美國運通 (AXP) 2017 Q3 法說會逐字稿

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

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

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

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 the comparable GAAP financial measures may be found in the third 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 Ken Chenault, Chairman and CEO; and Steve Squeri, Vice Chairman, who are joining us for the beginning of the call to make some remarks about the company's leadership transition.

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

Once Jeff completes his remarks, we'll move to a Q&A session on the quarter's results.

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

Thanks, Toby, and thanks to all of you for joining us this afternoon.

Steve and I wanted to start the call with a few words about our announcement from earlier this afternoon.

As you'll see from the results, we're completing a 2-year turnaround ahead of plan and getting ready to start a new chapter.

Given the progress we're making, I thought this was the right time to begin the leadership transition, and I'm very pleased to report that the board has elected Steve to be Chairman and CEO effective February 1 of next year, which will coincide with my retirement.

It's been a great honor to lead American Express, and I've treasured every day of my 37-year career here.

It's been a journey that spanned profound changes in the world of business, the payments industry and the global economy.

Against that background, we continued the long tradition of reinvention that has characterized American Express since its founding more than 1.5 centuries ago.

We shifted our business from a narrow travel and entertainment focus to one that accommodates the everyday spending of our Card Members.

We created one of the world's largest loyalty programs in Membership Rewards.

We built a global network of bank partners.

We transformed our marketing, card acquisition, servicing and risk management capabilities for the digital age.

We formed groundbreaking partnerships with a new generation of technology platforms.

We launched countless new and innovative products and services, built long-term relationships with millions of customers and merchants around the world and elevated our reputation as the gold standard for customer service.

We've navigated through the tragedy of 9/11, the disruption of natural disasters, the financial crisis of 2008 and 2009 and attacks on our business model.

And we've come out stronger every time.

It's been an absolutely amazing time, and I'm delighted that I will be handing over the reins to someone who has played an important role in shaping the company that we are today.

Steve knows the business and the brand.

He knows the marketplace.

He is an excellent strategist, a strong leader and a great partner.

We've been moving the company forward in a very competitive environment, and Steve has been there every step of the way.

I feel very good about how we are positioned for the next several years.

Now Jeff is going to speak to our current results in a few minutes, but I thought it would be helpful to offer a little bit of context on the business and on the succession process.

Those of you who have been following us for a while know that we decided a few years ago to renew some co-brand relationships and end others.

We knew that those decisions would involve short-term pressure on earnings and raise questions with a number of you.

But given how marketplace economics were evolving, we didn't want to simply stick with the status quo and tie up resources in relationships that wouldn't make economic sense over the long term.

We believed the breadth of our business model offered better opportunities.

Many of you wanted to see the proof, and rightly so.

We focused on refashioning the business for a new competitive, regulatory and digital environment.

We did that by innovating and drawing on our traditional strengths, not by abandoning them.

We reorganized the company along global lines of business, and we built a leaner, faster, smarter culture.

We accelerated our reengineering work and are on track to take $1 billion out of our expense base.

We used our investment dollars to transform many of our capabilities and fund the initiatives that are driving much of the growth you see today.

The products and benefits we've added over the past few years, the relationships we've strengthened and the new customers we've acquired have been showing strong returns.

Cards-in-force, billed business and earnings per share are back above where they were before we began to reposition the business.

For the last few quarters, we've been generating strong growth across our consumer and commercial payments business here in the U.S. and in a range of international markets.

You'll be hearing more about that from Jeff.

But let me also offer some context on succession, which is something the board and I have been focused on since the day I became CEO.

The critical phase of the process has been underway for 5-plus years.

We considered potential candidates from both inside and outside of the company.

It has been a very thorough process and involved every member of our board.

They all agreed that Steve's the best person to build on the progress that's now underway.

I know many of you have spent time with Steve over the last few years, and there will be many opportunities to meet with him in his new role.

Before you hear from him, I thought I'd offer a little personal background.

Steve caught my attention early in his career back in the 1990s, and we've worked closely since the start of my tenure as CEO.

He'd been responsible for 2 of our core businesses, Merchant Services and commercial payments.

He had a background in dealing with technology, including managing our Y2K transition.

Technology has always been important to American Express, and I believed digital innovation was going to be even more important in the years ahead.

I also believed Steve was going to be more important in the years ahead.

So I asked him to head up our technologies group.

I told him this was all about focusing on the future and that it was a big opportunity for him and for the company.

Under Steve's leadership, the tech organization became the engine that drives almost everything we do today.

So it worked out well for us.

It worked out pretty well for Steve, too.

As he accomplished more and more, we asked him to do more and more.

That included overseeing the global service network.

It included reorganizing commercial payments into one of the fastest-growing businesses at American Express.

It included leading the company-wide effort to improve our operating efficiencies.

He has been a great partner.

And I am delighted, as someone with a large ongoing financial interest in the success of this company, to turn the reins over to him.

Thanks, Ken.

I'm honored and humbled that Ken and the Board of Directors have asked me to be the next Chairman and CEO of the American Express Company.

I've been privileged to work here for over 32 years.

And through it all, I have been constantly reminded how great and truly special this company is.

Ken Chenault is one of the most respected business leaders in the world.

Working for him for the past 13 years has been an incredible learning experience for me, and I plan to draw on that experience as I move forward.

When I look ahead, I'm very excited about where we are and what our future holds.

We're coming out of a period of transition and moving into a period of growth with tremendous momentum across our businesses.

We have a strong leadership team that has instilled a sense of purpose and collaboration across the company.

We have talented and engaged people in every business all around the world who are resilient, creative and focused on delivering for our customers and our shareholders.

