quick things.

One, I think at Investor Day you had talked about improving EPS each quarter throughout the year.

Now I know that could be some timing around certain investments.

But do you still feel confident in that?

And then, I guess, just related to that, you're now saying revenue growth above the high end.

Your tax rate is going to be lower, so I know you had mentioned selectively reinvesting.

Can you just maybe talk about the decision between allowing the incremental revenue to hit the bottom line versus where you may potentially reinvest some of the stronger revenue?

Yes.

So there's a couple of good questions there, Ryan.

I think, first on EPS progression, certainly, we are pleased with the first half that we have had, and so I would probably not reaffirm those statements about EPS progression.

The point I would make is you have the first 2 quarters of EPS and you have our full year guidance.

I do think it's important, as I say that, to point out that we're only halfway through the year.

Just like everyone else, we would sort of like to see next quarter's clean comparisons before we think about an updated view on the full year.

And there are some reasons that I talked about in my remarks around growth in yield at some point slowing that caused us to want to see one more quarter before we adjust what we see for the year.

And to your point, we always are thinking about how we balance the financial commitments we have, which we take very seriously, in the short term with the opportunities we see to invest and build for the longer term.

And even in the first half of the year, we have selectively chosen to spend a little bit more on a couple things in the M&P line than we had originally intended this year because we're very pleased with the revenue growth.

We're very pleased with our progress on the cost-reduction efforts, and we can do those things while still being -- remaining very consistent to the earnings commitments that we've made to our shareholders.

So we'll have to see as we get into the quarter.

We're now 19 days into exactly what all that means for the rest of the year.

But clearly, we're off to a stronger start than we expected.

We feel really good about the revenue growth and all the efforts that we have underway.

And we will, as always, balance the short term and the long term as we make decisions in the next 6 months.

We'll go next to Sanjay Sakhrani with KBW.

I guess, just when we think about that revenue growth for the second half, Jeff, as you look forward, you mentioned there might be some moderation.

I mean, is that the running expectation that you have?

I mean, what is the swing factor that will either sort of drive us better than what you're anticipating versus not?

Because we kind of know what the impact of the yield part is if it stays constant.

And then when we're thinking about spending more than what was planned, I mean, where exactly do you see the opportunities?

Is it in some of the areas where your competitors are kind of retrenching some and you could take back share?

So a lot of good questions there, Sanjay, so let me make a few comments.

First, my comments about revenue growth and the 8% you see in Q2 were really meant to point out that there's 2 things that, in particular, are helping us right now, and that's the very strong sequential growth you've seen in yields.

And all of the drivers of that growth, we think, will sustain themselves in terms of the absolute level of yield you see today, but we can't keep raising prices, for example, forever.

So there's some moderation I'd expect in the year-over-year growth in the yield going forward.

Clearly, we made some significant investments, and this is really the point that Ken was asking about in the first question.

We made some significant investments in the U.S. on both the Business Platinum and the consumer Platinum Card, and that is really driving a really nice result in terms of increased Card Member engagement.

The effects of -- the economic effects of that to Ken's question will play out over a longer time period because the fee increase benefits you actually won't begin to see until you get into the latter part of the year.

All that said, I would expect there is some stabilization, if you will, of the growth rate driven by all of those changes as we go into future quarters.

So for all of those reasons, Sanjay, for now as we look at the low GDP growth, low inflation environment we're in, as we look around the globe at the range of competitive and regulatory issues we face, as I go beyond 2017, we're going to drive revenue growth as much as we can, but the target that I'm trying to communicate we are still focused on is that 6% level as you get beyond 2017 for the reasons I just described.

Your last question about selectively reinvesting as we look at our stronger performance, boy, the great thing about the growth we're seeing right now is it is very broad across almost all of our customer and geographic segments with the exception probably of the large and global corporate segment, which is not, as we've said for some time, a particularly growing segment right now.

So the modest amount of reinvestment that is spread across almost every geography and every customer segment, and sure, we are always trying to be responsive to changes in the competitive environment.

On the other hand, we run the company for the long term.

We try to build long-term customer relationships, and we're a little cautious sometimes about reacting over the short term to any one particular move by a competitor.

So hopefully, that covers the waterfront there, Sanjay.

Our next question comes from Mark DeVries with Barclays.

Jeff, you indicated you still see a very long runway for growth -- for loan growth that is particularly with existing customers.

Can you help us think that through in a little more detail?

I mean, how much of the growth is coming from what you might consider lower hanging fruit?

