American Express Company (AXP) — Q3 2022 Earnings Call Transcript

Thank you, Darryl, and thank you all for joining today's call. As a reminder, before we begin, today's discussion contains 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. And 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 good morning, everyone. Thank you for joining us for our third quarter earnings call. As you saw in our release this morning, we had another strong quarter. Revenues grew 27% on an FX-adjusted basis and earnings per share were $2.47, up 9% over last year. Our investments to drive customer engagement, acquisitions, and retention once again generated great results and our credit quality remained strong. Card Member spending remained at near record levels in the quarter. Billed business was up 24% on an FX-adjusted basis over the record growth we delivered a year earlier, led by the continued strength in Goods & Services spending and the ongoing strong rebound in Travel & Entertainment. As we said earlier this year, we expected the recovery in travel spending to be a tailwind for us, but the strength of the rebound has exceeded our expectations throughout the year. In the quarter, total T&E spending was up 57% from a year earlier on an FX-adjusted basis, driven by the continued strong demand from consumers and small business customers. Particularly noteworthy is the strength we're seeing in T&E spending in our international markets, which exceeded pre-pandemic levels for the first time this quarter on an FX-adjusted basis. Business travel also continued to recover and overall activity remained strong through September. Importantly, we're seeing increased customer engagement with a wide range of travel and dining benefits and services we offer as part of our membership model. For example, bookings to our consumer travel business reached their highest level since before the pandemic in the third quarter. And in dining, our Resy reservation platform continues to see strong growth. Since we acquired the platform in 2019, Resy users have tripled to reach $35 million, and we quadrupled the number of restaurants available around the world on Resy. Goods & Services spending grew 16% year-over-year. The continued growth in Goods & Services is supported by the structural shift to online commerce that was accelerated by the pandemic and has been sustained since then, and the new online and mobile-oriented benefits we added to our value propositions. These benefits are particularly attractive to our millennial and Gen Z customer base, which is our fastest-growing customer cohort. The investments we've made in our value propositions are also continuing to drive momentum in new card acquisitions. We added 3.3 million new proprietary cards during the quarter, our highest quarterly level of acquisitions since the pandemic began. And we continue to see strong uptake of our premium fee-based products with acquisitions of U.S. Consumer Platinum and Gold cards as well as U.S. Business Platinum cards reaching record quarterly highs. Millennial and Gen Z customers are powering this growth, comprising more than 60% of our proprietary consumer card acquisitions in the quarter. As we sit here today, we see no changes in the spending behaviors of our customers, and our credit metrics continue to be strong with delinquencies and write-offs remaining at low levels even as loan balances are steadily rebuilding. Of course, we are mindful of the mixed signals in the broader economy. As always, we have plans in place to pivot should the operating environment change dramatically. And we've been taking thoughtful risk management actions to be prepared in the event of a downturn. But as I've emphasized many times before, we run the company for the long term and make through-the-cycle investment decisions. Our strong third quarter results show that our strategy of investing in our brand, value propositions, customers, colleagues, technology and coverage continues to pay off, and our performance is consistent with our long-term growth aspirations. Looking ahead, we continue to see many great growth opportunities, and we will continue to take actions to best position our business for the long term. As you will recall, our international businesses were among the fastest growing prior to the pandemic. As more countries relax their cross-border travel policies and life returns to normal, we see tremendous opportunities for growth in key regions despite ongoing macroeconomic and geopolitical uncertainties. To that point, we made an organizational change a few months ago to help seize on these opportunities. We brought together our international consumer, small business and large corporate management teams under one leader, which will increase our speed, agility, scale and efficiency in our operations outside the U.S. As a result, you'll see this quarter, we've introduced a new International Card Services reporting segment. Looking ahead, we remain confident that the successful execution of our strategy, driven by our outstanding leadership team and the talented colleagues throughout the company, positions us well as we seek to achieve our long-term growth plan aspirations of revenue growth in excess of 10% and mid-teens EPS growth in 2024 and beyond. Based on our performance through the third quarter, we also remain confident in our full year revenue growth guidance of 23% to 25%, and we expect to be above our original full year EPS guidance range of $9.25 to $9.65. With that, I'll turn it over to Jeff to provide a detailed overview of our Q3 results.