Of course, there are challenges to face, including fierce competition, rapid changes brought about by technological advances and regulatory pressures.

However, I've never felt better about our ability to take on those challenges.

Our underlying fundamentals, our brand and our business model is strong, and we have no shortage of growth opportunities.

Our next chapter will be about building on the momentum we have generated, with a special focus on innovation, expanding our core product offerings, enhancing our brand and our customer relationships and partnering with others to stay ahead of the curve in the evolving payments industry.

We'll continue pursuing many of our current strategies that show great growth potential, and we'll look for new avenues of growth that can help us extend our leadership position for the long term.

I want to build on what Ken has accomplished, without forgetting that the status quo, as he often says, doesn't cut it in a fast-changing and competitive environment.

I'm looking forward to spending time with many of you in my new role.

For now, I want to give you a sense of the items that are front and center on my agenda and where I believe sustainable growth will come from.

First, we aim to strengthen our leadership in the premium consumer space by continuing to deliver personalized benefits to customers through the expansion of our closed-loop data advantage, expanding our roster of business partners around the globe and building our premium lending portfolio through broader relationships with existing customers and industry-leading risk management expertise.

Second, we'll look to extend our leadership in the commercial payments space globally by leveraging and investing in our unmatched global footprint and commercial capabilities and continuing our emphasis on small and midsized businesses globally by expanding our existing products and services to help them fund and grow their businesses.

Third, we want to continue to make American Express an important part of our customers' digital lives by expanding our digital partnerships and through targeted acquisitions.

Finally, we'll focus on becoming the most innovative network by leveraging the fact that we are one integrated business model.

We'll help merchants navigate the convergence of online and offline commerce with cutting-edge fraud protection, marketing insights and digital connections to higher-spending Card Members, and we will offer expanded products and services to our GNS partners.

Developing long-term sustainable relationships is key to our business.

In every interaction, we'll continuously strive to provide the world's best customer experience through our best-in-class global service network.

This is a great business model, a world-class brand and an extraordinarily talented group of people.

I feel very good about our capabilities, what we've accomplished and where we are today.

However, the worlds of commerce and payments are not standing still.

As I've learned from Ken, if great businesses don't keep moving forward, they fall behind.

If great brands don't evolve, they lose their luster.

If talented people don't innovate, they lose their edge.

Or said in my own words, you can't seize the future if you're stuck in or wedded to the past.

I will continue to challenge our people to think what if, to rethink the possible and to innovate.

Now let me turn it back to Ken.

Let me close with a few short comments.

First, we're completing one chapter with results that show the upside of managing this business for the moderate to long term.

Second, we're starting the next chapter from a position of strength.

And third, as I said earlier, it's been a great honor and privilege to lead this company.

I've worked alongside some of the best and brightest talent anywhere.

I've had the opportunity to partner with some of the world's most innovative and respected companies.

I've been inspired by the thousands of employees around the world who deliver for our customers every day.

I owe all of them my sincere thanks.

There's always going to be more work to do, but I believe our best days are ahead of us.

I will likely see many of you over the next few months.

But for now, let me say thank you for joining us and turn the call over to Jeff, who is going to discuss the results in more detail and take your questions.

Well, thank you, Ken and Steve, and thank you for getting the company to where we are today.

Now as all of you might imagine, Ken and Steve have a lot of people to talk to about this news: employees, customers, partners, the media and many more.

So we're going to let them go off to attend to all these discussions, and Toby and I will stay here to talk to you about our latest financial results and outlook.

I would start by building on what both Ken and Steve said in their remarks, and you can see in our performance that our simple financial model is working.

We are driving revenue growth across our diverse businesses, leveraging our fixed cost base to drive expense efficiencies and steadily returning capital to shareholders, all of which are combining to drive the type of steady EPS performance for which American Express has long been known.

With this as context, let's turn our attention to Slide 3 of our investor presentation, where we'll jump into our third quarter results.

Revenue of $8.4 billion was up 9% versus the third quarter of 2016.

Excluding the impact of FX, where the dollar weakened a bit versus the prior year for the first -- adjusted revenue growth was 8%, consistent with the adjusted revenue growth rate from Q2 '17.

I'll come back to the drivers of revenue growth in a few minutes, but we are pleased with our steady performance across the different customer segments we serve and the different geographies in which we operate.

Net income grew 19% in the quarter while earnings per share was $1.50, up 25% from the third quarter of 2016 as we continue to steadily buy back shares.

Looking at the income statement.

Many of you will have noted that we had an unusually low tax rate of roughly 26% this quarter.

The lower tax rate results primarily from the realization of certain foreign tax credits in the current quarter as well as an ongoing shift in the geographic mix of our earnings.

In the quarter, we also incurred discrete charges related to our U.S. Loyalty Coalition business, our U.S. Prepaid business and the recent hurricanes in Texas, Florida and Puerto Rico.

I'll provide a bit more detail on these later in my remarks, but the aggregate impact of these discrete charges equates to approximately $0.12 of earnings per share.

So looking at both the lower tax rate and these discrete charges together, the net impact to EPS is minimal, and we believe the third quarter EPS of $1.50 is a good indicator of the underlying core performance of the business.

These results brought our return on equity for the 12 months ending in September to 23%.

This ROE performance is below our historical performance, primarily due to the uneven quarterly earnings we experienced last year in 2016.

If you simply look at our expected earnings range for the full year 2017 and our equity position, our ROE should trend back towards our historical level as we end the year.

Moving now to our metrics, starting with billed business performance trends, which you see several views of on Slides 4 through 6. Worldwide, FX-adjusted billings grew 8% in the quarter versus the prior year, consistent with the adjusted growth rate over the last few quarters.

