美國運通 (AXP) 2018 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the American Express Third Quarter 2018 Earnings Conference Call.

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

And I'll now turn the meeting over to our host, Head of Investor Relations, Mr. Edmund Reese.

Please go ahead, sir.

Thank you, Lori.

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 third quarter 2018 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 Steve Squeri, Chairman and CEO, who will start the call with some remarks about the company's progress and results.

And then Jeff Campbell, Chief Financial Officer, will provide a more detailed review of Q3 financial performance.

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

With that, let me turn it over to Steve.

Thanks, Edmund, and good afternoon, everyone.

I'll start with some of the key highlights from the third quarter results we released earlier this afternoon.

From there, I'll give an overview of the year-to-date results.

And before turning it over to Jeff for a more detailed discussion of our financial performance, I'll provide a quick progress report on the 4 strategic imperatives that we focused the organization on at the beginning of the year.

In the third quarter, we saw a continued momentum in our business that was in line with the strong growth in the first half.

Adjusted revenues grew 10%, and we delivered EPS of $1.88.

I feel really good about the company's performance.

We had several quarters of high-revenue growth and, in fact, this marks the sixth consecutive quarter with adjusted revenue growth of at least 8%.

Our growth has been broad-based, driven by well-balanced mix of Card Member spending, fees and loans and spread across geographies, businesses and customer segments.

We have continued to control our operating expenses, and that provides the flexibility to make investments in our brand, customer benefits and digital capabilities.

As I reflect on the first 9 months of the year, I see very consistent and positive trends.

We generated a healthy level of top line revenue growth and delivered strong bottom line results each quarter.

Year-to-date, our revenue growth is 10%, and our earnings per share growth is slightly higher than that after adjusting for the Tax Act of 2017.

We are gaining spending and lending share in almost all the countries in which we operate.

At the same time, our customer engagement expenses, which are composed of rewards, Card Member services and marketing, are growing a little faster than revenue.

We are seeing very good payback from the targeted enhancements we've made to our customer value propositions, but that does translate into some margin pressure.

The remainder of our costs are in operating expenses.

For us, these are primarily scalable infrastructure costs, and they're growing at a much slower rate than revenues.

So in effect, the margin compression created by higher customer engagement expenses is being partially offset by OpEx leverage.

And as many of you know, we have a proven track record of disciplined control on operating expenses while growing the rest of the business.

We're delivering strong results in a highly competitive and regulated environment where there are higher costs associated with driving growth.

And going forward, we are focused on sustaining the high levels of revenue growth that have been delivering steady and consistent double-digit EPS growth.

We believe that the best way to do that is to invest in share, scale and relevance for the long term.

Turning back to our year-to-date performance.

We feel good about the advantages that come from our integrated business model and the progress we are making on our 4 strategic imperatives, which I'll take you through now.

We continue to expand our leadership in the premium consumer space.

We introduced a new Gold Card in the U.S. with an enhanced value proposition and an innovative set of rewards.

We continue to refresh our international product line with enhancements to our Platinum Card in Australia, Singapore and Japan.

The U.S. Platinum Card continued its strong performance.

New consumer accounts are up more than 50%, and about half of those are from millennials.

Building on our strong position in commercial payments, small and medium-sized businesses continue to be our fastest-growing customer segment worldwide with particular strength in our international regions.

Continuing to strengthen our global and integrated network, we continue to add more places worldwide where American Express cards are accepted.

While I could expand much more on our progress in these first 3 areas, today, I want to focus more on our fourth priority, making American Express a more essential part of our customers' digital lives.

Given the announcement we made earlier today about an expanded relationship with PayPal, I wanted to put the many things we are doing here in context.

Over the past year, we've steadily gained traction on this critical imperatives that cuts across every part of our integrated business model.

Our progress on our digital efforts takes many forms.

Acquiring companies with great technology and AI capabilities like Mezi and Cake and working to integrate those capabilities into our app, creating partnerships with a range of innovative startups to stay on the leading edge of exploring new capabilities for our customers, steadily expanding our internal capabilities through new and innovative products, such as Early Pay and Amex Go, for our commercial clients, continuing to drive marketing efficiencies by having more of our marketing and new Card Member acquisitions come through our digital channels and building upon our long-standing relationship with a digital leader like Amazon and our strength in small business to come together and launch later this quarter what we believe will grow to be one of our leading small business co-brands in the U.S. And so like we are excited to expand our long-standing relationship with a digital leader like Amazon, I'm also excited about expanding our long-standing relationship with another digital leader, PayPal.

PayPal has long been one of our largest merchants and most important partners, helping to expand the reach of our digital payments in the American Express network, and I'm really excited about what we're doing together.

As part of our expanded relationship, Card Members will be able to use Membership Rewards points for purchases at millions of PayPal merchants online and send money via Venmo or PayPal to friends and family directly from the Amex mobile app, easily add American Express cards to the PayPal wallet directly from the mobile app or website -- from Amex' mobile app or website and pay their American Express bill with their PayPal or Venmo balance via the PayPal instant transfer feature.

We'll have a more prominent place on the platform and will continue to jointly explore additional innovative digital products and experiences.

I believe this is going to be a winning partnership for our customers, for our merchants, for us and for PayPal.

It's truly a win-win.

And as I see it, it is just the latest step in our journey to play a more essential role in the digital lives of our customers.

As I said at the start, I feel very good about our performance.

The investments we've made in new benefits, services, digital capabilities and the global marketing campaign that supports them are generating very good momentum.