Well, thank you, Steve, and good morning, everyone. Good to be here to talk about our third 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 third quarter revenues were $13.6 billion, reaching a record high in the second quarter in a row, up 27% on an FX-adjusted basis. Now I would point out that we continue to see a much stronger U.S. dollar relative to most of the major currencies in which we operate. So you do see a 300 basis point spread between our FX-adjusted revenue growth of 27% and our reported revenue growth of 24%, as we absorb some significant foreign exchange headwinds. Of course, the overall impact on our earnings still remains a headwind, but it is less significant, because we do have some offsetting positive impacts on the expense side. Our revenue performance in the third quarter drove reported net income of $1.9 billion and earnings per share of $2.47, representing EPS growth of 9% year-over-year, a great result considering the sizable credit reserve releases we had in the third quarter last year. Because of these prior year reserve releases, we have also included pretax provision income as a supplemental disclosure again this quarter. On this basis, pretax provision income was $3.2 billion, up 43% versus the same time period last year, reflecting the growth momentum in our underlying earnings. Before getting into a more detailed look at results, let me spend just a minute briefly explaining how we've evolved our financial reporting for the organizational changes that Steve discussed earlier. You will see in the disclosures of the company earnings release that beginning this quarter, we have moved from three to four reportable operating segments. We first took global consumer services and split the U.S. into its own segment, creating U.S. Consumer Services. We then combined the international consumer business with the international portion of small and medium-sized enterprises and large corporate creating the new International Card Services segment. Commercial Services, which includes U.S. SME, U.S. large corporate and select global corporate clients, and lastly, our Global Merchant and Network Services segment remains largely unchanged, and as always, includes our global payments network and network partnerships. You will see in the appendix of our disclosures that we have recast prior periods to conform to these new operating segments. The new segments will also be reflected in our third quarter Form 10-Q. Now let's get into our results, beginning with overall volumes. Looking at Slides 3 and 4, you can see the continued strength in our Card Member spending behavior that Steve noted earlier. Total network volumes and billed business were each up year-over-year at 23% and 24%, respectively, on an FX-adjusted basis in the third quarter. If you were to compare to 2019, third quarter billed business grew 30%, accelerating above last quarter's growth rate of 28% relative to 2019. And importantly, despite the uncertainties in the current economic environment, our spending trends performed relative to 2019 strengthened as we went through the quarter. We are really pleased with this growth. And the fact you see strong growth across all customer types and geographies, driven by both sustained growth in goods and services spending and continued T&E momentum. On Slides 5 through 8, we've given you a variety of views of this strong growth across our U.S. consumer services, commercial services and international card services segments, and the various customer types within each. Starting with our largest segment, billings from our U.S. consumer customers grew at 22% in the third quarter, reflecting the continued strength in spending trends from our premium U.S. consumers. Millennial and Gen Z customers, again, drove our highest billed business growth within this segment, with their spending growing 39% year-over-year this quarter. Turning to Commercial Services, you see that spending from our U.S. SME customers represents the majority of our billings in this segment, and that spending from these customers continued its strong growth, up 17% in the third quarter. Our U.S. large and global corporate customers, though a smaller part of billings in the segment, remain an important foundation for the entire company, and these customers continued their steady travel recovery this quarter, though overall billings are still 13% below pre-pandemic levels. We do continue to expect that this group will fully recover over time. And lastly, international consumer and international SME large corporate customers within the new International Card Services segment were amongst our fastest-growing pre-pandemic, as Steve said, and are now in a steep recovery mode. You can see our high levels of growth in Q3 at 34% and 43% year-over-year, respectively. And if you were to look at international consumer growth by age cohort, you would see, similar to the U.S., that the highest growth levels are from our millennial and Gen Z customers, who make up an even larger portion of overall billings than they do in the U.S. One other note on overall billings. The majority of our high level of growth this quarter was again driven by the number of transactions flowing through our network, with some modest impact from inflation. Overall then, we are pleased with the momentum we see across the board in our spending volumes, which is tracking in line with our expectations for both the year and for our long-term aspirations. Now moving to loan balances. On Slide 9, we saw year-over-year growth accelerate to 31% in our loan balances as well as good sequential growth. The interest-bearing portion of our loan balances also continues to consistently increase quarter-over-quarter, surpassing 2019 levels in the third quarter as customers steadily rebuild balances. As you then turn to credit and provisions, on Slides 10 through 12, the high credit quality of our customer base continues to show through in our strong credit performance. Write-off rates for Card Member loans remain well below pre-pandemic levels, flat to where they have been for the last three quarters, as you can see on Slide 10. As expected, you do now see that delinquency rates for loans have started to modestly pick up, but also remain well below pre-pandemic levels. Turning now to the accounting for this credit performance on Slide 11. As you know, there are two components to our provision expense: our actual write-off performance in the quarter, which, as we just discussed, remains strong; and second, changes in our credit reserves, where there are a few key drivers. Our loan balances, especially our revolving loan balances, grew strongly quarter-over-quarter and the macroeconomic outlook that we flowed through our models, which was informed by