American Express Company (AXP) — Q3 2018 Earnings Call Transcript

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 from 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 will 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 four strategic imperatives that we focused the organization on at the beginning of the year. In the third quarter, we saw continued momentum in our business that was in line with the strong growth of the first half. Adjusted revenues grew 10% and we delivered EPS of $1.88. I feel really good about the company's performance. We’ve 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 a 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 nine 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're 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 cost on operating expenses. For us, these are primarily scalable infrastructure costs, and they are 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're making on our four strategic imperatives, which I'll take you through now. We continue to expand our leadership in the premium consumer space. We introduced the new Gold Card in the US with an enhanced value proposition and an innovative set of rewards. We continued to refresh our international product line with enhancements to our Platinum Card in Australia, Singapore, and Japan. The US Platinum Card continued its strong performance. New consumer accounts are up more than 50%, and about half of those are for 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 integrated network, we continue to add more places worldwide where American Express cards are accepted. While I could expand much more in our progress in these first three 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. 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 Gold for our commercial products, continuing to drive working efficiencies by having more of our marketing and new card member acquisitions come through our digital channels and building upon our longstanding 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 US. And so, like we are excited to expand our longstanding relationship with a digital leader like Amazon, I am also excited about expanding our longstanding 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 an American Express card to the PayPal wallet directly from the mobile app or website from Amex’s mobile app or website and pay their American Express bill with their PayPal or Venmo balance via the PayPal instant transfer features. We’ll have a more prominent place on the platform and we’ll 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. But to 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 US 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% from 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 one-time 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 reviews 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, the 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 mid-sized enterprise card members or SMEs, US SME was up 10%. As the leader in the US 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 this segment can vary a bit, given the large volumes that a few customers can drive. This segment is heavily T&E oriented and you can see in the earnings table that the company's overall US T&E and global airline billings also accelerated sequentially to 9% on an FX adjusted basis this quarter. Moving to US 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 US consumer reflects our strong acquisition efforts through digital channels as well as the general strength we're seeing in consumer spending and confidence within our premium US 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 UK. 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 some time in which we have had double-digit billings growth across all of our proprietary groups: US and international SME and 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 few 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 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 yield to stabilize, which would cause year-over-year growth to moderate. You are 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 use 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 nine, 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. And I 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 and 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 US 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 discuss the largest and most significant part of our revenue, discount revenue. Our average discount rate in Q3 was 2.38%, which is a slight decrease of just 2 basis points compared to a year ago, marking a much smaller decline than we have observed in recent quarters. For a while now, we have been highlighting several factors that have contributed to a larger decrease in the average discount rate, which we anticipated would lessen over time. These factors included the effects of regulatory changes in Europe and Australia, the ongoing implementation of our program aimed at enhancing merchant coverage in the US, and some effects from our strategic decisions to strengthen relationships with certain key partners. This quarter, we can see that these impacts are indeed starting to ease. Additionally, the composition of our revenue also plays a crucial role in our average discount rate, and the increased growth in travel and entertainment spending this quarter has positively influenced the average discount rate. Consequently, we now expect the average discount rate for the full year to decline by less than the initial expectation of 5 to 6 basis points that we communicated during our March Investor Day. Moving beyond the discount rate and really more importantly, for many quarters, you’ve 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 in 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 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 longstanding 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 costs 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 two 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 two factors. First, as we've 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. Rewards expense increased by 11% compared to the previous year, which is roughly aligned with the growth in proprietary billings. Card member services costs rose by 30% in the third quarter. We anticipate that this will be our fastest-growing expense category, as it encompasses many aspects of our unique value propositions, such as airport lounge access and various travel benefits that we believe are not easily replicable. Regarding capital, we ended Q3 with a CET1 ratio of 10.8%. Our strong return on equity business model has enabled us to swiftly restore our capital levels to our target range of 10% to 11% following last December's Tax Act charge that temporarily brought us below this range. Consequently, we've resumed share repurchases in Q3 and increased our dividend, in line with the CCAR approvals we received 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 six 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, which 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 reinforce several points that Steve let 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. Before we open up the lines for Q&A, I'll ask those in the queue to please limit yourself to just one question. Thank you for your cooperation and with that, the operator will now open up the line for questions.