Given that momentum, we now expect full year 2018 revenue growth to be between 9% and 10%, and we are raising our adjusted EPS guidance to $7.30 to $7.40, up from $6.90 to $7.30 range we set at the start of the year.

I'm excited about the opportunities that lie ahead, and I'm confident in our ability to continue to deliver sustainable growth for our shareholders.

Now let me turn it over to Jeff.

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

It's good to be here today to talk about another quarter of steady and consistent revenue and earnings growth.

Let's get right into our summary financials on Slide 3. Third quarter revenues of $10.1 billion grew 10% on an FX-adjusted basis, with this growth again driven by a well-balanced mix of growth across discount revenue, fee revenue and net interest income.

I would point out that the FX-adjusted growth rate now exceeds our reported growth of 9%, given the strengthening of the U.S. dollar against the major currencies in which we operate.

This 10% revenue growth then drove net income of $1.7 billion, up 22% from a year ago.

And earnings per share was $1.88 for the quarter, up 25% from the prior year.

Our shares outstanding were down 2% in the prior year, a little less than recent quarters due to the suspension of our share repurchases in the first half of the year, which resulted from the onetime impact of the Tax Act last December.

We are now back within our targeted capital level range, and as a result, resumed share buybacks this quarter.

All in, these are results we feel really good about.

Looking at the details of our performance, I'll start with billed business, which you see several views of on Slides 4 through 6.

Starting on Slide 4. Our FX-adjusted total billings growth accelerated sequentially to 10% in Q3.

More significantly, as you can see on the top right, our proprietary business, which makes up 80% or the majority of our total billings, was up 12%, maintaining very strong growth levels.

The remaining 15% of our overall billings, which come from our network business, GNS, continues to see the expected impact of regulation in the European Union and Australia, and as a result, GNS billings were down 1% on an FX-adjusted basis.

The steady and strong growth across all of our proprietary segments is shown clearly as you turn to Slide 5, which gives you a segment-oriented view of our billings.

Turning to Slide 6. We have a more detailed view of billings by customer segment and also a reminder that Global Commercial and Global Consumer are roughly the same size, representing 41% and 44% of Q3 billings, respectively, while Global Network Services makes up the remaining 15% billings.

Starting on the left with our small and midsized enterprise Card Members or SMEs, U.S. SME was up 10%.

As the leader in the U.S. SME space, we feel good about the consistently strong billings growth that we have shown for many years in this customer segment.

International SME remains our highest growth customer segment with 23% FX-adjusted growth in the third quarter.

Our growth in this segment has accelerated significantly in the last year, and we continue to believe that we have a long runway for growth, given the low penetration we see in the top countries where we offer international small business products.

In the large and global customer segment, we saw a 10% growth on an FX-adjusted basis.

As you know, this is an important segment for us as it helps strengthen our network by driving acceptance and coverage.

Now on any given quarter, our growth rate in the segment can vary a bit, given the large volumes a few customers can drive.

This segment is heavily T&E-oriented, and you can see in the earnings tables that the company's overall U.S. T&E and global airline billings also accelerated sequentially to 9% on an FX-adjusted basis this quarter.

Moving to U.S. consumer, which made up 32% of the company's billings in the third quarter, we are pleased to report our third consecutive quarter with double-digit growth.

Our double-digit billings growth in U.S. consumer reflects our strong acquisition efforts through digital channels as well as the general strength we are seeing in consumer spending and confidence within our premium U.S. consumer base.

Moving to the right.

International consumer growth remains high at 18% on an FX-adjusted basis, consistent with Q2.

We have widespread growth in key markets with FX-adjusted growth of 13% in Japan, 14% in Mexico and over 20% in both Australia and the U.K.

Last, on the right, as I mentioned earlier, Global Network Services was down 1% on an FX-adjusted basis, driven by the impacts of regulation in the European Union and Australia.

Although the network billings are down in these regions, we are seeing strong growth on the proprietary side as I just mentioned.

Additionally, if you were to exclude the European Union and Australia markets, the remaining portion of GNS was up 8%.

Overall, our growth has been diverse, and this is the first quarter in sometime in which we have had double-digit billings growth across all of our proprietary groups, U.S. and international consumer as well as large and global corporate.

Turning next to loan performance.

On Slide 7, total loan growth was 16% in the third quarter and in line with the prior 2 quarters.

We continue to be focused on driving growth with our existing customers, and about 60% of our growth in lending came from existing customers once again this quarter.

I would remind you that we've completed the Hilton portfolio acquisition earlier this year, which contributed around 120 basis points to growth this quarter, roughly in line with the contribution to growth in the first half of the year.

On the right-hand side of Slide 7, you see that net interest yield was 10.8%, up 10 basis points versus the prior year.

As we have been saying for some time, we have expected net interest yields to stabilize, which would cause year-over-year growth to moderate.

You're clearly seeing that playing out over the last few quarters.

While net yield is still growing over the prior year, the increase continues to moderate as we lap some of our pricing initiatives.

To spend a minute on funding, I'd remind you that over half of our funding comes from deposits, and over half of our deposits are in our online personal savings program.

We resumed actively growing our online personal savings program this year and in a rising rate environment, it is generally our least expensive source of funding.

Our beta on this program has been around 0.7 of late, consistent with the assumption we used for internal planning.

Stepping back, while we view a rising rate environment as a modest headwind to us, it is usually mitigated by a stronger economic environment, which is certainly what we are seeing now.

Turning next to the credit metrics on Slide 9. On the left side, you can see that the lending write-off rate was 2.1%, up 30 basis points from the prior year and stable on a sequential basis.

As a reminder, we have been saying for some time now that we expect these rates to gradually increase as they have.

