American Express Company (AXP) — Q2 2022 Earnings Call Transcript

Thank you, and thank you all for joining today's call. As a reminder, before we begin, today's discussion contains certain forward-looking statements about the company's future business and financial performance. These 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 statements are included in today's presentation slides and in our reports on file with the SEC. The discussion today also contains non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials as well as the earnings materials for the prior periods we discussed. All of these are posted on our website at ir.americanexpress.com. We'll begin today with Steve Squeri, Chairman and CEO, who will start with some remarks about the company's progress and results. Then Jeff Campbell, Chief Financial Officer, will provide a more detailed review of our financial performance. After that, we'll move to a Q&A session on the results with both Steve and Jeff. With that, let me turn it over to Steve.

Thanks, Kerri, and welcome to the IR team and your first earnings call. Good morning, everyone. Thanks for joining us for our second quarter call. We had an outstanding quarter. Revenues were up 31%, reaching a record high, and earnings per share were $2.57. Card Member spending was at record levels. Billed business was up 30% from a year earlier on an FX-adjusted basis, driven by a vigorous rebound in travel and entertainment spending and continued strong growth in goods and services. We added 3.2 million new proprietary cards in the quarter, driven by continued strong demand for our fee-based premium products. Acquisitions of our U.S. Consumer Platinum, Gold, and Delta co-brand cards were all at record highs. Customer retention and credit quality both remain at exceptionally strong levels. While our strong growth may be somewhat surprising given the uncertainties in the external environment, there are a number of reasons for our continued momentum. First, the decisions we made through the pandemic continue to pay dividends. At the outset, we made it a priority to be there for our customers, focusing on delivering great service, providing financial relief programs, expanding our Shop Small initiatives, and injecting new value into our premium consumer and business products with benefits that were relevant for the times. We then ramped up investments early in the recovery to rebuild our momentum and grow our customer base, refreshing our premium products through a series of new benefits that enhanced our generational relevance and accelerated our acquisition engine. These decisions lay the foundation for the strength in customer retention, engagement, and acquisitions that you've seen over the past year and our results today. Other key factors driving our performance include the many competitive advantages that we have that differentiate us, as well as several structural shifts, some near-term recovery tailwinds, which you remember we discussed at our Investor Day. A critical competitive advantage is our global premium customer base, which is unrivaled in the industry, with millions of high-spending super prime, loyal consumer, and business customers across generations and geographies. Importantly, millennials and Gen Z consumers are a large part of our existing customer base and our fastest-growing age cohort, making up 60% of all new consumer Card Members we're acquiring and around 75% of new U.S. consumer Platinum and Gold Card Members. Our new customers have excellent credit profiles, are highly engaged in the premium benefits that come with American Express membership, and are spending more from the start of their relationship with us than previous newcomers, giving us a long runway for growth. In fact, spending by this age group grew 48% in the second quarter, significantly outpacing other generations. Our momentum is also being aided by several structural shifts, which we believe give us significant opportunities to sustain our growth across all lines of business over the longer term. These include the growth in the premium consumer card space around the world, the ongoing increase in online commerce and digital engagement among consumers, the strong pace of small business creation, and the acceleration in the digitization of commercial payments. Finally, in the near-term, we're benefiting from recovery tailwinds in our businesses outside the U.S., in the large and global corporate space, and in travel and entertainment. The travel rebound, in particular, has been faster and stronger than anyone expected. Total T&E spending exceeded pre-pandemic levels in April for the first time. It was at 108% of 2019 levels for the quarter, led by strong growth in Global Consumer and SME spending, and a significant uptick in large and global corporate travel. And we don't see demand in the T&E categories declining significantly anytime soon, based on the strength of future bookings coming through our consumer travel agency and the trends our partners in the travel industry are experiencing, particularly in the premium space. Of course, we are wary of the uncertainties in the current economic environment and the impact it's having on our business. The historically low unemployment rate is a positive factor as it's helping to drive our strong credit metrics, and we continue to see no significant signs of stress in our consumer base. Inflation is a bit of a mixed bag; it's a modest contributor to our strong growth in volumes. But inflation, when combined with low unemployment, also puts pressure on operating costs. For example, like everyone else, we're seeing intense competition for the best talent. But because our colleagues are a key driver of our success, we continue to invest in talent, which is having an impact on our operating expenses. Looking forward, as I've emphasized many times before, we run the company for the long-term, and our investment strategy is grounded in this principle. As we sit here today, we have an abundance of great opportunities. And we'll continue to make our decisions with a longer-term view, like we did during the pandemic. That means we will continue to invest at high levels in those areas that will drive sustainable growth, including our brand, value propositions, customers, colleagues, technology, and coverage. We remain confident that the successful execution of this strategy will position us well as we seek to achieve our long-term growth aspirations of revenue growth in excess of 10% and mid-teens EPS growth in 2024 and beyond. Thank you. And I'll now turn it over to Jeff.