And how much more challenging does that become as -- grabbing that growth as time passes?

Yes.

Mark, as you've heard a number of us say for a while, the track record we now have for several years of growing a little bit faster than the industry while still retaining best-in-class credit metrics, that's not a new thing.

The track record is now there for several years.

And despite that, as you know with our consumer customers and also for our commercial customers, we capture a far smaller share of their borrowing behaviors than we do of their spending behaviors.

And that gives us, we think, a rather unique opportunity relative to most of our competitors to tap into people we know really well, our existing customers, and try to develop the right products, the right pricing, the right marketing to get a little bit greater share of their borrowing behaviors.

And yet despite several years of doing that, when you actually just look at the map, our share of their borrowing behaviors has gone up a couple of points.

And in the consumer world in the U.S. for example, we still probably have double the share of a customer's spend behavior that we do of their borrowing behaviors.

So when you run the math out on that, there's just a long, long runway to continue to do all this.

And now we grow our lending both with existing customers and by being more focused on acquiring new customers who want to engage in some level of borrowing.

But as you look at recent quarters, we've driven over half of our loan growth from our existing customers, and it's that dynamic that makes us believe we have such a long runway to continue to grow a little faster than the industry while retaining really good credit quality.

Our next question comes from Craig Maurer with Autonomous.

So first question.

I just wanted your thoughts on the new surcharging ban that was introduced in the U.K. that will go into effect next year, how that -- how you believe surcharging has been impacting your ability to grow volumes in the U.K. And then just is your charge-off guidance still consistent with the up 15 to 25 basis points year-on-year for 2017 that you had discussed earlier?

Well, Craig, you obviously are very timely since the U.K. ruling came out just today.

Look, we -- I -- as a company have been on record for a long time all over the globe that we have a strong view that surcharging is a very consumer unfriendly thing and people who understand what they're paying for a product as they transact with a merchant.

And as you would know but others may not have had time to look at today, if you look at the ruling that the U.K. government has come out with and if you look at the press coverage of it and you look at some of the groups [that are] commenting on it, it is very much being taken and being seen as a pro-consumer action.

So that, to us, is a really positive step in the U.K. There are many other countries across Europe that are in the midst of debates about what to do about surcharging, the way this -- as you know, there's great complexity in the interplay between the EU payment rules and what then gets translated in each country.

But certainly, we would hope that the U.K. actions are emulated in many other countries.

It's a good thing for the consumer long term, and we think it's a good thing for us.

I would say great.

I don't know that, to-date, it has had a material impact on our ability to continue to grow our business.

As you know, the U.K. has been one of our strongest markets.

And this quarter, I cited its growth again being at 15% in terms of volumes, and it's been growing at those kind of levels for quite some time.

But over the longer term, we think this is just good policy and is helpful to us as well.

In terms of charge-offs, I am -- I think we remain very comfortable that what we are seeing on the credit side is right within the balance of what we would have expected given the growth we're seeing in lending.

We do not see any signs of a broader economic change that is causing any change in the credit profile.

So I would say we are performing exactly as I would have expected.

We are growing loans a little faster than we had in the original plan, and so that will also drive over time a little higher mix of new accounts going through a seasoning process.

So I think our real focus is making sure we stay with best-in-class metrics and we grow lending at good economics within the plan ranges we have because our goal is to grow lending as fast as we can within that.

I might be cautious about guiding you to a specific number on write-offs, but I would just say we feel really good about where we are today.

Our next question will come from Bob Napoli with William Blair.

Just the rewards competition suggested -- Steve Squeri suggested and so did David Nelms at the -- or a recent conference that they thought that the rewards competition had peaked at, obviously, in an aggressive level but seemed to have peaked.

And I just wondered if you -- if you're seeing that still 1.5 months -- 1 month, 1.5 months later, if you feel that's the case or not.

And just also just on a cost base, how close are you to being done with the moves you need to make to hit the $1 billion?

I want to take those in turn, Bob.

I guess, on rewards, I would say, well, gosh, I hope that Steve and David are correct.

But look, we don't run the company making any assumption other than it's going to be -- continue to be a very competitive environment.

We're going to continue to have to innovate and find new ways to offer value for our customers.

And look, the value enhancements we did with Platinum were significant.