And when we look at the segment view on Slide 5, you see consistent performance across the segments this quarter.

Moving to Slide 6. We have added a view of billings growth, bringing together several ways we have talked about our broad-ranging growth opportunities in recent years.

Before we get into the details, let me remind you that our Global Commercial and Global Consumer segments are roughly the same size, representing 40% and 43% of billings, respectively.

Global Network Services makes up the remaining 17% of billings.

Within the Global Commercial segment, the first 2 bars represent customers who are small and midsized enterprises, or SMEs, defined as clients with less than $300 million in annual revenues.

We have consistently seen strong growth from SMEs, and this continued in the third quarter.

U.S. SME billings grew at 10% in the third quarter while international SME, which has been one of our highest growth areas recently, was even more robust with FX-adjusted growth of 15%.

The large and global customer segment grew at 5% on an FX-adjusted basis this quarter, up modestly from prior quarters.

This customer group represents just 10% of our overall billings but is critical from a scale and relevance perspective, although we expect this segment to show more modest growth rates.

Within Global Consumer, the U.S. represents around 31% of the company's billings and is growing at 7%.

Although the U.S. consumer premium space remains competitive, we are seeing strong results in our U.S. consumer platinum franchise.

U.S. consumer platinum volumes and Card Member numbers continue to be at record levels since we rolled out new features and benefits starting in Q4 last year.

International Consumer is up 13% on an FX-adjusted basis, driven by our operations in countries such as Japan, the U.K. and Australia, all of which are up 18% to 19%, adjusted for FX.

Keep in mind these volumes represent our proprietary cards where the closed-loop model enables us to offer strong value propositions that are driving billings momentum.

Finally, FX-adjusted billings growth for our network business was 4%, a modest slowdown from last quarter and in line with our expectations.

As we've said before, with evolving regulations in Europe and Australia, we expect network volumes in those geographies to decline over time.

As we adapt to these new regulations, we would expect our proprietary international billings to grow faster than network partner billings.

Overall, we feel good about all the diverse sources of growth across our business segments and geographies.

Although we have some headwinds from regulation in markets around the world and intense competition in the U.S., we are particularly excited about the opportunities we have in high-growth areas like SME and International Consumer, which reflect the diversity of our business model.

Turning next to loan performance on Slide 7. Our loan growth accelerated to 14% on a reported basis and to 13% on an FX-adjusted basis.

Once again, more than 50% of the new loans added to our portfolio are coming from existing customers this quarter, in line with the strategy we first laid out in early 2016.

Before we get into our lending metrics, I thought it would be helpful to take a step back and review our overall lending strategy which, as a reminder, drives just a modest portion of our overall revenues, with net interest income coming in at 20% of our total Q3 revenues.

Over the last several years and, in particular, with the portfolio sales last year, the mix of our loan book has changed, with co-brand card loans representing a smaller portion of the portfolio and Amex-branded card loans making up a greater portion of the portfolio.

This shift in our portfolio leads to higher yields and, as we have said before, also higher loss rates.

Taken together, this generates attractive lending economics.

And you see the individual dynamics playing out across both our yield and lending credit metrics.

For example, on the right side of Slide 7, you can see net interest yield increased again sequentially to 10.7%.

The shift in the portfolio I just described is one of the drivers of this steady sequential increase, along with a few other factors we mentioned last quarter, including a shift in the mix of revolving loans towards higher APRs, including having a smaller portion at introductory rates, pricing actions taken in recent quarters and benchmark interest rates increasing more than our overall funding costs.

We are pleased with our progress here.

So at some point, we expect net interest margin to stabilize and, as a result, we expect the year-over-year growth in net interest income to slow from current levels.

Turning next to credit metrics on Slide 8. You see the upward trend, as expected, consistent with the same shift in the portfolio I just described.

The worldwide lending write-off rate was 1.8% for the quarter.

Let me remind you that if you compare to last year, the write-off rate in Q3 2016 was slightly elevated due to Costco loans that were not sold as part of the portfolio sale.

In the third quarter, the delinquency rate was 1.3%, in line with our expectations and, again, higher than the prior year due primarily to the mix shift in the loan portfolio.

Moving to Slide 9. Provision expense for the quarter is $769 million, and you can clearly see that we continue to build reserves to account for the growth in loans, which has exceeded our expectation, as well as the related seasoning in our loan portfolio and the mix shift towards Amex-branded products that I just discussed.

A small part of the reserve build also relates to the hurricanes, which we estimated around $20 million in the quarter.

This does include an estimate for Puerto Rico where we have a more limited amount of information available.

We are, of course, doing many things to support our Card Members and merchants and will closely monitor the situation in the coming months.

Looking forward, we continue to expect provision to grow at a higher rate than loans as we progress on our lending strategy, though I would expect the year-over-year growth rate in Q4 to move down towards the average for the full year.

We feel good about the tradeoff between risk in the portfolio, profitability and growth and believe we have a long runway to grow our share of our customers' borrowing behaviors.

Turning to our revenue performance on Slide 10.

FX-adjusted revenue was up 8%.

We are pleased with another quarter of strong revenue growth coming from a broad range of diverse business opportunities.

Looking now at the components of revenue on Slide 11.

First, discount revenue was up 6%, driven by the strong growth in billed business.

Net card fees growth was 5%.

If you look back to the third quarter last year, we had a small non-recurring benefit that we are growing over this quarter.

Considering this, our growth this quarter remains consistent with our recent trends.

This quarter also had a very small impact from the Platinum fee increase for existing U.S. consumer Card Members since the results would only show a 1-month impact for Card Members whose anniversary date is in September.