Well, thank you, Steve, and good morning, everyone. It's good to be here to talk about our second-quarter results, which reflect another strong quarter and great progress against our multiyear growth plan. Starting with our summary financials on Slide 2. Most importantly, our second-quarter revenues were $13.4 billion, up 33% on an FX-adjusted basis, strengthening sequentially from last quarter's already strong 31% year-over-year growth rate. Our reported second-quarter net income was $2 billion, with earnings per share of $2.57. Now, as I said last quarter, given that year-over-year comparisons of net income have been challenging due to the volatility that the pandemic caused in credit reserve adjustments, we are including pretax pre-provision income as a supplemental disclosure again this quarter, which we believe gives you additional insight into the trends of our underlying earnings. On this basis, second-quarter pretax pre-provision income was $3 billion, up 27% versus the same time period last year. So now let's get into a more detailed look at our results, beginning with volumes. Turning on Slide 3. You can see the continued momentum in spending from our strong customer base that Steve noted earlier. Billed business and total network volumes were up around 30% year-over-year on an FX-adjusted basis in the second quarter. We feel really good about both our year-over-year growth as well as our sequential growth. The second quarter saw us achieving our highest ever level of quarterly billed business. And if you were to compare it to 2019, the first quarter grew 19%, while the second quarter growth rate accelerated even further to 28%. Importantly, our spending volumes strengthened as we went through the quarter, with the month of June also reaching a new monthly record high. As we sit here today, this momentum has continued into early July. Now I would point out that when you think about year-over-year growth rates, volumes in 2021 were, of course, in a steep phase of recovery as the year progressed. So I do expect that our year-over-year growth rates will moderate as we progress through the rest of 2022. Our spending metrics are being driven by both sustained growth in goods and services spending and by an acceleration in T&E recovery in the second quarter. Starting first with goods and services spending on Slide 4. We saw a year-over-year growth of 18% in the second quarter. We are now multiple quarters into seeing the effects of the structural shift in online commerce spending patterns, which was accelerated by the pandemic, with our growth rates remaining steady. Specifically, online and card-not-present spending grew 15% in the second quarter. In contrast, total T&E spending, as you see on Slide 5, showed an acceleration in its recovery this quarter even more than we and many others would have expected, reaching 108% of 2019 levels. The high demand for travel will be a steep recovery across all customer types. This strength in both goods and services and T&E spending is also evident as we break spending trends down across our consumer and commercial businesses, with a few other key points that I'd suggest you take away. First, beginning on Slide 6, millennial and Gen Z customers continue to drive our highest global consumer billed business growth, with their spending up 48% year-over-year. I would also call out that this quarter, all other age cohorts have now reached pre-pandemic levels of T&E spending, including baby boomers, who had been slower to recover. In our commercial business, on Slide 7, spending from our small- and medium-sized enterprise clients continues to drive our overall growth, with spending up 25% year-over-year. While a smaller part of our business, it is worth noting the significant acceleration in growth of 58% of the large and global corporate customers, significantly above last quarter's growth rate. This is a sign of a more meaningful business travel recovery. So overall, we are pleased that our strength in spending volumes has exceeded our original expectations for the year. Again this quarter, the majority of our high level of growth was driven by the number of transactions flowing through our network, with some modest additional impact from inflation. This positions us well for our long-term growth aspirations. Moving on now to receivable and loan balances on Slide 8. We saw a good sequential growth in our loan balances, which are now well above pre-pandemic levels this quarter. The interest-bearing portion of our loan balances also continues to consistently increase quarter-over-quarter, but remains a bit below 2019 levels, as paydown rates have remained elevated. As we then turn to credit and provision, on Slides 9 through 11, the high credit quality of our customer base continues to show through in our extremely strong credit performance. Card Member loans and receivables write-off and delinquency rates remain well below pre-pandemic levels. And though they did continue to tick up slightly overall this quarter, as we expected, they are trending a bit better than our expectations when we started the year. Turning then to the accounting for this credit performance on Slide 10. As you know, there are a couple of key drivers of provision expense. First, actionable credit performance, which, as we just discussed, is extremely strong; and second, changes in credit reserves under the CECL methodology. We built a small amount of reserves this quarter as our loan balances grew and the macroeconomic outlook that we flowed through our CECL models got slightly worse relative to the outlook back in Q1, both partially offset by improved portfolio quality. This reserve build, combined with our low net write-offs, drove $410 million of provision expense for the second quarter. As you see on Slide 11, we ended the second quarter with $3.2 billion of reserves, representing 3.1% of our loan balances and 0.2% of our Card Member receivable balances, respectively. This remains well below the reserve levels we had pre-pandemic. Going forward, we continue to expect delinquency and loss rates to move up slowly over time, but to remain well below pre-pandemic levels this year. I do expect to end the year with a higher level of reserves on our balance sheet than where we ended this quarter, given our expected loan growth. But the overall range and timing of reserve adjustments will be heavily influenced by how the macroeconomic outlook evolves between now and the end of the year. Moving next to revenue on Slide 12. Total revenues were up 31% year-over-year in the second quarter or 33% on an FX-adjusted basis, as we continue to see a stronger U.S. dollar relative to most of the major currencies in which we operate. Overall, these results were above our original expectations. Before I get