And, in fact, the rates continue to be slightly better than we expected for this year.

On the bottom left, we have added delinquency rates, which you can see have been relatively stable now for several quarters.

On the right side, you can see similar metrics on our charge portfolio.

The charge write-off rate, excluding GCP, was 1.7% in the third quarter, up 20 basis points from a year ago but down on a sequential basis.

Here, I'd remind you that there can be some quarterly volatility in these charge rates due to seasonality, and looking forward, we do not see anything in the performance of our tenured customers to suggest any change in the broader environment.

Turning next to provision on Slide 8. Provision was $817 million.

I would point out that our reserve build was $92 million this quarter versus $229 million in the third quarter of 2017.

I'll also remind you that the third quarter of 2017 reserve build took into account a number of factors at the time, including recent hurricanes, accelerating loan growth and seasoning in the portfolio.

For this year, as you just saw on the prior slide, the delinquency rates have remained relatively stable for several quarters, so that is what you see reflected in our reserve build this quarter.

Based on our year-to-date performance, we are now lowering our full year provision growth expectation from the mid-30% range to less than 30%.

We feel good about our ability to continue growing our lending a bit faster than the industry by focusing on our existing customers while retaining best-in-class credit metrics.

Turning now to revenues on Slide 10.

FX-adjusted revenue growth was 10% in the third quarter.

As Steve mentioned, this represents the sixth straight quarter of having adjusted revenue growth of at least 8%, driven by steady growth from a well-balanced mix of spending fees on lending.

On Slide 11, you see the components of our total revenue.

Discount revenue, which makes up 61% of our revenue, was up 8% on a reported basis, which I'll come back to on the next slide.

Net card fees growth was 11%, driven by growth in Platinum and Delta in the U.S. as well as growth in key international markets like Japan and Australia.

We continue to demonstrate the ability to generate card fee revenues by offering differentiated value propositions even in the face of the steady competitive challenges that others present.

Lastly, net interest income was up 17%, driven primarily by the growth in loans that I mentioned a few moments ago.

Turning now to Slide 12 to cover the largest and most important component of our revenue, discount revenue.

Starting on the left, our average discount rate in Q3 was 2.38%.

This is down just 2 basis points from a year ago, a much smaller decline than we have been seeing in recent quarters.

For some time now, we have been talking about how there were several factors driving a larger decline in the average discount rate that we did expect to fade over time.

These factors included the impact of regulatory changes in Europe and Australia, the continued rollout of our OptBlue program to drive towards parity merchant coverage in the U.S. and some impacts from decisions we made to deepen the broad relationships we have with certain strategic partners.

You see this quarter that these impacts are indeed beginning to moderate.

In addition, mix also plays an important role on our average discount rate, and the higher growth in travel and entertainment spending this quarter that I discussed earlier also helped the average discount rate.

As a result, we now expect the average discount rate for the full year to be down less than the 5 to 6 basis point expectation that we originally shared at our March Investor Day.

Moving beyond the discount rate, and really more importantly, for many quarters, you have heard us say that our main focus is on driving discount revenue growth, not managing to an average discount rate.

And what you see on the right-hand side of Page 12 is that discount revenue growth was up 9% on an FX-adjusted basis.

This represents the highest FX-adjusted growth rate on discount revenue that we have shown since 2012.

And we feel really good about the momentum in our largest and most critical revenue line.

Turning now to expenses on Slide 13.

Let me start with operating expenses, which were down 1% this quarter while there were a number of discrete items that impacted the growth rate in both the current and the prior year.

If you were to adjust for all the various discrete charges, we would have seen a modest increase in operating expenses from the prior year, consistent with our long-standing trend of getting operating expense leverage relative to our revenue growth.

We continue, as Steve said, to have great confidence in our ability to deliver steady operating expense leverage.

So that brings me next to customer engagement cost on Slide 14.

In total, customer engagement expenses were $4.5 billion in the third quarter, up 13% from the prior year.

Starting at the bottom, we have the marketing and business development line, which has 2 components: our traditional marketing and promotion expenses as well as payments we make to certain partners, primarily corporate clients, GNS partner banks and co-brand partners.

This line in total is up 14% versus the prior year driven by 2 factors.

First, as we have said for the last few quarters, we have some increases in partner payments due to co-brand agreements that we signed in the last year and growth in our corporate business.

Second, as you may recall, we launched a new global brand campaign earlier this year.

And as you would expect, we increased our spending in marketing to support our brand refresh.

I would add that we feel good about our continued ability to drive marketing efficiencies in our Card Member acquisition efforts, as we have grown our acquisitions to 3 million new proprietary cards globally this quarter without a corresponding increase in our levels of direct spending.

This marks our highest quarter of acquisition in many years, when you set aside the Hilton portfolio acquisition earlier this year.

Moving up to rewards expense, you can see that it was up 11% from the prior year, roughly in line with proprietary billings growth.

Moving then to the top of the slide, Card Member services cost was up 30% in the third quarter.

We continue to expect this line to be our fastest-growing expense category as it includes the cost of many components of the differentiated value propositions, which we believe are difficult for others to replicate, such as airport lounge access and other travel benefits.

Turning last to capital on Slide 15.

You can see that we ended Q3 with a CET1 ratio of 10.8%.

Our high ROE business model has allowed us to quickly rebuild our capital levels to our target range of having a 10% to 11% CET1 ratio after last December's Tax Act charge briefly dropped us below our target range.

This has allowed us to resume share repurchases in Q3 and to raise our dividend consistent with the CCAR approvals we received from the Fed in June.

So that brings us to our outlook, and then we'll open the call for questions.