While it is still early, we are pleased to see strong Card Member engagement, acquisition and renewal trends with a refreshed U.S. consumer platinum value proposition.

Other fees and commissions grew 11% in the second quarter while other revenues declined by 10%.

The decline in other revenues was primarily driven by prior year revenue from a small business we sold in Q4 of last year.

Net interest income grew by 26%, driven by the higher net interest yield we discussed earlier and higher adjusted loan balances.

Turning to discount rate on Slide 12.

The reported discount rate was 2.42%, down 5 basis points from the prior year.

And the ratio of discount revenue to billed business was 1.76%, down 4 basis points from last year.

You'll remember the right side of Slide 12 from our Investor Day this March where we talked about the factors driving erosion in our discount rate.

The biggest drivers of erosion in the third quarter were merchant-specific negotiations across the globe and our OptBlue efforts in the U.S., consistent with what we described at the Investor Day in March.

In addition to the drivers we described in March, we did see a slightly larger-than-expected impact from mix in part due to strong growth outside the U.S.

Turning now to expenses on Slide 13.

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

But first, let me cover operating expenses.

Total operating expenses were flat to the prior year.

However, as I mentioned earlier, there were discrete charges impacting operating expense both this year and last year.

In Q3 '16, we incurred a restructuring charge related to our initiatives to remove $1 billion from our cost base.

In Q3 '17, we took discrete charges related to our U.S. Loyalty Coalition business and our U.S. Prepaid business.

In the U.S. Loyalty business, you may have recently seen announcements from certain founding partners of Plenti regarding their future loyalty plans.

Giving -- given these changes, we are in confidential discussions with a few remaining Plenti sponsors regarding the future of the program.

As a result of these partner announcements and the evolving state of the U.S. program, we have taken an impairment charge and a related restructuring charge for the U.S. Loyalty Coalition business this quarter.

Before moving on, I would remind you that we run a similar program, Payback, in 5 other countries, with a particularly well-established long-running program in Germany.

In the U.S. Prepaid business, the charges were related to the recently announced distribution agreement with InComm.

Total operating expenses adjusted for these discrete charges in both years declined by 4%, consistent with the year-over-year change on an adjusted basis that we saw in Q2.

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

As we have previously mentioned, given our revenue performance and accelerated progress on our cost savings initiatives, we have taken the opportunity to selectively reinvest into areas of the business that we believe will help drive continued revenue growth going forward.

Finally, on Slide 13.

As I previously discussed, our effective tax rate for the quarter was 26%, down from 34% a year ago, due primarily to the realization of certain foreign tax credits in the current year and an ongoing shift in the geographic mix of earnings.

Going forward, we estimate our ongoing tax rate will be approximately 32%, given the changes to our geographic mix of earnings.

Of course, the rate in any given period can be further impacted by discrete tax items as we saw in Q3.

Moving to the summary of our Card Member engagement spending on Slide 14.

Total engagement spending in Q3 was $3.1 billion, flat sequentially and up 11% versus the prior year.

Looking at the components of that spending, M&P was down 12% versus Q3 '16.

As a reminder, we expect marketing and promotion to be down significantly for the full year relative to 2016 as we realize efficiencies in our marketing spend and move beyond the unique investment opportunities we had in the second half of 2016.

I would point out that given our overall strong financial performance year-to-date, we have chosen to selectively reinvest into growth opportunities for the medium to long term.

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

In the quarter, we added 2.6 million new proprietary customers globally.

In our global consumer business, over 2/3 of new customer acquisition came through digital channels, and over 35% of new customers were millennials.

Rewards expense increased 21% in Q3, while proprietary billings grew by 9% versus last year.

This growth in rewards resulted in a ratio of rewards cost to proprietary billings of 84 basis points, which is up from the prior year but down 2 basis points from the prior quarter.

The 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 in Q4 '16 as well as strong growth in our Delta co-brand portfolio.

Cost of Card Member services in the quarter increased 31%, reflecting higher engagement levels across our premium travel services, including airport lounge access and co-brand benefits, such as First Bag Free on Delta as well as usage of the new Uber benefit on Platinum.

This remains an area where we offer differentiated benefits, and we plan to continue to invest in Card Member services.

Turning now to capital on Slide 15.

We continue to be pleased with our ability to return excess capital to shareholders through share buybacks and dividends.

We returned 97% of the capital we've generated thus far in 2017 to shareholders, which has driven a 5% reduction in our average shares outstanding versus the prior year.

The third quarter common equity Tier 1 capital ratio moved down sequentially to 11.9%, in line with our expectations and driven by growth in the balance sheet and the fact that we've returned 115% of the capital generated this quarter.

We are confident that the strength of our business model provides us with the ability to return significant amounts of capital to shareholders while maintaining our strong capital ratios in accordance with the annual CCAR review.

So to summarize.

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

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

We are seeing the payoff in our 2017 results with strong and consistent performance over the first 3 quarters.

Given these strong results and where we are in the year, we are increasing our full year earnings per share guidance to a range of $5.80 to $5.90.

We are pleased to be able to both raise our earnings expectations while also funding some incremental investments aimed at driving moderate to long-term results.

It has long been our practice to balance the financial commitments we have in the short term, which we take very seriously, with the opportunities we see to invest and build for the longer term.

As we go forward, we are focused on delivering steady and consistent earnings growth, building upon the range of growth opportunities that we see across our diverse customer segments and geographies.

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

Thank you, Jeff.

(Operator Instructions) And with that, the operator will now open up the line for questions for Jeff on the quarter's results.

Kathy?

(Operator Instructions) Our first question will come from Sanjay Sakhrani with KBW.

Good results and congratulations to Steve and Ken if they catch the replay or read the transcript.