into more details about our largest revenue drivers in the next few slides, I would note that service fees and other revenue was up sharply at 79% growth year-over-year, largely driven by the uptick in travel-related revenues that accelerated this quarter, with cross-border spend in particular surpassing pre-pandemic levels. Our largest revenue line, discount revenue, grew 32% year-over-year in Q2 on an FX-adjusted basis, as driven by both our sustained growth in goods and services spending and the accelerated T&E recovery that you saw in our spending trends. Net card fee revenues were up 19% year-over-year in the second quarter on an FX-adjusted basis, with growth continuing to accelerate, as largely driven by the continued attractiveness to both prospects and existing customers of our fee-paying products as a result of the investments we've made in our premium value propositions. This quarter, we acquired 3.2 million new cards, with acquisitions of U.S. Consumer Platinum Card numbers again reaching a record high and increasing 20%, above last quarter's record levels, demonstrating the great demand we're seeing, especially for our premium fee-based products. Moving on to net interest income. On Slide 15, you can see that it was up 31% year-over-year on an FX-adjusted basis, accelerating above last quarter's growth rate due to the continued recovery of our revolving loan balances. Looking forward, while I would expect our loan balances to continue to recover at higher growth rates, the rising rate environment will likely cause our net interest income growth rate to slow given our sizable non-interest-bearing charge balances. To sum up on revenues on Slide 16. We're seeing continued strong results and sustained momentum across the board. So looking forward, we now expect to see revenue growth of 23% to 25% for the full year of 2022. So the revenue momentum we just discussed has been driven by the investments we've made in our brand, value propositions, customers, colleagues, technology, and coverage. And those investments show up across the expense lines you see on Slide 17. Starting with variable customer engagement expenses, these costs came in as expected, at 42% of total revenues for the quarter, and are tracking with our expectations for variable customer engagement costs to run at around 42% of total revenues on a full-year basis. On the marketing line, we invested $1.5 billion in the second quarter. We feel really good about the strong demand for new card acquisitions, as we showed on Slide 14. More importantly, we feel good about the spend, credit, and revenue profiles of the customers we are bringing into American Express membership, which continue to look strong relative to what we saw pre-pandemic. I would now expect to spend a little over $5 billion on marketing in 2022. Moving to the bottom of Slide 17 brings us to operating expenses, which were $3.3 billion in the second quarter. There's often some quarterly volatility in this number due to the varied timing of certain accruals and entries. This quarter, for example, we see the impact of the prior year including a sizable benefit from net mark-to-market gains in our Amex Ventures strategic investment portfolio. As I said last quarter, and as Steve discussed earlier, inflation, while driving some modest positive impact on volumes, is also putting pressure on our operating expenses, particularly in our compensation costs. Taking everything into account, we now expect our full-year operating expenses to be around $13 billion, as we invest in our talented colleague base, technology, and other key underpinnings of our growth given our tremendously high levels of revenue growth. Turning next to capital on Slide 18. We returned $1 billion of capital to our shareholders in the second quarter, including common stock repurchases of $611 million and $394 million in common stock dividends on the back of strong earnings generation. Our CET1 ratio was 10.3% at the end of the second quarter, within our target range of 10% to 11%. We plan to continue to return to shareholders the excess capital we generate while supporting our balance sheet growth. Given the concerns about the macroeconomy and the market, it is worth noting that in the Fed's CCAR stress test results released last month, American Express was again one of the few firms that remained cumulatively profitable under the Fed's macroeconomic stress scenario and we had the highest profit margin as a percentage of assets of any participating bank. That brings me to our growth plan and 2022 guidance on Slide 19. Our performance year-to-date and our full year guidance reinforce several points that Steve and I have now both discussed. First and most importantly, we clearly have momentum across all of the areas critical for us to drive sustained high levels of revenue growth, including customer acquisition, engagement, and retention, evidenced by our strong Q2 results. Inflation is additionally providing some modest benefit to our revenues. The combination of all of these things led us to increase our expectations for full-year revenue growth to 23% to 25%, up from our original range of 18% to 20%. For now, though, our EPS guidance remains unchanged from between $9.25 and $9.65. Let me walk you through our thinking here. As I talked about earlier, we feel really good about the strong results generated by our marketing investments this year. And that's why we now expect to spend a little over $5 billion for the full year, modestly above our original expectations. Both Steve and I also talked about the fact that there are some pressures on our operating expenses, particularly around compensation and partially fueled by inflation. Therefore, we now expect our operating expenses to be around $13 billion this year. Lastly and most importantly, as we think about our EPS this year, as I talked about in the credit section, while our credit performance and metrics remain extremely healthy, we can't predict how the macroeconomic outlook will evolve. That makes it difficult sitting here today to predict a precise range of outcomes for any potential CECL reserve adjustments for the balance of the year. That said, should the macroeconomic outlook not change meaningfully between now and the end of the year and therefore, not have a large impact on current reserves in the balance of the year, we would expect to be at or even a bit above the high end of our EPS guidance range. In any environment, we remain committed to executing against our growth plan and running the company with a focus on achieving our aspiration of delivering revenue growth in excess of 10% and mid-teens EPS growth on a sustainable basis in 2024 and beyond. With that, I'll turn the call back over to Kerri to open up the call for your questions.