First, we now expect full year revenue growth to be 9% to 10%.

As both Steve and I have pointed out, our revenue growth has been at least 8% on an adjusted basis for 6 consecutive quarters, and that strong growth has been driven across a diverse mix of both geographies as well as business and customer segments.

We can directly link our decisions and investments to the strong revenue growth that we have seen year-to-date, and we will continue to make investments that we believe will drive share, scale and relevance and will sustain our strong level of revenue growth.

Our confidence in this revenue growth leads us to raise our adjusted EPS guidance to $7.30 to $7.40, excluding any potential discrete tax benefits and other contingencies.

This is up from our original guidance range of $6.90 to $7.30.

Taking a step back, our performance year-to-date and full year guidance reinforced several points that Steve led off with.

First, over the last several quarters, we have had strong revenue growth and tax-adjusted earnings per share growth slightly above that as we offset some of the increased customer engagement costs with operating expense leverage.

Second, while our business model has the flexibility to throttle back spending on value propositions and Card Member engagement in ways that contribute to EPS in the short term, we believe that our decisions today are driving share, scale and relevance, which support the business over the long term.

Finally, we are focused on sustaining high levels of revenue growth, which we believe is the best way to generate steady and consistent double-digit EPS growth.

With that, let me turn it back over to Edmund to begin the Q&A session.

Thank you, Jeff.

(Operator Instructions) Thank you for your cooperation.

And with that, the operator will now open up the line for questions.

Operator?

(Operator Instructions) Our first question from the line of Sanjay Sakhrani with KBW.

(technical difficulty)

And it seems like the growth is diverse and accelerating...

Sanjay, you cut out for a minute.

So would you mind starting again?

Absolutely.

Okay.

Slow it down...

Okay, good.

So the revenues have been consistently surpassing your expectations this year.

And it seems that the growth is diverse and accelerating.

Could you guys talk about where specifically the outperformance is coming from?

Is it macro?

Is it investment?

Is it a favorable competitive environment?

And what gives you the confidence that it's going to persist?

And then, just on a related note on the discount rate, Jeff, you mentioned that you expect it to not be down as much as you guys envisioned, so what would be the trajectory going forward, given there's not as many of these partnership discounts or anything else sort of affecting that number.

So Sanjay, let me sort of start out and maybe get the first part of the question.

Look, what we have really focused on and not just this year but over the last couple of years is we've really focused in on investing.

We've invested in value for our Card Members.

We've really invested in value propositions, and we've certainly invested in coverage.

And Jeff will talk about sort of discount rate, but you've seen discount revenue.

But when you look at the -- you look at our growth, it's across the board.

You've got double-digit growth in every billing segment that we report with the exception of GNS, which has the issues as we wind down Australia, wind down Europe, but whether it's small middle-market in the U.S., even large -- large and global accounts, certainly international, both consumer and small business, really high double-digit and double-digit growth rates with SME up in the 20% and U.S. consumer as well and, look, we continue to grow our lending book judiciously, not only in the U.S., but in international.

So I think we've spoken in times that maybe from an organic perspective there's a little bit of the economy but certainly, we believe that the investments that we're making are really driving this sustainable -- what we believe is sustainable growth, and we believe our value propositions are resonating with what would be our traditional customers and what I think a lot of people are surprised at as millennials.

And so it really is across-the-board growth.

Yes.

The only thing I'd add on that, Sanjay, then I'll talk about discount rate, is we did talk going actually all the way back to the January call about the fact that late in last year's fourth quarter, we did see a noticeable uptick in what we would call organic growth, and we really can't particularly attribute that last little uptick to anything other than the economy, and it sustained itself this year, though not further accelerate.

So there's a modest boost from economic growth, but I think all of the factors Steve talked about is a much larger drivers for us.

On discount rate, Sanjay, you have enough history to know that for many years, we used to talk about a 2 to 3 basis point a year decline in the average discount rate due to mix, people hitting volume triggers, et cetera.

In fact, if you look at history, it was usually more 1 to 2. And then for a couple of years now, we've said because of OptBlue, because of regulations in Europe, Australia, because of a few strategic agreements we've done, that has driven it down an unusual amount, but all those you see this quarter are beginning to fade.

Now I'm not going to give you guidance for the future beyond that because I think Steve and I have been very clear this year that our focus is on driving discount revenue growth, and so we're going to make decisions sometimes that leverage our integrated business model if we think they're going to drive discount revenue growth than we're not going to worry about the average discount rate.

What I would say is we feel good within any given category of merchants about the stability of the rates and about where we are.

Our next question from the line of Don Fandetti with Wells Fargo.

Jeff, if I look at sort of forecasted revenue estimates, they're probably around a 7 handle, yet you guys are doing a 9 10.

And so I guess, the question is on sustainability.

So you talked a little bit about build business, but you're facing tougher comps on proprietary yet easier on GNS.

I guess, my question is can your build business growth accelerate?

Or is it more likely that we peaked out here?

Well, I'll make a few comments and then Steve you can add.

Look, I think Steve and I couldn't have been clearer about the focus we have on sustaining the kind of revenue growth that you have now seen for 6 consecutive quarters.

And of course, that revenue growth is coming from a mixture of great billings growth, steady loan growth, steady growth in all the fees that we generate.

And the key to sustaining the overall revenue growth we have is we see a long runway to sustain growth in all 3 areas.

So I would say we're not particularly trying to drive or forecast or suggest acceleration from where we are.

We feel really good about the share and scale gains that we're getting with our performance right now, and that's what we're focused on sustaining.