Jeff, I wanted to make sure I understood your comments on the provision.

It sounds like this quarter's elevated levels were related to a little bit of an expectation of higher charge-offs in the future as you expect the provisions to come down next quarter in terms of the growth rate.

Can you just help us think about where you see the net charge-off rate going over the next 12 months?

Yes.

So thank you, Sanjay, for the question.

A couple of comments.

First, I'd remind everyone that I've often said there's a little bit of volatility quarter-to-quarter in the provisions, so I encourage people to think a little bit about the longer-term trends.

If you look year-to-date, the provision is up 37%, loans are up 14%.

And as I said, I would expect the year-over-year increase in provision to look more like that year-to-date number in Q4.

Next thing I'd say is, remember, there's a real tie here if you think about the shift that has occurred in our loan portfolio between yields and the write-off rates.

And so one of the inflection points in our growth rates was around 18 to 24 months ago, when we were very focused on all the changes occurring as we went through the transitions around our co-brand portfolios.

A lot of the newer accounts that we acquired in that time are just hitting sort of a key point in the seasoning time line, 18 to 24 months.

And frankly, that's part of what's driving yield up as they come off introductory rates and start paying off.

And frankly, that's also what's giving us a little visibility into what the right future expected write-offs are, and that's a little bit of what drove the provision up this quarter.

So I think it's very important to keep those 2 things in mind.

We're getting attractive economics overall.

As I think about net write-offs going forward, I think, Sanjay, if you think back, we in early '16, seeing all the changes we were making, began to say that we'd expect to see a modest, steady upward drift as we grow a little bit above the industry and as that drives the inevitable seasoning of the portfolio and a bigger portion of the portfolio being of lower tenure.

That actually didn't happen much in 2016.

It's now begun to happen in 2017, and I really expect similar trends to continue as we get into 2018.

So hopefully that helps on the provision.

Our next question is from Craig Maurer with Autonomous Research.

And I'll add my congratulations, if they're listening, but I doubt it.

Yes.

Believe me, they will read every word of the transcript, Craig.

So there you have it, okay.

You're talking about reinvestment, where appropriate.

I was hoping you could be more specific because the read we seem to be getting on the U.S. consumer market is that there's certainly been a plateauing effect in rewards.

In fact, it seems like some of the most aggressive players over the last few years have been rationalizing their investment because the returns might not have been what they thought they were going to be or that consumers outsmarted them to a degree just at a time when Platinum has accelerated.

So are you pushing the gas pedal down further in that part of the business?

Or are there other parts of the business that you're finding more attractive right now?

Yes.

That's an excellent question, Craig.

And I think this really goes to the unusually broad range of both customer segments and geographies that our business encompasses.

And so yes, as we have had stronger financial performance than we have expected this year, we are putting a little bit to the bottom line, and that's the increase in guidance, and we're also putting a little bit into the M&P line and a little bit into some things that are in OpEx.

And if you think about that, where are the particularly high-growth areas that we've seen lately?

Well, in particular, I called out in my remarks the small and medium-sized enterprise based both in the U.S. and internationally as well as the proprietary international consumer space.

And so those are -- we see those as particularly good growth opportunities for us.

And as we have thought about where might there be a really good return over the medium to long term in spending a little bit of incremental resource, it's those kind of areas.

And some of that goes into M&P.

Some of it also goes into OpEx, right?

When you start talking about the commercial space, you're often talking about sales people who run through OpEx.

You're talking about how we use our call centers to help drive more volumes, the timing that runs through OpEx.

So it's a mixture.

But we are, as you would expect, being very thoughtful about putting incremental dollars only in those places where we think there are particularly good returns for us right now, and where we have a unique position or a unique advantage.

We'll go next to Ryan Nash with Goldman Sachs.

Congrats to Ken and Steve.

I guess just in terms of the guidance, you noted that you're raising the guidance.

It seems like the business momentum is strong.

Revenue growth has remained over 8%.

I guess you made some remarks about NII, over time, the growth will slow.

But can you just talk about your ability to sustain these levels of growth, both top line and bottom line, as we move into '18, given that you're making some incremental investments which, in theory, should drive revenue growth over the short and intermediate time?

Or would you expect this over the time to move more back to the interim goals of 6% top line and 10% bottom line?

Yes.

So boy, there's a lot there in that question, Ryan, thank you.

Let me start with revenues and then work my way to the bottom line.

We're really pleased by the 8% revenue growth that we've seen the last 2 quarters, and we have tremendous momentum across all of our businesses.

Just like I did last quarter, I have pointed out that at some point the tremendous sequential growth you've seen in our net interest yield will start to plateau and slow down a little bit, and that will have an effect of slowing the revenue growth rate a little bit.

I'm not calling out exactly when that turn happens.

It certainly didn't happen this quarter.

But at some point, it will slow us down a little bit.

Similarly in 2017 thus far, you've seen a particularly nice uplift in the U.S. from both the consumer and the Business Platinum value proposition changes we made late last year and early this year.

At some point again, you will begin to lap those.

Although I would remind you, on the consumer platinum product, that is a long lapping process because the fee increase for existing customers only went into effect beginning with customers who had their renewal dates in September, so it will actually play out over the next -- the way the accounting works, the next 24 months.

So those 2 things over time will put a little bit of downward pressure on the current momentum you have at 8%.

Now you also have some things next year that will go the other way.

So we are really pleased with the announcement we made along with Hilton a few months ago that point out we will have an expanded partnership with Hilton in 2018, and we will become the sole co-brand provider.

And that will certainly provide some incremental revenue opportunities for us in 2018.

I would be remiss if I didn't point out that as you would expect for co-brand renewals in recent years, it also comes with some margin compression.