third-party macroeconomic forecasts as well as the latest Fed outlook, was slightly worse this quarter relative to last quarter. The combination of our strong loan growth and the updated macroeconomic assumptions resulted in a $387 million reserve build. This reserve build, combined with low net write-offs, drove $778 million of provision expense for the third quarter. As you see on Slide 12, we ended the third quarter with $3.5 billion of reserves, with reserves for loans representing 3.2% of our balances. I would point out even with this quarter's reserve build, this remains well below the reserve levels we had pre-pandemic, driven by our improved portfolio quality today compared to that prior time period. Going forward, we continue to expect delinquency and loss rates to move up slowly over time, but to remain 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, the overall level of reserve adjustments will again be influenced by how the macroeconomic evolves in the fourth quarter. Moving next to revenue on Slide 13. Total revenues were up 24% year-over-year in the third quarter or 27% on an FX-adjusted basis. 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 39% year-over-year. Similar to last quarter, this strong growth was largely driven by a recovery in travel-related revenues. Our loan revenue line, discount revenue grew 26% year-over-year in Q3 on an FX-adjusted basis. As you can see on Slide 14, driven by both our sustained growth in Goods & Services spending and the continued momentum in T&E spending that you saw in our spending trends. Net card fee revenues were up 23% year-over-year in the third quarter on an FX-adjusted basis, with growth continuing to accelerate, as you can see on Slide 15, largely driven by the continued attractiveness to both prospects and existing customers of our fee-paying products through the investments we've made in our premium value propositions. This quarter, we acquired 3.3 million new cards with acquisitions of U.S. Consumer Platinum and Gold Card members and U.S. Business Platinum Card members, all reaching record highs in the quarter and now each more than two times higher than pre-pandemic levels, demonstrating the great demand we're seeing, especially for our premium fee-based products. Moving on to Slide 16, you can see that net interest income was up 30% year-over-year on an FX-adjusted basis due to the recovery of our revolving loan balances. While generally speaking, a rising rate environment would be a modest headwind for us due to our sizable non-interest-bearing charge balances. In fact, it has been fairly neutral in terms of impact for us year-to-date. Over time, though, I would expect rising rates to represent a modest headwind. To sum up on revenues, we're seeing strong results across the board and really good momentum. When looking at Slide 17, I would point out that we have now seen six consecutive quarters of revenue growth above 24% on an FX-adjusted basis as we are now showing strong growth even on top of the strong recovery-led growth in the prior year quarter. I would also point out that we have a couple of hundred basis points of difference when looking at revenue growth on an FX-adjusted basis versus our reported results. So, while we are leaving our full year reported revenue guidance at 23% to 25% for 2022, I would expect to be above that growth rate range on an FX-adjusted basis. Now, all this 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 18. Starting with variable customer engagement costs, these costs, as you see on Slide 18, came in at 41% of total revenues for the third quarter, roughly in line with what I still expect variable customer engagement costs to run for the full year at around 42% of total revenues. On the marketing line, we invested $1.5 billion in the third quarter, on track with our expectation to spend over $5 billion in 2022. We feel really good about the strong demand for card acquisitions, especially premium card acquisitions as we showed on Slide 15. 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. Moving to the bottom of Slide 18 brings us to operating expenses, which were $3.3 billion in the third quarter, essentially flat to last quarter. As Steve and I have both discussed all year, these results reflect the impact inflation has had on our operating expenses, in addition to our investments in other key growth underpinnings to support our tremendous revenue growth. You can see, based on our third quarter results that we are tracking with our expectation for operating expenses to be around $13 billion for the full year. And looking at the year-over-year OpEx growth of 22% this quarter, it is also important to note that we see an impact from the prior year, including a sizable benefit from net mark-to-market gains in our Amex Ventures strategic investment portfolio, while this year we saw a modest impairment charge. More generally, we continue to see operating expenses as a key source of leverage moving forward, and we'd expect to have far less growth in OpEx than revenues in our ambitious growth plan. Turning next to capital on Slide 19. We returned $1 billion of capital to our shareholders in the third quarter, including common stock repurchases of $600 million and $391 million in common stock dividends on the back of strong earnings generation. Our CET1 ratio was 10.6% at the end of the third 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. That then brings me to our growth plan and 2022 guidance on Slide 20. With each quarter of this year, we have demonstrated consistent progress against our 2022 guidance and our long-term growth aspirations of delivering sustainable high levels of revenue and EPS growth. For the full year 2022, we are reaffirming our reported revenue growth guidance of 23% to 25%. Although I would point out, as I said earlier, that I would expect our FX-adjusted revenue growth to be above that range. And we now expect to be above our original EPS guidance range of $9.25 to $9.65. The uncertainty in the level of our final EPS for the year remains the possible impact on credit reserves and how the macroeconomic outlook evolves in the fourth quarter, while I expect our actual credit performance and metrics to remain healthy. It's harder to predict exactly how the macroeconomic outlook might evolve. In addition, we are working towards our 2023 plan and expect revenue growth to remain above our long-term aspirational targets, which should create a platform for producing strong EPS growth. Of course, we'll have to see how the economic environment evolves versus where we are today. In any environment, though, 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. And with that, I'll turn the call back over to Kerri to open up the call for your questions.