Look, I think what we have said is we have lots of great investment opportunities, and we're going to take advantage of those investment opportunities.

And those opportunities are not only within our commercial business and consumer business but they're broad-based.

And so what you will continue to see us do is invest in card acquisition, and you will continue to see a focus on investing in coverage.

And we believe that as we have invested in coverage here in the United States, that has made a huge difference, and you're seeing that play out in discount, you're seeing that play out in build business growth, you're seeing that played out in discount revenue growth.

And we're not at where we want to be even in the United States at this particular point in time.

As we said, we want to get to virtual parity coverage by the end of 2019, and so you will continue to see us focus there and you continue to see us focus internationally on coverage, which there is a relationship between improved coverage and driving billed business and the more billed business if you think about our spend-centric model, then you actually can drive -- continue to drive the revenue growth that we're also getting from lending.

So bottom line is we're going to be investing for share and for scale as we continue moving forward.

And our next question from Jill Shea with Citi.

Related to billed business from large and corporate customers, you saw some accelerating trends there.

Can you just speak to the strengths and how should we think about growth going forward, and then perhaps also touch on airline and U.S. P&A and the strength that you saw this quarter and how we should think about the outlook going forward there?

I think for large and global, it was particularly good quarter.

I think there are some -- we would have some grow-over issues as we move forward, but what you're seeing is a little bit more diversification in terms of we're getting some more B2B within that space, but we also continue to see our large corporates and our global accounts continue to spend in the T&E space.

So we're really happy with the sort of the double-digit growth.

It's not something that we've experienced in quite a while.

In fact, if you go back a few quarters, you saw this sort of at a 2% level, at a negative level, and we've had that uptick, partially due to our focus on B2B, but also due to increased T&E spending with our large and corporate accounts.

And our next question from the line of Betsy Graseck with Morgan Stanley.

I just wanted to change conversation a little bit and talk about the very fast loan growth you've been generating with strong credit quality, a little bit of an uptick in net charge-offs but not that much.

And related to how you're thinking about reserving as we go into the CECL world, really the question has to do with the fact that you've got, obviously, a lot of transactors.

Does that mean that you could potentially pull back on some of the reserving that you're doing and drive that into even faster loan growth or potentially buybacks?

Or is that not part of the equation?

And if you could speak a little bit to how you're thinking about the new accounting world and when we'd be getting some information with regard to how that's going to impact you, that would be helpful.

So let me first just remind you.

We're now 4 years into growing a little faster than the industry because of our unique focus on capturing a bigger share of our own customers' borrowing behaviors which, frankly, we've historically underpenetrated, and that's why we have 60% of our loan growth coming from our existing customer base.

I'd point out, if you take that growth out, you'd be growing at about the industry.

That's why 4 years into this exercise, we still buy, quite a stretch, the best-in-class credit metrics, and credit has consistently performed as we have told people it would.

So we feel really good about the growth, and we actually think we have a very, very long runway to continue to grow a little faster than the industry.

On CECL, Betsy, I'm afraid I'm not going to give you a lot of insights that are much different from what others have said.

If you look at our card lending book, I would suggest that you are liable to see larger reserves that are somewhere in the range of what you've heard others talk about, somewhere in the 10, 20, maybe a little higher percent range.

What is unique about us, as you point out, is we are the only financial institution in the world that has a really large charge card franchise that, obviously, has some different dynamics in a CECL world.

Frankly, we're still working through that, partly, because of our uniqueness.

There's a lot to work through with regulators and auditors and accounting authorities.

The net of all that, we'll have to see.

I guess, I will go on record in saying we're one of the great majority of financial institutions who think that there is incredible complexity to this accounting standard.

There's probably also some pro cyclicality, which may be the opposite of what the regulators set out to accomplish when they went down this path, and we'll have to see what that means overall.

We'd also hope but, boy, it's way too early to say that this is a pure accounting change, which you would think shouldn't affect ratings, shouldn't affect capital requirements, although there are certainly no commitments out there right now from the Fed or the rating agencies to, in fact, take that approach.

So I think there's still a lot of discussion to have on this, Betsy, and I actually see that discussion growing a little bit in the industry as well as in D.C. I will say, like most other institutions in 2019, we'll be running parallel, and that's really when we'll be able to give people more specific insights.

And we'll go next to David Togut with Evercore ISI.

This is Anthony Cyganovich on behalf of David Togut.

Do you expect to reduce merchant discount rates further in Europe, as PSD2 goes into effect in Continental Europe next year, which you may promote more ACH-based payments?

So look, as we look at -- so the Europe, as you know, we're outside of the regulation, but our competitors aren't, and so we still have a premium.

Our business in Europe is very different.

It is a Corporate Card, SME, really high-end consumer business, which merchants value.

And when you look at that business, that's a business that's grown in the high, high double digits at this particular point for us, all across the board, international and in Europe.

So I don't see that happening, and I don't see us having actually the exact same coverage needs that we do in the United States.

But what we will do is we will use discount rate as a tool to provide coverage where we need coverage whether that be B2B, whether it's a different value equation.

And remember, again, here's where the integrated model helps us out because we have both sides of that equation and especially in Europe because we're not able to use sort of the same models we have in the United States.

And as we need small merchants, we may run our own -- what I call our own theoretical OptBlue program here from a pricing perspective.

But other than that, I don't see us -- I see us maintaining that premium and again, I wouldn't look at that as it relates -- we don't share this, obviously, but I wouldn't look at that as it relates to the discount rating in Europe.

I would look at us is using that discount rate as a tool to get coverage when and where we need it.

We have a question from Bob Napoli with William Blair.