We're very pleased with that opportunity.

So exactly where all that comes out in 2018 in terms of revenue growth, we'll give you an update on, on the January call, but we feel good about the momentum.

And those are probably the 3 things that, at the margins, will move it a little up and a little down as you get into next year.

And I guess I should also point out, I'm making all my comments ignoring any changes that new rev rec rules might cause, which would just be geography anyway.

Bottom line, look, I think we have a long track record that we are showing renewed vigor on this year in that our model lets us get tremendous expense leverage, and the kind of spend-centric model we have does not require a lot of capital to support balanced growth each year, which lets us do lots of share repurchase and payment of dividends.

So that's the model, and we should consistently be able to turn good revenue growth into even better EPS growth.

Exactly what that looks like for 2018, we'll let you know as we get into the January earnings call.

Our next question is from Betsy Graseck with Morgan Stanley.

Can we talk a little bit about the funding side?

I just wanted to get a sense of how you're thinking about the deposit growth build.

It's been very strong this quarter.

Just wondering if you're looking to first continue that kind of growth rate?

Or do you feel good about where your loan-to-deposit ratios are today?

And what kind of pricing you feel you need to attract deposits and where deposit betas are going over the course of the next year if there's another 1 or 2 rate hikes?

Yes.

So just to level set for everyone, for us, if you think about the 100 basis points that the Fed has raised rates over the last almost 2 years, we've -- as they've gone up -- or as the Fed has gone up 100 basis points, we've raised rates on our personal savings programs about 35 basis points.

So that certainly has been a big positive for our results.

Now I would not expect the beta, if you will, to remain at 0.35 forever going forward.

On many occasions in these calls, I've talked about a 0.7 beta over the longer term that we use in a lot of our modeling.

Obviously, we'll have to see exactly where the industry grows.

Our goal will be to remain competitive.

In terms of balances, for the last couple of years, Betsy, we've said we're kind of comfortable where we were because we want to remain very active in both the asset-backed securities market as well as the unsecured market, and being active in all 3 markets is an important part of our funding strategy.

I would say as we get into the latter part of 2018 and beyond, I would expect to see us growing personal savings again at levels that we haven't in a number of years.

And so that's not something you'll see next quarter or early 2018.

But I would say, over the course of the next 12 to 18 months, you will see some significant growth there.

Exactly how much will be a little bit of a function of where the rate environment goes, both in terms of the base level of what the Fed does as well as what the competitive market does for these kinds of online accounts.

But you're trying to get the loan-to-deposit ratio up perhaps?

Is that the reason for that?

Well, the way we really think about it, Betsy, is -- I come back to, given our mix of business, we probably think of it less as a loan-to-deposit ratio, and we think we want a funding strategy that creates a balance of being diversified across different sources in different markets so that from a security and soundness perspective, no matter what happens in the capital markets, we have good access to capital.

And we want to do that while also being efficient about funding our diverse business model.

I think what people forget sometimes is because we have a big international business, because we have a Corporate Card business, our funding structure requires that we access different sources of funding in different places as our funding is not all fungible.

So that's really how we approach it.

And what I'd say is the personal savings rate or number, which has been in the $30 billion number for a while range, that is a number that I would expect to go up over the next 12 to 24 months.

We now have a question from Don Fandetti with Wells Fargo.

Congratulations to both Ken and Steve.

So Jeff, on that note, how do you make sure that a big management change like this doesn't have any impact on negotiations around, let's say, the Starwood deal?

Well, there's probably 2 questions there.

First, gosh, I'm going to go back to the things Ken and Steve said.

Steve Squeri has worked hand-in-hand with Ken Chenault for 32 years and has been intimately involved in every change that we've made, in particular over the last couple of years.

So I don't think we missed a beat on any aspect of running the business.

As I say that, I also think it's important to remind you of Steve's words that we fully understand though that doesn't mean you don't constantly have to change.

You can't stand still.

So I feel really good about all that.

In terms of Marriott and SPG, look, we've said for a long time that there's 3 possible outcomes here, right?

Marriott chooses to keep 2 co-brand partners, they go with the other co-brand partner or they go with us.

I will acknowledge we are the smaller of the 2 partners.

On the other hand, Marriott has made a lot of public statements here about the fact that they want to bring the 2 programs together next year, that our contract doesn't expire until 2020.

The other co-brand bank, their contract expires next year.

So we have been working really hard to demonstrate the tremendous value that the range of travel assets we have, consumer travel agencies, Business Travel agency, a huge Membership Rewards program, a premium-oriented customer base, we think those are really tremendous assets when you're talking about a travel co-brand.

We think they've been a really important part of what has made SPG a really powerful program.

And I think Marriott is very focused on making sure they keep the loyalty and the engagement of all those SPG card members, and we would love to be a part of it.

So we'll have to see where it goes, but I don't think we'll miss a beat there.

Our next question will come from Mark DeVries with Barclays.

Jeff, when I saw you at our conference last month, it sounded like you thought the NIM was already kind of at a level where it might have plateaued, yet you had another big step-up this quarter.

And it also sounds like you're not necessarily closing the door to the notion that it could have a little bit more upside there.

First, just want to get your reaction, am I recalling that correctly?

And if so, what, if anything, has kind of changed the outlook?

And kind of what specifically really was the driver of the strength this quarter?

Well, you are completely accurately recalling my comments, the public comments from your conference a little bit ago.

I think the important words here, which I tried to replicate in my remarks earlier this afternoon, are, is that at some point -- obviously, you can't raise your net interest yield forever so, at some point, it has to plateau.

Now we're working hard to try to continue to do smart things that are consistent with building long-term customer engagement and loyalty that will continue to drive the net interest yield up.