Thank you, 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.

Hey, good morning, guys.

Good morning, Ryan.

Hi, Ryan.

So maybe just start on the top line, Steve. Solid results, once again, although clearly, as you and Jeff articulated, FX was a headwind in the quarter. And I know you mentioned you're not seeing any changes. Jeff mentioned the strength over the quarter. Can you maybe just talk about what you're seeing from a spend perspective, maybe relative to what you saw 90 days ago? Any changes under the surface? And then, maybe just flesh out a little bit further your confidence in the ability to generate mid-teens top and bottom line growth into 2023? Thank you.

We're confident in our current position. The spending trends clearly demonstrate this. For instance, goods and services have increased by 16%. U.S. consumer spending is up 22%, while Millennial spending has surged by 39%. Our travel and entertainment spending has risen by 57%, and international spending is up 37%, with no notable changes observed. Comparing quarter-over-quarter, last quarter set a record for spending, and we’re just about $1 billion below that. Year-over-year, we haven't detected any shifts in consumer spending behavior. While future changes are always possible, we can only report on what we currently see. Looking ahead, many inquiries involve T&E spending and whether it will remain strong. As Ed Bastian mentioned last week, there's positive momentum at Delta and a bright outlook for the holiday season. Similarly, Chris Nassetta from Hilton has shared encouraging insights regarding our major partners. Our consumer travel bookings show significantly higher numbers than we've experienced in a long time, dating back to pre-pandemic levels. As for the upcoming holiday season, it looks robust, with many people booking travel three months in advance. Travelers typically dine out and often bring gifts when traveling. Therefore, we don't anticipate any major changes in the next three months. As we transition into next year, we feel optimistic about our growth strategy. However, we are ready to adapt if necessary, as we demonstrated during the pandemic. We have contingency plans in place for a recession or shifts in the credit cycle, but it’s not prudent to invoke them at this time given our strong growth and credit outcomes. Currently, there are no new developments. To summarize, this quarter mirrors the strong performance of previous quarters. Our model has proven its strength, and this year's results highlight the advantages of our differentiated approach. The consistency in year-over-year earnings growth and top-line revenue isn't typical for us, unless you have been observing the past six quarters.

And Ryan, let me just add maybe a few other comments to try to dimension when Steve and I used a term like, well, we know how to pivot if we need to. I would remind everyone that GDP in the U.S. shrank in the first two quarters of this year, and we've been putting up revenue growth in the 24% to 30% range, steadily right through that. I'd remind you that I talked about our credit reserve is influenced by macroeconomic forecast. So you can go look at what the Fed said in September. You can go look at what Moody's is saying, and they are predicting modest upticks in unemployment. That's contemplated in everything Steve and I have said and in the guidance that we've provided. If you look at October, October is just a continuation of all that Steve just talked about thus far. So we feel good about the guidance we've given. We are acknowledging the environment we're in. But I don't want people to overplay our reaction to the fact that growth has been pretty slow in the U.S. because with our differentiated business model, as Steve just pointed out, performing very strongly in this environment.

Thanks. Good morning.

Good morning, Sanjay.

I would like to follow up on that question. Steve, you mentioned the recession playbook. Can we discuss your thoughts on operating the business for the long term? In the event of a slowdown, how should we approach managing expenses? Marketing has been significantly increased, and it might not be wise to maintain such a rapid growth rate under the current circumstances. Could you elaborate on the flexibility we have and how to view our aspirational targets in the context of a recession, even a mild one? Additionally, Jeff, could you provide insights on the reserve rate? I know that people often associate the reserve rate with CECL day one. Do you believe you will return to that level considering the current low loss rates? Thank you.