The international SME and consumer business has continued to grow at a very high rate.

What is specifically driving that?

I think it's still relatively small relative to the opportunity.

Are we early days?

What is driving that?

And if I could, the Amazon program, how are you going to manage that with all the other SMB programs, small business programs you have in the U.S.?

How does that fit in and compete with your other programs?

Look, let me go with the second one first here.

I think we'll be launching the Amazon product soon, and we have a range of -- we have a range of small business products.

We have a Delta co-brand, a Hilton co-brand, a Marriott co-brand, a Lowe's co-brand.

Now we have an Amazon co-brand and additional proprietary products and proprietary products whether those be Cashback, whether they be charge products or what have you.

And a lot of our customers actually use multiple products.

You will see small businesses that use a Corporate Card product.

You will see small businesses that use a Marriott product and use an Amex SimplyCash product.

And I think that the beauty of the Amazon and Delta, Marriott and so forth and so on is that we provide small businesses the opportunity to use the variety of products that meet their needs and meet their rewards' needs and spending needs and so forth.

And so our view is I'd rather have that sort of arsenal of products all under the American Express umbrella than certainly have to compete there.

And so it will be -- you may see customers that have our small business product today, also get the Amazon product, just like they also got the Marriott product.

And so I just think it's one of the ways that we will continue to drive our billings and drive our position in commercial payments in the U.S. As far as your first question, when you look at the SME segment, internationally, and then I'll get into consumer, when you look at the SME segment internationally, which is a relatively newer segment that is being penetrated, here's the advantages of global scale.

What we're able to do is leverage our global infrastructure, leverage our global footprint, leverage everything that we have in our commercial business in the United States and our global business outside the United States, and we've been driving that business.

And the way we drive that business is we drive it in multiple ways.

We drive that from a telesales perspective and in-person sales perspective and a digital perspective, and the reality is we see that as a large growth opportunity.

And when you look at that business for us, right now, we are growing that primarily on from a billings perspective.

But over time, there will be a working capital component, we believe, to that base that we have.

From a consumer perspective, American Express has been a premium product brand outside the United States for many, many years.

And look, we are continuing to inject value.

And what's really interesting about our business outside of the United States is that in a lot of places or in a lot of cases, our fees that we charge to our consumers are actually higher than they are in the United States and the services that we provide are on par or even better.

So we see that opportunity still has a growth opportunity for us.

And as we continue to increase the coverage, we believe spending will increase as well.

Our next question from James Friedman with Susquehanna.

This is Jamie at Susquehanna.

Since you called it out, Steve, I just wanted to probe about trend in the leverage and the margin trajectory, especially with regard to Card Member services.

Just kind of philosophically, I realize you conclude that it's a good area of investment, but I'm just getting questions from investors at what point will it likely stabilize because 30% is a pretty big ticket.

Let me maybe make a financial comment, Steve, and then you can comment on the strategy.

One caution, James, one for you and really for everyone is we pull different levers at different times in different geographies in different parts of our business.

And one of the reasons why we flipped a while back to talking broadly about Card Member engagement costs, which includes rewards, which includes business development, payments to partners, traditional marketing, and it includes cost of Card Member services, although I would point out that's, by far, the smallest component is because at different times, the growth rates are going to vary across those 3 depending on what we think is going to produce best returns.

So I encourage you to look in many ways across all 3 of those categories, but we've been pretty clear today that, look, those have been growing a little faster than revenue, but we actually feel great about the revenue growth that that's generating.

We feel great about the platform that provides to produce steady double-digit EPS growth, and we think it is allowing us to build scale and relevance in a way that, quite frankly, we haven't in a number of years.

Look, I think it's -- it really gets down to sort of how we inject value, and I think Jeff is right.

I mean, we look at multiple levers to do that.

And I think as we continue to get more customers, as we continue to get more of their billings, it provides us that platform to do more things with them as we can develop -- as we continue to develop more and more products and services.

So again, our strategy here is really about more share, really about more relevance and really about more scale.

And we believe that's the right lever for us to pull at this particular point in time.

And we go to Moshe Orenbuch with Crédit Suisse.

I wanted to talk about the reserving, because, obviously, very strong results both somewhat in Q2 but even more so in Q3, I mean you did lower your expectations for the full year.

How do we think about it going into '19 just because the portfolio is obviously growing at a fairly high rate.

And while credit ratios are good, the dollar amounts of both delinquencies and loss are growing, and I guess, how do we think about that into '19?

Well, we'll have to give you, of course, a much more thorough answer in 90 days when we are on the January call, and we'll provide a lot of commentary around 2019, but look, I'll make a few comments.

As you very well understand, provision is affected by a lot of things, including sequential rates of growth in your loan.

So in a world, though, where, let's say, our loan growth in 2019 roughly looks like where it is today, I think what you're seeing in our trends of late is we're getting past some of the more dramatic seasoning that we had to get -- go through, and we're starting to get to the point where your provision growth will begin to [add some tone down] all else being equal, towards your loan growth rate.

Now we are growing loans in the mid teens, so that tells you that you should expect a provision to at least grow at that level even as we maintain the kind of credit performance that we've had, but we feel really good about the economics we've been getting from 4 years of growing lenders a little faster than the industry, and I think we can do this in the current kind of economic climate for many years to come.

Our next question from the line of Rick Shane with JPMorgan.

Look, you guys have articulated and really executed on a wallet share-driven loan growth strategy.

I am curious if there are any differences in how seasoned customers build balances, and if there is any more sort of concentration in terms of transaction, higher utilization initially or how we think about seasoning and future growth, given that this portfolio could be constructed a little bit differently?