Thanks, Jeff. Before we open up the lines for Q&A, I will 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.

Maybe just to start on revenue growth, Steve. It's obviously coming in much better than expected, and you're choosing to invest more to propel future growth. So I was just hoping maybe you can just talk a little bit about the additional investments that you're making across the company, whether it's in OpEx or in Card Member engagement. How much of this is offensive versus defensive? And then given the acceleration of investments that we're seeing through ‘22, could this position us for better revenue growth in the intermediate timeframe?

I believe everything we’re doing is proactive. While raising compensation might seem defensive, you’ve seen compensation levels increasing across the board. If we break down the categories, operating expenses are rising due to two main factors. Firstly, we are investing more from an operational standpoint. The primary reason for this investment is that you can’t grow your billings by 30%—with most of that growth coming from more transactions—without hiring more people to support your customers and engage with them in their travels. One of our key advantages is our ability to serve customers when and where they need assistance. As we handle more transactions and attract more customers, there is a significant increase in operating expenses, mainly due to adding staff. This may not be a popular discussion at the moment, but we are increasing our workforce, not reducing it, to maintain our service levels during this growth phase, which we anticipate. Additionally, with wage increases, it's necessary to pay more to retain our top talent. From a marketing standpoint, having worked in this field for many years, I can say we have numerous valuable investment opportunities. It would be shortsighted to let these pass by simply because we anticipate spending $5 billion instead of $5.2 billion, as we are focused on long-term growth. The investments we are making, particularly in technology, stem from a long-term vision. Regarding revenue projections for next year, we are gaining momentum. When we initially stated we would grow by 18% to 20% this year, there was some doubt. Now we are projecting 23% to 25%, which will result in higher revenue than we expected. We have a strategy to achieve over 10% revenue growth on a sustainable basis in 2024, meaning our 2023 results will exceed that 10% target. I can’t specify the exact figure at this moment, but I assure you it will reflect our growth trajectory. As long as we see good revenue opportunities, I will keep investing in the business. We’ve chosen not to raise our EPS guidance due to uncertainties regarding CECL, which are largely beyond our control. It would be unwise to increase it now only to potentially reduce it later in the year. However, the revenue outlook is promising. If I believed we would experience a slowdown in the coming quarters, I wouldn’t be raising our revenue expectations to 23% to 25%. That encapsulates my perspective.