When considering how to operate during a recession, it's crucial to understand our credit acquisition and underwriting processes, which we continuously adjust. We revise our models on a daily and weekly basis, and our performance thresholds adapt accordingly. We aim to maintain profitability as we navigate through the economic cycle. Reflecting on our actions during the pandemic provides a valuable lesson; we reduced Card Member acquisition due to the lack of visibility and concerns about the quality of potential customers, but we never ceased acquisitions altogether. Our marketing spend has significantly increased to over $5 billion compared to the pre-pandemic range of $3.5 billion to $3.9 billion, allowing us greater flexibility in our marketing budget. Additionally, many of our Card Member service costs are variable and fluctuate with spending, giving us confidence in our ability to adjust our marketing and operational expenses as needed. We have shown our capability to tighten underwriting continuously as market conditions change. Furthermore, our card membership does not reflect the overall U.S. economy, as our market share is only a small fraction. Many people mistakenly connect stock market performance with consumer spending, but historically, there has been no correlation. Our main concern lies with white-collar unemployment and potential job losses among professionals, which our models factor in. We’ve faced similar challenges before and are well-prepared to handle them again.

Before I get to credit reserve, Sanjay, I can't resist just adding though. You said, well, what would you do in a mild recession? I don't want to get into the debate here about semantics, but some could argue that from a growth perspective. We're in a mild recession and we just grew revenues 27%. To turn it to our credit reserves, our credit reserve adjustments do include the latest economic forecast, which has unemployment ticking up a little bit next year, and that's included in all of our forward-looking comments. As you pointed out, it's on Slide 12 in our deck today. Our day one credit reserve percentages of total loans were 4.6%. This quarter, they were all the way down at 3.2%. I will point out that if you look across the industry that is by far the lowest percentage. It's also the lowest percentage relative to day one. There's differential timing that all the different financial institutions have had over the last couple of years just due to the vagaries of the way the accounting works here. As you sit here today, our reserve balance both on an absolute basis and relative to that day one basis is below the industry. And that makes sense, Sanjay, because we have by far the most premium book in the industry. We have strong credit metrics. Relative to pre-pandemic in that day one number, our credit profile is stronger today. So, all else being equal, you would not expect our reserve percentage of loans to get back to where it was day one CECL because the average credit profile is stronger than it was day one CECL.

Thanks. Could you discuss what's driving the accelerating growth in new accounts off of already high numbers? How sustainable do you believe account growth at these levels is? Additionally, can you provide any insight into the typical increase in spending you would expect from new accounts as they mature? Lastly, did you experience a spike in new account applications from Gen Z around your Jack Harlow concert?

I cannot comment on the Jack Harlow concert, as I am not aware of any impact on our account acquisition. However, it probably didn't hurt us. What we've been focused on is not just acquiring a large number of cards; we aim for high-value cards with a strong value proposition, particularly among millennials and Gen Z, who make up 60% of our card acquisitions. While I don't have specific ramp-up numbers for spending in the first year, I can highlight that our millennial and Gen Z cohort increased by 39% this quarter. This focus on generational relevance has been beneficial for us, as it allows us to introduce our premium product early on in their lives, rather than starting with a fee-free product and trying to upgrade later. Many millennials and Gen Z are actively using our products. We see ourselves as not just a payment solution but also as a lifestyle brand. The Jack Harlow concert illustrates how we integrate ourselves into people's lives, and we have seen an uptick in services like Resy and travel bookings. While I don't have exact figures for the first-year spending ramp-up, a 39% increase is a promising indicator. Concerning our target of acquiring 3.3 million cards next quarter, I don't have a clear idea at this moment. We will acquire cards as long as they align with our underwriting criteria and are expected to be profitable over time, and this quarter, it happened to be 3.3 million.

The only two comments I would add are amongst the modest risk management adjustments we've made across the course of this year. We've significantly actually raised our financial hurdles required for some of the new card members that we're bringing in and still just brought in a record level, which tells you something about the level of demand that we see right now due to all of the trends that Steve just talked about. I'd also point out, as I said in my earlier remarks, that the average customer, whose behavior we track every single month, is coming in with much higher spend patterns, much better average credit quality and a much greater average fee component than what we were seeing pre-pandemic.

So it's harder to qualify to get a card. We're getting more. I mean just to cut to the chase.

Hi, good morning. Thanks so much for the time.

Hi, Betsy.