I think, Rick, the thing that I always keep trying to bring people back to is, historically, our customers don't think of American Express as a place to do their borrowing on a card.

And that's why Doug Buckminster, Steve and myself, we talked a lot about the statistics in the U.S. consumer segment, which is where most of our lending is, then we capture roughly 50% of our customers spending behaviors and only 25% of their borrowing behaviors.

So what we have consistently worked at now, for the last few years, is trying to do lots of different things in marketing, in product, in pricing and incentives to try to change that mindset.

And that's why 60% of our loan growth is coming from our existing customers.

It's why we're able to keep credit metrics at the levels that I was just talking about in response to Moshe's question, and it's why we think we can keep at this for a long time.

Yes.

And the only thing I would say is that, and I've said this before in meetings and at our analyst calls and so forth, it is important for us to have a broader relationship with our customers.

And if they are going to go and borrow money someplace, someplace else that also provides the possibility of them spending someplace else as well, so it really is important, which is why it is important for us from a small business perspective to continue to talk about and expand what we're doing with small businesses whether that be cross-border payments, whether that be merchant financing, 90-day working capital loans and things like that because they do have other options.

And it really is important, especially in a world where things are so accessible from a digital perspective, that they don't look at us as a one-trick pony, and that they're looking at us as a source of their -- and look, this applies from a small business perspective and a consumer perspective as a source of their working capital needs, and that's what we're really trying to do.

And so that's why this sort of messaging and you see this a little bit with some of our advertising when you look at it and you see somebody applying for a loan, a small loan online as they're watching TV.

So you're going to continue to see us expand what we're doing with our customers.

Got it.

And again, look, I'm just sort of curious, presumably, a seasoned American Express customer has a different balance bill behavior than a millennial, and that totally make sense.

I'm trying to understand what the implications are in terms of future growth, if we should think about how those loan season.

And again, no judgment, one way or the other, better, worse, faster, slower but how we think about the difference in terms of how that initial-entry behavior translates into long-term performance?

I guess, Rick, I want to come back to, remember, the diversity of our products portfolio, U.S., international, consumer, small business, lots of different cards, people borrow on the Platinum Card, they borrow on everyday cards.

Those kinds of generalizations, I'm just not sure, we -- frankly, we don't look at the world that way because of the diversity of our base.

I'm just going to come back to we see a long runway to continue what we're doing here.

Our next question from Mark DeVries with Barclays.

Coming back to the topic of the relationship between your revenue growth, engagement expenses and EPS, I think you indicated, given the faster engagement expense you were seeing EPS growth, adjustments for the tax benefits, it's slightly ahead of the revenue growth.

And I think the Amex of old, we could kind of reliably expect a mid- to high single-digit revenue growth to translate into a kind of mid-teens EPS growth.

Would you expect to widen back out to that kind of relationship over time?

Or do you see that kind of margin pressure persisting?

Well, Mark, it's a very good question, and let me just maybe be clear with everyone.

So Steve and I were very clear on the call that we are focused on sustaining the kind of high levels of revenue growth we have.

We think we have a good runway to do that, and we think it's a great basis to produce double-digit EPS growth.

If you look at Q2 and Q3 though, just to look at some actual results, and there's a little complexity to the taking out the impact of the Tax Act.

But if you do take the impact of the Tax Act out, you see 9% to 10% EPS growth in those 2 quarters, and you see 10% to 12% EPS growth, excluding the impact of the Tax Act.

In history, to your point, 2012 to 2014, we were getting very little revenue growth, 4%, frankly losing share, losing some scale, but we've squeezed 11% EPS growth out of that, precrisis.

You saw some numbers like that.

We don't think that's the right way to run the company in the current competitive and regulatory environment.

We don't think that produces the kind of sustainable foundation that's going to build scale and relevance and share that will allow us to really sustain double-digit EPS growth.

Right.

I mean, look, the Amex of old and the Amex of today, from a numbers' perspective, we're in a very different environment, as Jeff just said.

We're in a different environment competitively.

We're in a different environment from a regulatory perspective.

We're in a different mindset, too, though.

And I think that mindset that we have is it is really important that we continue to grow our share and we continue to grow our relevance and scale and you don't need any more proof of that than what we've been doing from a coverage perspective and just how important it is and what we've been doing from a value injection perspective with our Card Members, and so we're going to continue to do that as well as continue to build capabilities, so that we can expand our relationships with them.

So we believe the right way to win is to really focus in as we both said on higher revenue growth with a narrowing of that revenue and that EPS number.

But just to point out, it is with a lot higher revenue growth.

And we go to Bill Carcache with Nomura.

I had a follow-up on Moshe's question earlier.

Credit has held up much better than many expected with Amex never really facing the severe normalization headwinds that some of your lend-centric competitors did.

Can you help us understand the role that your closed loop, things like machine learning and other technologies have played in driving your strong credit performance and maybe speak to the extent to which you think those assets provide you guys with an edge over your competitors to operate in an open-loop environment?

I mean, it's -- other than if you look at sort of blip during the credit crisis, the financial crisis, closed loop is the secret sauce.

It's the secret sauce from a fraud perspective.

It's the secret sauce from an underwriting perspective.

It's a secret sauce from a targeting perspective upfront and who we acquire, and reality is that good credit starts right at the beginning of the funnel in terms of who you're targeting, who you're letting in, how much money you're lending.

And all of that is all about sort of how we continue to invest in our machine learning capabilities, in our data capabilities, and all that's really powered by the closed loop and all the data that we have.