T&E was a big driver of the upside. I think, Jeff, you mentioned there's been further strength in July, which makes sense given we're moving into the heart of the summer months. Are you guys concerned this is sort of a pull forward, and you see a slowdown thereafter? And maybe that ties into what we saw in corporate T&E because that also moved up quite a bit. Where do you think the new normal shakes out?

So if you look at where we are right now, yes, we're at 108% growth over 2019. And that's not really a big number when you think about it. When you think about 8% growth over 2019 from a T&E perspective and you consider airline prices, you think about some of the inflation built in, I'd say there's more room to run on T&E. When you disaggregate T&E, and you see that the consumer is running sort of 38% above, international consumer running only 8% above, SME running probably 8% above, and corporate travel is only 60% of what it was in 2019, I wouldn't call it a pull forward. When I examine my future bookings in my consumer business, they're strong. Then when you disaggregate and you look closely at what's driving it, you see tremendous growth, 48% growth in restaurants. Lodging is huge. Airlines are way up. But lodging and airlines are still below 2019 levels in aggregate. The airline industry is probably only about 85% or 90% of their capacity, and they are facing staffing issues and are canceling flights. I don't think this is a pull-forward at all. I believe there's a huge pent-up demand to travel and see the world at this particular point in time. So I'm not really concerned about a pullback because I don't think we've gotten to a normal level yet. And while we’re not going to see 90% year-over-year growth rates, we need to focus on absolute aggregate numbers and recognize we're not at a normal T&E level in our business.

Yes. It's really great results here. I wanted to dig in a little bit on how you're thinking about the loan growth on the SME side. I know that's been accelerating here. Just give us a sense as to where the pockets of opportunity are and how you would flex if there was a slowdown.

Look, our stated goal for our SME business is to be the working capital provider for small businesses. We are trying to provide liquidity to them using cards. We've got some short-term working capital loans, and they're taking advantage of it. But don't forget the pandemic. Many were concerned about how stressed small businesses could be based on the perception of their makeup. I have said this many times before, when people think about small businesses, they think about restaurants and retail on Main Street, but it's much more than that. Our credit metrics performed very well through the pandemic. We've always grown, well before the pandemic, a little faster than the market. We have a low share of our small businesses lending volume relative to their spending volume. We probably have over 40% of their spending volume, but less than maybe 20% of the loan volume. So there is opportunity, and we will pursue this opportunity in a measured, analytical, and risk-adjusted way. We're not trying to grow recklessly; we are just providing our customers with what they need. We love that our small business base continues to grow and that it is so diverse across various industries and that's really important.

Also congratulate you on a super strong number. Really great to see. I guess maybe a question on network coverage, one of your key areas of focus and incremental investment. Any update on how you're performing versus your plan on network expansion, especially internationally?

Yes. From a U.S. perspective, we continue to remain in parity coverage, and it doesn't mean you're not going to run into someone who doesn't accept the card now and again. Typically, we're able to sign them up because it's old news in terms of what the rates are and how we operate. I'm not concerned about the U.S. or where we are in that. Internationally, we have been focusing on priority cities and continuing to drive those numbers higher, and those continue to do well. We signed well over 3 million merchants this year, which means we're on pace to sign as many as we did last year on an international scale. We're really pleased with the progress, especially in priority cities. We continue to focus on signing any merchant that does not accept the card, but it’s more critical to sign those where Card Members actually are. That's why priority cities and countries are vital for us, and we're feeling good about this. If you look at our international spending this year, it's up higher than our consumer spending year-over-year for this quarter, and that highlights the importance of growth for us.

I had a question for Steve about the 48% growth in millennial and Gen Zs. I assume it's normal for the younger generations to have stronger growth, just as a combination of what I assume are kind of stronger new account acquisitions and also just the ramping of spend as they age and their incomes grow.