I just wanted to understand a little bit about how you thought the FX impacted yourself in the quarter? I mean you can see a variety of ways that you present, but just want to understand from your perspective what the impact was on the revenues and on the expense side, in particular, the reward side? And then give us a sense as to how you think about the revenue guidance range if it was FX adjusted for the year and for what you're expecting in the fourth quarter? Thanks.

Thank you for the question, Betsy. I will say, I think foreign exchange movements are very dramatic right now and more dramatic than they've been in many years. I think it's a little difficult to communicate and hard for a lot of people to fully understand. You've seen dramatic moves in many of the currencies that are most important to us, from the yen to the euro to the pound. And so when you look at our revenue growth this quarter, that’s why you saw a 300 basis points difference between the FX-adjusted revenue growth and the reported revenue growth of 24%. Now, on the bottom line, it is a much more muted impact, Betsy, because, of course, we also have a very large proportion of our colleagues outside the U.S. to go with all that business that we do around the globe, and the cost of rewards in all those countries is in the local currencies. So the impact on our earnings per share is pretty minimal. I think we have a 10-K disclosure where we talk about over the course of a full year movement maybe costing you $0.10. That's a quarter. That's why I don't really call it out when I think about EPS. When you convert all that into our guidance, it's why we're very comfortable saying we're going to be above our EPS guidance range. We left our reported revenue growth number the same as it was previously. I would expect to be a couple of hundred basis points above that reported revenue guidance on an FX-adjusted basis. I'll conclude by saying, in some ways, our revenue performance has exceeded our expectations of 90 days ago. That has offset the foreign exchange headwinds, which are a little bit greater on the revenue side than what I would have expected 90 days ago. But at the bottom line, you don't really need to factor it in that much.

Thank you, and good morning. I'd love to get a little update on SMB and online spending. I mean, the SMB obviously is a critical business for you and just obviously growing strongly. But any color you could give on SMB, any changes? And then, online spend has actually been pretty steady. I mean, a lot of discussion around what is the right growth rate for online spend versus offline over the long run. I think there is a little bit of deceleration, and maybe an offline but steady and online. So just any color on SMB and your thoughts on the long-term growth of online spending.

Let's start by discussing goods and services spending, which includes both online and offline. Our goods and services spending is at 16%, with the growth rate being fairly balanced between the two. In fact, offline growth may be outpacing online slightly, with both growth rates in the 15% to 17% range. We believe this growth is sustainable. Online spending has seen a surge, while offline spending has returned to levels above those before the pandemic. We're optimistic about both channels as consumers are actively shopping at malls and also making online purchases. This dual activity is beneficial for us. We're confident in the 16% figure for goods and services spending, which constitutes about 70% of our total spending. Regarding small businesses, they continue to perform very well with a 17% growth this quarter, which is significant for our business. We are expanding our offerings with our checking accounts, Kabbage, and small business loans, so we're pleased with how small businesses are doing and their continued strong performance for us.

Guys, thanks for taking my question. I want to revisit the topic we raised last quarter. Historically, your product offerings basically caused a customer base that's positively selected for spending pay and the product offering essentially habituated them to the pattern. Now you're offering a product that offers revolve on day one. As you move into a younger demographic, do you think over time, despite the upward move in terms of credit profile, that that will change credit performance, that you will actually increase your beta to the credit cycle, because you've changed the way you habituated your customer and how you've selected them?

Yeah. So I think, Rick, it's a good question because you are good to point out that there's been a significant change as we have, from our perspective, added more functionality for all of our customers on what our traditional charge products. Many to most of those customers still use them as traditional charge products and leave it paying off every 30 days, and some occasionally take advantage of their new functionality and being able to carry a balance if they want for a little bit. When you think about the impact on the company, Steve used the term a couple of times today, our differentiated business model. If you look over time, our net interest income is about 19%, 20% of our overall revenues. That's where it was many years ago, and frankly, that's where we'd expect it to be many years from now. As much as we see an opportunity to get a little bigger share of our both consumer and small business customers lending wallet, we grew fees 23% this quarter. We are seeing tremendous growth in discount revenue. We do get great growth and expect to continue to get great growth on the lending side, but I don't actually expect it to make a big difference in the overall mix of revenues that we have as a company or in the business model we have.

No, I don't think it's going to make a difference in the mix of, as Jeff said, in the mix of our overall breakup of revenue. What it also gives us an opportunity is to actually acquire more spending. When we did not have that feature, that group may have started off with a competitive lending card or we may have put them on a Blue Cash card. What’s happening is, as the spending numbers of 39% growth show, that cohort is consolidating their spending and they're consolidating that spending with our product. It gives them an opportunity to earn more rewards. The more important part is, I think the lifetime value of these customers is going to be a lot more than the lifetime value of customers we acquired previously because we're going to run these consumers right through the cycle; they're going to be with us from day one, and I think that's really important. So, I don't think it changes the profile of our revenue or the profile of the riskiness of our company, but I do think it gives us an opportunity to grow more spending and obviously to capture more revenue from this segment.