So it has been a tremendous advantage for us from day 1. The other thing I would add on this is that the other thing that's really important within the closed loop, which absolutely has nothing to do with the closed loop is a no-preset spending limit.

And so when we look at our machine learning capability, it also helps to drive just how we set that no-preset spending limit.

And one of the huge advantages that we have is in the small business space because in the small business space, small businesses use credit card products as a form of working capital, whether it's charge or whether it's lending.

And to be able to set a no-preset spending limit where we're dynamically determining what the level of spend is based upon data from millions of small businesses and historical data and so forth is a huge advantage to us as well.

So look, there's many models that are out there in this business.

There's a PayPal model, Visa, MasterCard model, there's JPMorgan Chase model.

Our model is unique.

And the uniqueness is it's integrated.

That integration gives you the closed loop.

The closed loop gives you the data.

It gives you the relationships on either side, and it gives you the ability to have the to play with economics which becomes even more important down the road from a B2B perspective, so closed loop is key for us.

Our next question from the line of Jeff Cantwell with Guggenheim Securities.

Can you talk a little more about today's announcement with PayPal?

I guess, what I'm curious about is how much opportunity is there for Amex card holders who might be interested in using Amex rewards points for purchases at the PayPal merchants online?

Maybe tell us why this is something where you think you'll see a lot of demand from your cardholders?

And then a related -- sorry, just -- if you don't mind, just a related question on how eager are Amex cardholders to add their Amex cards to the PayPal wallet through the mobile app or the website, and then starting to spend via the wallet?

I'm really just trying to get a framework for how incremental this might be for you.

You are particularly...

Yes.

So look, I think what you saw today, really, is a multifaceted expansion of our relationship with PayPal.

Our relationship with PayPal goes way back.

They're a huge partner of ours from an acquiring merchant perspective.

They're a leader in the digital space.

I think that's very, very clear.

My perspective is it always makes sense for us to sort of expand our relationship with them.

And look, Dan and the team are really great to work with, and I have a long-term relationship with Dan.

We worked really well together here and the teams as we went through this.

What we try to think about is ways we could add incremental value to American Express, ways we could add incremental value to our merchants, ways we could add incremental value to PayPal and ways we could add incremental value to our Card Members.

And so when you think about sort of this integration within the app or within the wallet, the one thing that you realize is the more seamless you can make things, the easier it is for your Card Members, your customers to transact.

I mean, when you think about merchants, for example, one of the things that they look for is to make sure that they don't lose shopping carts and that they make sure it is easy as possible online, they're not shopping carts in the sort of in the supermarket, but online.

And we wanted to make sure is that we could make it as seamless as possible for our Card Members to be loaded their cards into PayPal because PayPal offers us a tremendous expansion of our network today.

And so to be able to make those millions of merchants available to our Card Members in a more seamless way is a win-win for everybody.

It's a win-win for merchants.

It's a win-win for us.

It's a win-win for PayPal.

It's a win-win for our Card Members.

As far as the American Express Pay with Points and how many Card Members will use those points at PayPal merchants, this is the most valuable bank of points anywhere in the world bar none.

It's a behemoth and the reality is that we're looking for more ubiquity.

Our Card Members used points for a variety of things at a variety of places, and this just expands that ubiquity.

And it's going to be good for merchants.

It's going to be good for our Card Members.

Can I put a number around it?

I can't put a number around it, but the reality is, I think, this will be an uptick in points burned.

I think this will be an uptick in Card Member satisfaction.

I think it's going to be an uptick in merchant satisfaction as well.

So we're really pleased with this.

And obviously, there'll be more announcements as we move along from a timing perspective and what have you, but we're really excited about this expansion of strategic partnership.

And the last question comes from the line of Chris Donat with Sandler O'Neill.

I wanted to ask one strategic question on a piece of the revenue that you haven't touched on much today.

The annual fees, because with the Platinum and Gold Card, we've seen some increases, and Jeff mentioned some increase or some growth in Japan and Australia on fees.

I'm just wondering if you're strategically thinking about fee increases being more likely in the future.

It seemed like that was something.

There was some hesitancy around in past years, but it just seems like there's more appetite among consumers for higher fees.

Then I also wonder if there's more trade-off from some of your member services with that, too.

So if you look at it, right, our Card Members are looking for value.

And our experience is, is that Card Members will pay for value, and so what you've seen is lots of value injection, and that value injection takes many forms.

I mean, and when we look at Card Member engagement costs, you look at some fixed -- you look at some fixed costs, which could be your allowances and things like that, which get consumed as people go through, but they don't get charged out on a variable basis.

You look at rewards cost, and you look at deals we may do with some of our merchant partners where both of us can bring value to that equation as well.

And so our belief is if you are bringing value, you should charge for that value.

And there's no better proof in the pudding then when under -- in a very, very difficult competitive environment with the launch of Chase Sapphire, we put in $100 increase in our Platinum Card and so attrition go down and so our acquisition go up and so more acquisition go up from a millennial perspective as well.

And the reality is that's all due to value.

People will pay for value and American Express is known as a brand that does provide value.

And so where we have opportunities to raise our fees, we will raise our fees.

And we did that just with the Gold Card.

We've done that in various international markets, but we've injected value.

And when you inject value, the other benefit of injecting value is people will use the card more.

When they use the card more, they spend more.

When they spend more, you give them an opportunity to revolve more.

So it's a virtuous cycle as far as we're concerned, and we're going to continue to pursue that strategy as well.

With that, we'll bring the call to an end.

Thank you, Steve.

Thank you, Jeff.

Thank you to those of you on the phone.

The IR team will be available for any follow-up questions after the call.

Operator, back to you.

Thank you.

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