Yes. We don't really break that down in our release, but let me give you a couple of points. When we look at how we're acquiring card member spending, we really focus on share of wallet. That’s really important for us. For millennials and Gen Zs, we're capturing a higher share of their wallets off the bat. This is crucial. With many boomers, they were used to an American Express that had limited acceptance. Gen Zs and millennials are used to an American Express accepted everywhere. We're penetrating their wallets more right out of the gate. As they grow, as their wallets grow, and as they progress through life, our goal is to continue to maintain that wallet share. Regarding the 48% growth, I know you want a breakdown similar to same-store sales versus new store sales, but I don’t have that handy right now.

Yes. We don't disclose the exact numbers, but we do analyze data as you've described. A disproportionate share of our new account acquisitions are going to that millennial and Gen Z demographic. But also, as Steve noted, these generations show the fastest growth on a same-store sales basis, contributing to both factors.

Great. You're reporting incredibly strong recovery spending numbers. If you just think about the spending cycle and inflation boosting nominal PCE versus real PCE, how should we think about the effects on your high-end consumer base versus the average U.S. consumer in terms of their susceptibility to a spending slowdown?

Well, they have more money. When you look at the economy and the fluctuations in the stock market, we've never seen a correlation between our customer base and those changes. What correlates more is unemployment and people losing jobs, which could be an issue down the road. We're experiencing a very unusual environment. We've got high inflation and low unemployment. Yes, there are layoffs and companies are slowing down hiring, but it’s not a widespread issue. Our customer cohort is a smaller segment of the U.S. population, yet a very powerful segment. For this cohort to be hit, a significant credit crunch driven by escalating unemployment needs to occur. When we analyze our spending, this uptick is not inflation-driven. It's essential to understand that while there is inflation in these numbers, it doesn't benefit our business proportionally. The most important thing is that we're witnessing an increase in transactions, which is the catalyst for our current growth.

The only thing I'll add is that we've consistently noted that a modest level of inflation, which I'd still classify as modest based on current conditions, is generally net positive for our business, provided unemployment doesn't spike. It helps revenues a bit, but may apply some pressure to costs. This gives us confidence in our guidance for the remainder of the year.

Could you speak to how much the competitive environment for high spending customers has intensified post-pandemic? And I guess more specifically, could you discuss which products are enjoying the greatest uplift there?

Yes. This environment has been highly competitive since the financial crisis, and that hasn't changed. Companies are investing more. We assume our competitors will continue to invest and follow our actions. Thus, we operate under the belief that the environment is competitive. You're primarily touching on the U.S. consumer segment, but there's also strong competition in small business and corporate cards. We strive to offer the best products and services, resulting in our sustained success. As for corporate spending, while we're only at 60% of T&E recovery levels and around 80% overall on corporate card spending pre-pandemic, we're seeing pockets of strong activity and interest, such as consultants and bankers getting back on the road and booking meetings further ahead, which portends well for growth in lodging, airlines, and ultimately us.

Steve and Jeff, you've commented earlier on some of the near-term investments that you're making given the strong growth in top line you're seeing in wages and marketing, et cetera. Can you also comment on some of the longer-term investments that you're leaning in on, perhaps to position Amex even better for the next sort of 3 to 5 years?

Yes. There's always a balance between long-term investments and short-term investments, and we only share details about long-term investments as they happen. We have continued to invest in our technology infrastructure, and we won’t make drastic adjustments. We believe in continuous investment in our technology. We're constantly focused on improving our value proposition. When we discuss our Card products, we often use the Platinum Card as a proxy, but we're investing in all our card products globally. Refreshing products isn't instantaneous; it involves months of planning and partnerships. We also continue to invest in the lounge program and explore ways to create stickiness for our customers. For instance, our services have evolved considerably, offering varied banking solutions for both consumers and small businesses. We aim to bolster ongoing engagement between our members and American Express.

Great. I note your comments that you're not anticipating a recession in the next couple of quarters. Could you just talk conceptually about how you think about account acquisition in terms of new accounts? Clearly, the industry as a whole is still doing that.

Moshe, let me remind everyone about our analytical process for determining who we bring into our franchise. We focus on seeking premium customers considering vast data and history with strict financial criteria. Given our current outcomes, we find that new customers have higher credit quality than pre-pandemic levels and are demonstrating higher spending capabilities while carrying robust balances. We feel confident about the caliber of individuals being inducted into our franchise. Moreover, we always conduct an analysis assuming a recession when we bring new customers on board. We believe there will be a recession at some point; the challenge is timing it. The dynamics of customer acquisition remain adaptable, reflecting the current economic outlook and the models we track.