And it seems like the growth is diverse and accelerated.

Hey, Sanjay. You cut out for a minute, so would you mind starting again?

Absolutely. Okay. Good. So the revenues have been consistently surpassing your expectations this year and it seems like the growth is diverse and accelerating. Could you guys talk about where specifically the outperformance is coming from, is it macro, is it investments, 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 expected 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 start by addressing the first part of your question. Our primary focus has been on investment, not just this year but over the last few years. We have concentrated on providing value for our card members, enhancing our value propositions, and improving coverage. Jeff will discuss the discount rate, but you might have noticed our discount revenue. When we analyze our growth, it is evident across all billing segments we report on, except for GNS, which is facing challenges as we wind down operations in Australia and Europe. In the US, both the small and middle markets as well as large and global accounts are experiencing double-digit growth. Internationally, both our consumer and small business sectors are seeing high double-digit growth, with small and medium enterprises reaching around 20%, alongside consumer growth in the US. We continue to grow our lending practices responsibly, both domestically and internationally. While there are some organic influences from the economy, we strongly believe that our investments are driving what we consider to be sustainable growth. Our value propositions are appealing to both our traditional customer base and millennials, contributing to broad growth across the board.

I would like to add that during last year's fourth quarter, we noticed a significant increase in organic growth, which we attribute primarily to the economy. This trend has continued this year, although it has not shown further acceleration. Thus, we have seen a slight advantage from economic growth, but the larger factors influencing our performance are the ones Steve mentioned. Regarding the discount rate, you are aware that for many years, we discussed a decline of 2 to 3 basis points annually, impacted by various factors such as mix and volume triggers. Historically, it was more like a decline of 1 to 2 basis points. For the past couple of years, due to some regulations in Europe and Australia and specific strategic agreements, we have experienced an unusual decrease in the discount rate, but those influences are beginning to diminish this quarter. I won’t provide future guidance as Steve and I have emphasized that our main focus this year is on driving discount revenue growth. We will make decisions that utilize our integrated business model if we believe they will enhance that growth, without worrying about the average discount rate. I can say that we feel confident in the stability of the rates within any given category of merchants and in our current position.

If I look at sort of forecasted revenue estimates, they’re probably around a seven 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 billed business, but you're facing tougher comps on proprietary, yet easier on GNS. I guess, my question is, can your billed business growth accelerate or is it more likely that we've 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 clear about the focus we have on sustaining the kind of revenue growth that you have now seen for six 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 three 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.

We have numerous promising investment opportunities that we plan to leverage, not just within our commercial and consumer sectors, but across the board. You will see us continue to invest in card acquisition and coverage. Our investments in coverage in the United States have significantly impacted our performance, as evidenced by increases in discounts, billed business growth, and discount revenue growth. However, we are not yet where we want to be in the U.S. We aim for virtual parity coverage by the end of 2019, and we will keep focusing on improving coverage both domestically and internationally. There is a correlation between enhanced coverage and increased billed business, which aligns with our spend-centric model and contributes to our revenue growth from lending. In summary, we will be investing for market share and scale as we progress.

Related to billed business from large and corporate customers, you saw some accelerating trends there. Can you just speak to the strength and how should we think about growth going forward and then perhaps also touch on airline in US T&E and the strength that you saw this quarter and how we should think about the outlook going forward there?

I believe it was a particularly strong quarter for our large and global segments. While there are some growth challenges ahead, we are noticing increased diversification as we gain more B2B presence in that area. Additionally, our large corporate and global accounts continue to invest in travel and entertainment, which is encouraging. We're pleased with the double-digit growth we've achieved, something we haven't seen for quite some time. A few quarters ago, growth was around 2% or even negative, but we've seen a rebound, thanks in part to our focus on B2B and the rise in T&E spending from our large and corporate clients.

I just wanted to change the conversation a little bit and talk about the very fast loan growth that 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 would be helpful?