But at some point, it will plateau.

I'm not calling exactly when that happens, and it certainly did not happen this quarter.

And we're really pleased with the momentum we have.

We'll go next to Chris Brendler with Buckingham.

Jeff, I wanted to talk to you or ask about discount revenue and the trajectory there.

If I look at discount revenue, net of rewards, it's actually still shrinking about 3%, and 5% including the services line.

And I know we faced some challenges at Costco, but we're kind of beyond that, and you got some renegotiations in Europe and other things that are weighing on discount rate.

But is that a line on the -- that should start to grow again as we go forward?

And I would think that's something that would be a focus of yours, so growing the discount revenue net of rewards is kind of my area of question.

Well, believe me, it is a focus.

And yes, you're -- I don't know the exact math you just did but, yes, directionally, you're correct.

The thing you need to remember is we made a very conscious decision late last year, early this year, to make some significant value proposition enhancements in the U.S. in both the Business Platinum card and the Consumer Platinum card.

And those are both very substantial and material franchises for us.

So it's worked tremendously well.

We've really exceeded our own expectations even in terms of Card Member engagement, new Card Member acquisition as well as continued, really, de minimis attrition rates.

Until you're done lapping that increase in rewards cost, you get the effect you just described on discount revenue overall.

So look, there -- it is a competitive environment in all the markets we serve but particularly competitive in the U.S. consumer space.

But once you're done lapping these, you should begin to see a little different trend when you do the calculation that you just described.

And certainly, our goal across the globe is to get that discount revenue net of rewards number growing consistently.

And I would think that would -- does that suggest that there are some onetime cost associated with this?

So I would think those rewards cost would be perpetual if your increasing the value of the products and the value of spending that you wouldn't necessarily have an anniversary.

But maybe there are some one-time costs that you can you could anniversary there?

Yes.

But when you're looking at year-over-year growth, remember you have a big step-up in the rewards cost this year and a kind of, what I'm going to call, standard step-up in discount revenue.

And what we would expect to see once you're done lapping that is you're still on the same or somewhat similar trajectory in terms of your gross discount revenues.

But growing -- but your rewards cost don't have the huge spike in growth that they had this year.

If you think about it, that's the -- in my remarks, I think the numbers I called out were rewards costs were up 19% while the...

21%.

21%, while the associated billings were up much less.

So that will -- that relationship, as we go into the next quarter or 2, will get much more aligned again.

And that will change the phenomenon you described.

Our next question is from Ken Bruce with Bank of America Merrill Lynch.

Congratulations to both Ken and Steve.

My question really relates to reserving.

Obviously, the loss rates for American Express are quite low relative to the industry, and you kind of talked about the increase that you're looking for.

I guess I'm trying to understand kind of the reserving that you're anticipating.

Sometimes companies use 12 months, sometimes a little longer.

Can you give us any kind of sense as to how you're thinking about that reserve because it looked like a very large build no matter how you want to look at it this quarter.

Yes.

Gosh, the reserving process, Ken, we could probably bore everyone for the next hour if we went through it in great detail.

And as you know, it is both a heavily regulated process, not just by the usual accounting standards you would expect but also heavily by our regulators, and some of what we do is very much driven by them.

Look, there's no question, this was a big reserve build this quarter.

What I keep coming back to is the -- when you put aside there's a little quarter-to-quarter volatility, and you look at this over any given couple of quarters, we're trending as we would have expected.

We are pleased with the loan growth we're seeing overall.

The shift in portfolio mix is an important part of what is driving tremendous growth in net interest yield, and that comes with some growth in the write-offs.

And we are getting, as I explained earlier, to this point where a significant number of the newer accounts we brought on 18 to 24 months ago are getting to the kind of key part of the time line as they season.

And so we're building some reserves for that, and that's part of what's driving the yield up as well.

So there's really not a lot more to the story.

I mean, yes, we certainly look at what kind of coverage we have going forward, although we make differ judgments in charge versus lend in different parts of the world.

But we feel good about the reserves.

We think they're conservative, and we feel good about the overall economics that we're getting from our lending.

We'll now go to Moshe Orenbuch with Crédit Suisse.

I wanted to come back to Chris' question about the rewards costs.

And you had mentioned that it was down a couple of basis points from the second quarter in terms of the rewards costs.

And maybe -- I saw in the notes here that the ultimate redemption rate was stable.

Could you discuss whether that was an impact from a cost per point or something else that's going on and how that might kind of move around going forward?

Yes, so I -- yes, you're right, Moshe, the -- there was a small sequential decline.

I think what you're calling out is the ratio of the rewards costs to the billings.

There's a little quarter-to-quarter volatility.

It's a very complex calculation that, of course, is not just a U.S. calculation, but involves lots of other international markets, and we're doing the calculation by market.

So you get a little bit of volatility quarter-to-quarter.

So I would not want anyone to leave the call thinking that 84 basis points is exactly what you should expect forever going forward.

It'll bounce up and down a few basis points each quarter.

In general though, that's the range I would expect to be in given all the value propositions that we have in the marketplace today.

And I wouldn't point to any particular business change or anything that drove that 2 basis points sequential decline, Moshe.

Our next question is from Rick Shane with JPMorgan.

Obviously, congratulations to Ken and Steve, both well deserved.

I wanted to talk a little bit about incentives.

And one of the things we've seen over the last several years is there's been a distortion between, I would describe, rewards and loyalty.

And as the rewards sort of [wore] abates a little bit, are you starting to see brand loyalty become more important again?

And are you seeing any shift in terms of wallet share amongst your existing customers based upon that?