Yes. And those criteria can change daily or weekly. They may also vary monthly, depending on the economic analysis we conduct. Importantly, our approach is not static. We continually adjust and refine the process. We could adjust our thresholds to grow aggressively, but we want to ensure we bring in quality customers and maintain a robust bottom line. That balance is critical.

Right, to reiterate, we run the company for the long term. We decide on a through-the-cycle basis. While we cannot time a potential downturn, we position ourselves for the highest possible sustainable long-term growth.

I wanted to dig deeper on the travel and entertainment recovery, particularly revisit the question of a pull forward. I heard about strong bookings, which gives great visibility for airlines and lodging. Do you see any reason for concern around restaurant spending, given its robustness?

The only thing I'd suggest is that if restaurant spending is highly correlated with lodging and airlines, expect it to increase. Anyone who's been to a restaurant recently knows that prices are higher due to rising wage and fluid costs. From my perspective, restaurants have changed their business models during the pandemic; many that weren’t doing takeout have started to offer it. People are dining out and spending more, ordering takeout. So, I don't believe it's highly correlated at all. In looking at travel, restaurants contributed to the growth in T&E, not the other way around. Travel spending is still recovering, and restaurants remain an important contributor to recovery.

I’m curious if as millennials and Gen Z customers are taking cards, are those being delivered with additional features enabled on borrow? Are there behavioral factors that are causing the younger demographic to borrow more?

We have moved over the last couple of years to add pay-over-time capability to the majority of our charge products. For existing Card Members, this feature phases in. For new Card Members, it’s available when they receive the card. I'm confident this has impacted our results. Furthermore, our new customers are higher spenders and exhibit a greater propensity to carry balances compared to older demographics.

Many younger customers utilize our pay and plan it feature more commonly, enabling installment plans. This flexibility lets them manage their payments effectively. When they assess their spending, they can choose which purchases to pay in installments or in full, providing overall solutions for their payment needs.

I wanted to ask a bit about the longer term. I appreciate your comments about making investments now while the opportunity is available, but I was wondering just longer term – for example, in 2023, you've guided to higher revenue growth in 2023. Will that translate to higher EPS growth or higher PPNR growth? Or is there so much white space available that 2023 could be a big investment year?

I can't resist starting by pointing out, yes, Steve and I discussed the heavy investments we’re making this year. We’re also growing our pretax pre-provision profit by 27% this quarter in line with the 31% revenue growth. We feel really good about our revenue trajectory. We expect to be comfortably above the 10% level in sustainable revenue growth next year. What that specific number will be is uncertain; we will have to observe. However, it should also provide a strong platform for good earnings growth. It's important to note that it's still early July. We have not given specific guidance for next year yet. The main uncertainty from a GAAP EPS perspective arises from the volatility experienced in CECL credit reserves. We have good visibility and confidence about our business trajectory, but consensus macroeconomic forecasts will affect our credit reserve determinations.

To consider those numbers Jeff quoted, 31% revenue growth and 27% PPNR growth, would you feel better if it were 32% and we decided not to invest? I believe it's essential to focus on growth and sustainable progress. This creates a flywheel effect. Scale leads to more scale; our premium Card Members will attract merchants eager to offer value, establishing a strong cycle. We recognize that replicating this closed loop is challenging. The relationship between high-spending Card Members and the merchants’ value they provide is pivotal. By focusing on these aspects, we can enhance our business model sustainably.

Can you provide an update on B2B progress? Are you seeing small businesses accelerate their automation of accounts payable, and are large corporates on the supplier side accepting more cards?

The short answer is yes. We’re seeing continuous growth in our small business base, where over 80% of their spending is in B2B versus T&E spending. Our partnerships are driving value, and in the corporate card segment, we are about 80% of where we were on corporate card volume pre-pandemic, while only 60% from a travel perspective. We’ve witnessed more suppliers accepting cards, and there’s a strong push toward process automation in B2B. The long-term play is to further drive this acceptance and spend.

Great. With that, we will bring the call to an end. Thank you again for joining today's call and for your continued interest in American Express. The IR team will be available for any follow-up questions. Operator, back to you.