Hey, good morning. Thanks so much for taking my question. The loan growth was up, as you just mentioned, about 31%. That's really industry-leading levels of loan growth. I know you've talked about in the past that you're trying to penetrate your existing customer base. So could you just provide some of the breakdowns that are giving you the supercharged loan growth versus the industry again? Thanks so much.

Let me just start, Dominick, with a few stats that I think are important, and then Steve may want to add. The biggest thing driving the 31% growth in loans is tremendous growth in spending, right? In recovery mode and seeing tremendous progress there. Customers are also beginning to rebuild balances a little bit, so I think it's fair and natural. Yes, I think that when you look at those who have reported thus far, you're seeing industry-leading growth in loans, but you're also seeing industry-leading growth and spending. I think we feel good about the trends and expect them to continue. I would expect long-term, just as we were before the pandemic, to grow a little faster than the industry on lending and to do it while still maintaining best-in-class credit.

What's also important to realize is this loan growth is not all revolving balances here, right? That’s an important point. But spending growth like we've had will drive overall loan growth. We've had a large year-to-date sort of spending growth, but if you just look at it sequentially quarter-to-quarter, you only have about $4 billion in overall loan growth on a sequential basis. You do have quite a bit year-over-year. So it's not like all of a sudden, this thing just jumped up. Spending continues. Spending has continued on a quarter-to-quarter basis, and that drives loan growth.

Thanks for that. As a follow-up, Jeff, you mentioned that the interest-bearing portion has been growing at a faster rate, which is benefiting net interest income. Can you discuss when that might level off? Also, Steve touched on the fact that a significant amount of the lending growth isn't made up of interest-bearing balances. Looking ahead, how do you see that unfolding?

I would expect most for the next couple of quarters to see the revolving or interest-bearing portion of those balances grow a little bit faster than the overall loan growth because we're not quite back to pre-pandemic levels of behavior. I think that our expectation is overtime; it may take a while still you will eventually get back to pre-pandemic types of behavior. The other factor I would point to goes a little bit to Rick Shane's earlier question, which is you have this evolution going on as we've added a little bit more functionality to some of our charge products. Those customers who have the traditional charge products have that pay overtime feature and use it less than your traditional credit card or revolving customers. That’s putting a little bit of complexity in tracking our numbers here. In terms of watching the macro trend, I would expect loan balances to grow a little bit faster than the industry.

Yes. On the international org change, does that signal maybe a faster pace of investment? I know it's always been a balancing act in international markets. And then also, is there anything new on the tech investment strategy, so you were ramping up hiring seems a little late in the game for that?

No. I think the tech investment strategy remains the same. And I mean, there was an article on us ramping up hiring. A lot of contracted conversion that we're doing. I mean, anybody that's in financial services has their own employee base and has a large contractor base. It’s not necessarily an indication of increased headcount in technology, nor is it an indication of being late in the game. What it is an indication of is a balancing act between our contracted population and our overall colleague population. We've been pretty steady with our investment over the last couple of years, and we'll continue that same level of tech investment this year. The international piece of this, I think from an international perspective, when you run a global company, it is important to ensure that you bring the best and the brightest to bear on all the problems and issues that you have. When you think about acquiring card members, engaging card members and retaining card members, having a dual or a tri market structure sometimes can slow down your speed and your agility versus having a single market leader looking at making the right investment decisions for that market. So, you’ll see more with the right investment allocated to where the best returns are. The other thing that I would say, look, I've been here for a long, long time. Organizational constructs change for the times that you're in. For the technology that's available and the value propositions that are available, this is a little back to the future. We did globalize all these things, but now we feel it’s better to take these global capabilities and deploy them on a much more local level, with more local decision-making and more adjudication between the various business units. We just think that will be a more effective and faster way. Coming out of the pandemic, I think speed of decision-making and agility will be really important.

Thanks. Good morning, Steve and Jeff…

Hi, Bill.

Your PPNRB and the strength of the underlying trends certainly highlight the earnings power in the model. But I was hoping that you could address investor concerns that thinking back to the 2007 time frame, your models back then, we're saying that customers with multiple mortgages were good credits and you guys essentially grew into that recession. While today's environment is very different, some investors are looking somewhat by analogy to that time frame and have expressed concern that you may once again be growing into the next recession and the strong spending trends that you're seeing are a reflection of the inflation problem that the Fed is trying to fight. Would love to hear your thoughts around that dynamic.