So let me first just remind you, we're now four 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 under-penetrated, and that's why we have sixty percent of our loan growth coming from our existing customer base. I point out if take that growth out, you'd be growing at about the industry. It's why four 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 look, 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 the 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 as 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 DC. 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.

Hi, good evening. This is Anthony Cyganovich on behalf of David Togut. Do you expect to reduce merchant discount rates further in Europe as PST 2 goes into effect in Continental Europe next year which may promote more ACH based payment?

As we consider Europe, we are not impacted by regulations like our competitors, allowing us to maintain a premium. Our business model there focuses on corporate cards and high-end consumer services, which are highly valued by merchants. This segment has seen significant growth, particularly in high double digits across international markets and Europe. I do not anticipate a shift in our coverage needs compared to the United States. However, we plan to leverage the discount rate as a tool to provide necessary coverage in different areas, such as B2B, where the value proposition varies. The integrated model benefits us since we address both sides of the equation, especially in Europe, where our approach differs from that in the U.S. As we engage with small merchants, we might implement a theoretical ARPU program for pricing, but overall, I expect us to sustain our premium. While we don't typically disclose this information, I suggest that the discount rate should be viewed as a strategic tool for coverage rather than a direct correlation to pricing in Europe.

Thank you. And nice job on the quarter. The international semi and consumer businesses 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 and 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 US? How does that fit in and compete with your other programs?

Let me address the second question first. We anticipate launching the Amazon product soon. We offer a variety of small business products, including co-brands with Delta, Hilton, Marriott, Lowe's, and now Amazon, along with our proprietary offerings such as cash back charge products. Many of our customers utilize multiple products. For instance, small businesses may use a corporate card, a Marriott product, and an Amex Simply Cash product. The advantage of the Amazon, Delta, and Marriott offerings is that they provide small businesses with the flexibility to choose products that align with their specific rewards and spending needs. We prefer to have a comprehensive range of products under the American Express brand rather than just competing separately. Customers who currently use our small business products may also adopt the Amazon product, similar to how they embraced the Marriott product. This strategy will help us enhance our billings and strengthen our position in the US commercial payments sector. Regarding your first question about the international SME segment, which is relatively new to us, we benefit from our global scale. We can leverage our global infrastructure and footprint, along with our commercial business strengths in the US and beyond, to drive this segment. This growth is propelled through various channels, including telesales, in-person sales, and digital marketing. We see significant growth opportunities in this sector, currently driven by billings, and we believe there will be a working capital component added to our base over time. From a consumer standpoint, American Express has established itself as a premium brand internationally for many years, and we continue to add value. Notably, our consumer fees in many international markets are actually higher than in the US, while the services we offer are on par or better. Thus, we view this as a continued growth opportunity, and we believe that as we expand our reach, consumer spending will also increase.

Hi. Let me echo the congratulations. It’s James at Susquehanna. Since you called it out Steve, I just wanted to probe about the 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? Thank you.

Let me make a financial comment, Steve, and then you can cover on the strategy. One caution, James, and one for you and really for everyone is we pull different levers at different times in different geographies and 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, 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 three depending on what we think is going to produce the best return. So I encourage you to look in many ways across all three 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 a pretty 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.

I think it really gets down to 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 that platform to do more things with them 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.

Thanks for your remarks. I wanted to discuss the reserving, as we have seen very strong results in Q2 and even more so in Q3, although you did lower your full-year expectations. How should we approach this as we look into 2019, considering that the portfolio is growing at a significant rate? While the credit ratios are favorable, the actual amounts of delinquencies and losses are increasing. What should our perspective be for 2019?

Well, you know, we will have to give you a, of course, much more thorough answer in 90 days when we are on the January call and will provide a lot of commentary on 2019. But, look, I’d 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 asymptote 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 the 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 four years of growing lender a little faster than the industry but I think we can do this in the current kind of economic climate for many years to come.

Guys, thanks for taking my question. 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 seasoned in 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, myself, we talk a lot about the statistic in the US consumer segment which is where most of our lending is, that we capture roughly 50% of our customers' spending behaviors and only 25% of their borrowing behavior. So what we have consistently worked at now for the last few years is trying to do lots of different things in marketing and product and pricing, in 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.