They're being very well received by customers and driving just the kind of increased engagement and increased new Card Member acquisition that we wanted, but we will continue to follow the competitive environment and continue to make sure that we offer great value propositions relative to what others put in the market, always mindful of the fact that we have some very unique and differentiated assets to offer, and we're always going to focus on trying to leverage those as opposed to the things that are perhaps most easily replicated.

On the cost question, look, it's July 19, so we have, I would say, 100% of our plans clearly in hand well laid out.

They're not all executed, but they are all partially executed.

And we're working towards being done with all of those things as we get into the latter part of this year.

So at this point, I'm very confident in our ability to get $1 billion -- more than $1 billion of gross cost out of the company.

As I did say in my remarks, that progress combined with our revenue performance is allowing us to reinvest in a few areas -- those savings.

So for example, we're doing some things with our call centers to drive more revenue and new Card Members that have been extremely successful for us, and frankly, the savings we've generated elsewhere the way we run our call centers have allowed us to do those kinds of things.

And of course, there's always things that I try not to talk about on calls like this that come up that we also have to cover with these cost savings.

And my favorite so far this year that I won't bore you with is the $60 million or $70 million of hedge ineffectiveness [charges] that we've taken thus far this year.

But I try not to talk about that stuff because that's why we're taking $1 billion out of the cost structure, so you don't particularly notice the increases that come from things like that.

So I feel good about our progress.

But to be clear, there's work to do, but it's just execution.

It's not, gee, we still need to find another $100 million.

We -- it's very clearly in our sights.

We'll go next to Rick Shane with JPMorgan.

Look, one of the unique growth drivers here is the wallet share gains in terms of getting your existing customers to borrow.

Two questions related to that, and they're both credit.

How do you prevent adverse selection when you're offering a customer who's been offered the opportunity to pay over time for years?

How do you know that you're not getting sort of picked off at exactly the wrong time to make a loan to that customer who said no before?

Well, Rick, it's a good question and one we think a lot about.

In many ways, I would point to our track record, which is several years of steadily growing above the industry while still retaining, by far, the best-in-class credit metrics.

How do you do that?

Well, you do that by focusing on your existing customer base to a great extent, where we know our customers extremely well, and we know a lot about them and have a strong ability to make the kind of judgments you're pointing out we have to make.

We do it by, we believe, having best-in-class data efforts that both involve the way we use our own data, the way we use every bit of data across -- that's available across the industry, and we combine it with what we think are best-in-class data science experts and efforts to be really thoughtful.

Do we get it right 100% of the time?

No, we don't.

But do we get it right enough for the time so that we are able to retain best-in-class credit metrics?

Absolutely.

And look, we're very mindful of the broader environment and what all of our competitors are and are not doing.

And I would say we are constantly evolving our tactics in this area very real time as we see other things happening in the industry with our competitors and with the economy.

And Jeff, do those loans season in the same way that a de novo customer does?

No.

So you certainly see different behavioral patterns as you take on a brand-new customer versus as we grow lending balances with existing customers.

There can still, to your point, be a seasoning process, but they follow different patterns, which we, of course, track based on our historical experiences.

We now have a question from Chris Donat with Sandler O'Neill.

Wanted to just to go back to the Card Member services because, as we look back historically, thinking of my Card Member services as a percentage of discount revenue, it's been growing.

Seems like it should be growing more as you layer on the Uber credit, baggage, some of the Delta cobrand changes, more the Centurion Lounges.

I'm just wondering, should we be thinking about that as a -- that line for the Card Member services really as a percentage of discount revenue?

Or are you getting more kind of fixed fees in there with the lounges?

[Anything] just a little guidance on that.

It's a good question.

We have made a conscious pivot, I would say, to even more than we have historically on our value propositions, emphasize the things that are hard for others to replicate, and a lot of those things build on our scale, our global reach, our brand.

And so the lounge access is a great example of that.

We have the scale to both build our own Centurion Lounges as well as collect an unequaled amount of access to lots of other lounges around the globe, and that is highly valued by our Card Members.

And all that runs through cost of Card Member services.

And as usage goes up, it drives the cost up.

The Uber benefit is another great example.

In many ways, Chris, the reason why starting, I think, back at Investor Day, I began to talk collectively about our marketing and promotional rewards and cost of Card Member cost is because it is important that people realize that we think of those as 3 tools we're using to drive more revenue.

And for particularly right now, the fastest growing in terms of -- in percentage terms, fastest-growing tool is cost of Card Member services, and I'd expect it will stay that way because of this pivot to really want to emphasize the things we can do uniquely.