Well, I guess -- Rick, let me make a few comments and they may or may not be responsive to exactly where you're going.

Certainly, we believe -- both Ken and Steve in their remarks talked about the fact that we think we have a particularly strong brand.

And our customers, given our long-standing reputation for service, attach to our brand.

And we take that loyalty really seriously and really value it and work very hard at it.

And one of the things that we've talked about on many of these calls is that sometimes people will do a pure mathematical calculation of different products that are out there in the marketplace and say, "Gee, American Express, you can't possibly compete because" -- let's use the simplest category, "Because your Cashback card doesn't seem to be as rich as somebody else's." And yet our response to that is often, "Well, our Cashback cards are doing really good in terms of new customer acquisitions.

They're growing nicely, and they're producing really good economics for us." And one of the things I like to point out internally is we do believe there's value in the brand.

We do believe there's value in the range of services we provide.

And so by gosh, we should be able to get those things valued by customers and we shouldn't have to necessarily mathematically match every other aspect of the value proposition that some of our competitors put in the marketplace.

So I think, frankly, Rick, we see that long-standing view we have, our long-standing experience, there's proof that brand does matter and loyalty does matter.

We work really hard at doing things that build upon that.

If you think about the Platinum refreshes that we've done, they're very much focused on some of the aspects, the experiential aspects of the product that we think are more difficult for others to replicate and build upon some of our reputation.

So that's what we're trying to do every day.

We think it's what we've historically done, and we think it gives us some unique advantages that are not easy for others to replicate.

Jeff, look, I agree with that.

But -- and I'm specifically curious if you're seeing, as that sort of distortion normalizes, specifically any pickup in wallet share because I know that's been a big focus for you guys.

Yes.

Gosh, in a company with over 100 million Card Members, major trends evolve slowly.

Yes, we're very focused on attracting more wallet share.

We're also, in our consumer business, very focused on attracting more borrowing share.

And so we have clearly been making huge strides for the last several years on driving more borrowing share in terms of our Card Members' wallets.

And spending share, you kind of have to look at it by market, by commercial versus consumer.

I often say, Rick, our goal is to ultimately maximize our financial returns and to maximize our revenue share.

And we pay attention to our wallet share, we pay attention to our share of billings, we pay attention to our share of lending.

And certainly, in the U.S. consumer space, we're growing share like crazy in our share of lending.

But we're not always trying to maximize every one of those if we don't think it's economic.

So we feel good about our revenue performance, and we think it's building on good economics for us so...

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

Congratulations to Ken and Steve.

Not a big surprise, I guess, after my last conversation with you guys.

But I guess on Page 6, very helpful just on going through that.

I'd just like a little more color on the growth of your -- in your presentation there, looking at the SME -- U.S. SME, International SME, international consumer where you have some pretty high growth rates and then the deceleration in Global Network Services.

Is that -- are we -- is there a multiyear opportunity in each of these that are much larger?

I mean I think the opportunities seem to be very large, but do we have a long way to go, long runway in the growth of these higher growth segments?

And should we expect GNS to continue to become less important?

Yes.

So a couple of comments.

Yes, we see tremendous growth opportunities that will last a very, very long time in the SME space because the point we try to make over and over and over to people, Bob, as you know, is that in that space we're often competing against just trying to get small and midsized enterprises to put more of their payment needs on to the card.

And it's frankly less about the competition, less about some of the highly competitive rewards competition we face elsewhere.

And the growth rates you've seen in both the U.S. and international SME segments have been very high for some number of years.

They're driven by our continual ability to work with small and midsized enterprises to drive more spend on to the card.

And we think despite that, we've only captured a small fraction of their spend, and we can keep at this for years.

Similarly, when you go outside the U.S., because of evolving regulation in Europe and Australia, for some time, we'll have to see exactly how long it takes, but there's a little bit of a wind-down of the network business in those 2 parts of the world.

It's still growing really nicely everywhere else, and it's still globally an important part of the American Express network, right?

So I don't want anyone to walk away from this call thinking it's a less important part of our company.

It's really important to the Global Network.

You're just going to see modest overall growth rates because of the step-down in Europe and Australia.

That very step-down though in the evolving regulatory climate is part of what's helping fuel some tremendous growth rates in places like the U.K. and Australia and our proprietary card business where, of course, we also get a much greater share of the overall economics.

So that's a pretty good trade for us.

That international consumer segment as well, Jeff, longer term, does that have the same growth opportunities as SME?

Absolutely, absolutely.

Because remember, outside the U.S., our consumer businesses are still in what I often call, Bob, in earlier stage of growth, and we're growing faster than the market in every of the major countries that we do business in, with the exception of Canada.

And we still have pretty small market shares, we have value propositions that are very difficult for others to match.

We're very bullish about that business.

That will come from David Togut with Evercore ISI.

Congrats to Steve and Ken.

I'm curious for your thoughts about any additional cost takeout you might have in 2018 in addition to the $1 billion run rate you expect to hit at the end of this year.

So look, we feel really good about the hard work that it's been over the last 2 years to take yet another $1 billion out of the run rate of the company, and we're on track.

We'll get it.

When you go beyond that, David, what I always say is, look, you can always take cost out of a company.

It's not always prudent though.

And I think when you go beyond 2017, the way to think about it is, in a world where we're seeing the kind of revenue growth now, we can support that, and we will support that, with very little growth in operating expenses.

And so that's a tremendous ongoing source of operating leverage.

For now, I think saying that we're going to take out another $1 billion would probably not be prudent and we would lose more revenue than we would gain.

But steady operating leverage, you should absolutely expect from us.

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

Kathy, back to you.

Thank you.

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

Thank you for your participation and for using AT&T Executive TeleConference.

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