We manage that quite carefully. I can also say that our ability to collect is completely different than it was back then. Our models are different. It would be foolish to think that we haven't changed or learned a lot. In terms of growing into the recession, I would say this: 80% of our growth is driven by transactions right now. If you look at that spending number, this is not inflation; this is transactions. This is higher levels of engagement. The notion of us growing because we have some tailwind of inflation is a silly notion because we're engaging our card members more. We have more transactions. We have more card members. The last point, just going back to your first question. Our card base is so much different than it was in 2007 from an economic perspective. It’s a much more robust, resilient card base than it was back in 2007. The way we grew our balances was not necessarily just through spending back then. There was a lot of balance transfer activity. This company is very different than it was in 2007 going into the recession. The card base is different. The way we were growing is different. We've really become much more of a growth company. We have a lot more premium cardholders and a lot more fee-paying cardholders than we did. Our growth is coming from different sources. At the end of the day, when and if you have a big downturn, we'll see what happens, but we feel pretty good about our abilities, and we feel pretty good about our models. We feel really good about how our spending is being acquired right now. We're not just riding a tailwind here; we are riding real growth through customer acquisition and increased spending from existing customers because the value propositions are driving that growth.

The spending is coming from existing customers. The loan growth is predominantly coming from existing customers that we know well, who have a better average credit profile. We feel good about our winning through the cycle models that tell us these are customers who we should have in any environment. I'll come back to my earlier comments about our credit reserve levels are still below everyone else in the industry. They’re below relative to day one, and that's appropriate given our strong credit profile.

Hey, good morning, everyone. Thanks for including me. I just wanted to follow up.

Hi, Lisa. Good morning.

On that point, considering the ongoing strength in your business and the benefits you're still experiencing from the delayed recovery effects of the pandemic, could you share your thoughts on leveraging the current valuation environment to pursue some smaller M&A opportunities or possibly larger organic investments? Specifically, are there certain areas you are looking to expand or accelerate within your business? Thank you.

I mean, chunky organic investments, you've seen how we've driven our marketing spending to acquire Card Members while, as Jeff said, making it harder to get a card. So, we’ve leaned in on our marketing investments. We feel really good about our technology investments. We're always looking at opportunities to tuck things in that makes sense for us; whether it was Kabbage or Resy or LoungeBuddy or Acompay and so forth. We're always looking at those things that will add adjacent value and add to our organic core. What we're not looking for, are things that are outside of our universe. I think we've proven that we can expand with our customer base. We can expand services we offer and look at additional services that lead to more spending or lead to more acquisition opportunities. Resy is a restaurant reservation system; we look at that as a way to engage our card members. That is a way to engage with our restaurants. We’re looking at it as a way to acquire new card members. Acompay is another one, where it's an ability to pick up more B2B spending. We’re always on the lookout for capabilities. If the right valuation comes along with the right set of capabilities, we’ll take advantage of it. But as far as leaning in on organic investments, I think we've leaned in. We’ve invested in marketing, card member services, our value proposition, and we’ve invested in our colleagues.

Good morning and thank you for squeezing me in here. I just wanted to touch on the regulatory backdrop. It seems there's anything worth highlighting there from your perspective, specifically I'm thinking of the building proposal. Is there anything else on regulatory that we should be thinking about? Thank you.

Okay. I'm sorry; it was really hard – I don't know if you're on a speakerphone or, it was really hard to hear you. Durbin, is that the question?

So yeah, I was just asking about the Durbin proposal and the regulatory backdrop.

Regarding the Durbin proposal, it's just a proposal at this stage. I can't predict the outcome or its implications for us since we operate under a three-party system. We don't anticipate any negative effects from it, although we are uncertain about any potential positive impacts or if it will even be implemented. We are monitoring the situation and will see how it unfolds. The current regulatory climate is challenging, but I believe the main goal is to protect and be transparent with consumers, which we support. The CFPB is currently discussing late fees and matters like that, but these do not represent significant portions of our revenue. Transparency for consumers is crucial, and we aim to uphold that. I don't think the regulatory environment has become any more difficult than in the past few years, and we will continue to navigate it. Compliance can sometimes incur additional costs, whether that's through technological updates or other adjustments, similar to the way we handle competition. It's a constant necessity to invest in compliance with regulatory standards, and we will keep doing that. I do not view this as a major challenge for us as we progress.

All right. 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.