I want to emphasize that it’s crucial for us to build a broader relationship with our customers. If they choose to borrow from elsewhere, it may lead them to spend their money elsewhere too. Therefore, it is vital for us, especially in regards to small businesses, to keep discussing and enhancing our offerings like cross-border payments, merchant financing, and short-term working capital loans. These businesses have alternatives, so it’s essential that they don't see us as just a limited service provider. We want them to view us as a key solution for their working capital needs. This is reflected in our messaging and advertising, such as in campaigns where you see someone applying for a small loan online while watching TV. We will continue to expand our offerings for our customers.

Thanks. Coming back to the topic of the relationship between your revenue growth, engagement expenses, and the EPS, I think you indicated given the faster engagement expense, you were saying EPS growth adjusted for the tax benefits, it's slightly ahead of the revenue growth and I think you know the Amex of all, kind of reliably expect that a mid to high single-digit revenue growth to translate into kind of a 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 two quarters and you see 10% to 12% EPS growth excluding the impact of the tax. 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. Pre-crisis, 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. It’s going to build scale and relevance and share that will allow us to really sustain double-digital EPS growth.

The Amex of old, 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 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.

Thank you. Good evening. Hi, Steve and Jeff. 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 competitor's swap rate in an open-loop environment?

Looking back, aside from a brief period during the credit crisis, our closed loop system has been a significant advantage for us. It plays a crucial role in preventing fraud, enhancing underwriting processes, and effectively targeting potential customers. The foundation of good credit begins with how we identify potential clients, determine lending amounts, and develop our machine learning and data capabilities, all of which are supported by the closed loop system and the abundant data we possess. This has provided us with a considerable edge from the very start. Additionally, within the closed loop framework, preset spending limits are vital. Our machine learning capabilities aid in establishing these limits dynamically, particularly benefiting the small business sector, where credit card products are commonly used for working capital. Our ability to set no preset spending limits while analyzing data from countless small businesses presents a significant advantage. There are various business models in the industry, such as PayPal, Visa, MasterCard, and JPMorgan Chase. However, our approach is distinct due to its integration. This integration results in a closed loop, providing us with data, relationships, and the economic flexibility that becomes increasingly important in the B2B space. Therefore, the closed loop is essential for our success.

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 card holders. Just a related question. How eager are Amex card holders to add their Amex cards to the PayPal wallet through the mobile app or the website and then start to spend via the wallet? I'm really just trying to get a framework for how incremental this might be for you.

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 are 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 made sense for us to sort of expand our relationship with them and, look, Dan and the team are really great to work with. I have a long-term relationship with Dan. We worked really well together here. And the teams as we went through this, what we tried 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 use shopping carts and that they make sure it is easy as possible online. What we wanted to make sure is that we can make it as seamless as possible for our card members to be loaded in their card into PayPal because PayPal offers us a tremendous expansion of our network today. And so, to be able to make those millions of merchants of 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 card members. As far as you know 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 are looking for more ubiquity. Our card members use points for a variety of things at a variety of places, and this just expands that ubiquity. And it is 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 burn. 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 will 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.

Good afternoon. Thank you for the introduction. I wanted to ask a strategic question regarding the annual fees, which hasn’t been discussed much today. With the increases in platinum and gold cards, and the growth mentioned by Jeff in Japan and Australia regarding fees, I'm curious if you're considering increasing fees in the future. It seems there was some hesitation about this in previous years, but there appears to be more consumer willingness to accept higher fees now. Additionally, I'm interested in whether there will also be adjustments to some member services related to this.

So if you look at it right, our card members are looking for value and our experience 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, when we look at card member engagement costs, you look at some fixed cost which could be your allowances and things like that which get consumed as people go through, but they don't get charged on the 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 than when in a very, very difficult competitive environment with the launch Chase Sapphire, we put in a $100 increase in our platinum card, and so attrition goes down and so our acquisition go up and so more acquisition go up from a millennial perspective as well, and 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 who 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.

Thank you, Chris, for that call. With that, we will 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.