I think it's a little tricky to -- so most of those things are not going to be directly tied in any way to billings or to discount revenue.

The way we think of it is you're creating an overall value proposition for your customer.

It's why we feel really good about our fee revenue increases continuing because it's those kinds of experiences on top of whatever the point proposition is that we have to make really appealing to our customers to build loyalty over time.

So that may not be as helpful as you would like in terms of how you might model this, but that's really how we think about the things that are appearing in that line from a business perspective.

That's helpful.

And just if I can tack on there, anything on the -- any surprising seasonality we should be thinking about there that, I don't know, baggage fees increase in 1 quarter or...

No, no.

That one, there really shouldn't be any particular seasonality in.

Our next question is from David Togut with Evercore ISI.

Question about the regulatory environment in Europe which you reference in your comments on the call.

How are you positioning American Express to win in an environment under PSD2 regulation where we start to see ACH-based e-commerce payments in Europe within the next couple years?

Visa is leaving its options open.

MasterCard just bought Vocalink.

So I'm curious what your strategy is.

Boy, a very good and large question, David, that I could probably spend another hour talking about.

Let me maybe just make a few comments.

Clearly, Europe is a heavily regulated market.

That regulation is evolving, and the regulation evolves in ways that aren't always crystal clear.

What we do have is a unique business model that gives us a lot of flexibility in terms of how we think about the best way to create value for merchants who we have to directly negotiate with and convince to accept our card and to pay our fees and directly create value propositions with Card Members that they will continue to use even in light of all the other changes that, to your point, are likely to happen in that marketplace.

In some ways, if you look at our results in Europe the last few quarters in places like the U.K., we have seen tremendous growth with some of the changes driven elsewhere in the market with various aspects of the payment service directive.

But it's a long game here, and I think there are many chapters still to play out.

You will see us evolve our business.

You will see significant reductions in coming quarters in the network aspect of our business in Europe, which is a small part of our company.

It's 10% of our European business, which is 10% of our company.

So it's 1% or 2% of billings.

But you will see us really significantly reduce that business in response to some of the evolving regulations.

And obviously, our opportunity and challenge as we do that is in fact to recapture a good chunk of that business on our proprietary network, which at times can actually generate more profit than we see on the network business.

So as always, we are focused on how do we use our unique business model, our unique brand and assets to create value propositions for both merchants and for Card Members that are very different from what others can offer.

And in many ways, I actually think, as complicated as it is, the European payment regulations, as they evolve, may well provide us new opportunities because we're so different from everybody else.

But we'll have to see as time goes by.

And Kathy, we have time for one more question.

Thank you, and that will come from James Friedman with Susquehanna Financial.

Just a quick question, Jeff.

At the Analyst Day on March 8, you had -- or Anré had, had an update about OptBlue.

I was just wondering, I didn't hear you make any comments tonight about that.

But where are we in that journey?

Are we close to the middle or the beginning or the end?

How we should think about the contribution to grow things like that?

Yes, it's a good question, James, and I probably should have mentioned it in my remarks.

We're in the middle of the game.

So we've been clear for a while that we have the company very focused on getting to parity coverage in the U.S. by 2019.

We are really pleased now to have all of the large merchant acquirers in the U.S. involved in the program.

I would point out to you that the last of the larger ones have come on fairly recently to the program, and it just takes time given the nature of how the acquirers work with small merchants to cycle across the many, many hundreds of thousands and, in fact, millions of merchants that we need to cycle across here.

But we're making good progress, and we remain very focused on our 2019 goal.

As you've heard me say, this is a really important goal for the company for the long term, but it is a long-term goal.

And first, we have to get to parity, then, we have to really change perceptions amongst our customers.

Those are long, long games.

And I don't think, if you look at our financial results today, that you see a material upside.

Today, when you just do the simple math of we have a lot more small merchants than we used to, we get business from those small merchants and that incremental -- or the revenues we get from that incremental business more than cover the lesser overall amount of economics we're getting from all small merchants as we put them on OptBlue.

So that's a net positive.

But the real game here is about, once we get to parity and once we change perceptions, it's about getting a greater share of wallet because of that, and it's about having an ability to be more efficient in our new Card Member acquisitions because of this.

And I think we're still a couple years away from seeing in a really material way the benefits from that.

So, thank you for the question.

Thanks, everybody, for joining tonight's call, and thank you for your continued interest in American Express.

Kathy, back to you.

Thank you.

And ladies and gentlemen, that does conclude our conference for today.

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