and gentlemen, good afternoon. Thank you for standing by, and welcome to the American Express First Quarter 2013 Earnings Conference Call. At this time, all lines are in a listen only mode. Later, there will be an opportunity for your questions and instructions will be given at that time. As a reminder, today's conference is being recorded.
I would now like to turn the conference over to our host, Mr. Rick Petrino. Please go ahead.
Thank you, Tom. Welcome, and we appreciate everyone joining for today's discussion. The discussion today contains certain forward looking statements about the company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today. The words believe, expect, anticipate, estimate, optimistic, intend, plan, aim, will, should, could, likely and similar expressions are intended to identify forward looking statements. Factors that could cause actual results to differ materially from these forward looking statements, including the company's financial and other goals, are set forth within today's earnings press release and earnings supplement, which were filed in an 8 ks report and in the company's 2012 10 ks already on file with the SEC.
The discussion today also contains certain non GAAP financial measures. Information relating to comparable GAAP financial measures may be found in the Q1 2013 earnings release, earnings supplement and presentation slides, as well as the earnings materials for prior periods that may be discussed, all of which are posted on our website at ir.americanexpress.com. We encourage you to review that information in conjunction with today's discussion. Today's discussion will begin with Dan Henry, Executive Vice President and CFO, who will review some key points related to the quarter's earnings through the series of slides included with the earnings documents distributed and provide some brief summary comments. Once Dan completes his remarks, we will move to Q and A.
With that, let me turn the discussion over to Dan.
Okay. Thanks, Rick. So I will start on slide 2. So the Q1 of 2013 summary financial performance. So total revenues came in at $7,900,000,000 for the Q1 of 2013.
That's 4% higher on a reported basis and 5% growth year over year on an FX adjusted basis. So that's the same FX adjusted revenue growth that we've had for the past two quarters. Pretax income came in at $1,900,000,000 up 8%. Net income came in at $1,300,000,000 up 2%. So net income grew at a slower rate than pretax income in the Q1 because in the Q1 of 2012, it included a tax benefit realized on certain foreign tax credits and we had no such item in the Q1 of 2013.
Diluted EPS was $1.15 up 7%. EPS grew at a faster pace than net income due to share buybacks. As you can see, shares outstanding on the bottom of this chart are 5% lower year over year. ROE is 23% for the quarter compared to 27% in the Q1 of 2012. And this is due to the 3 charges that we took in the Q4 of 2012, which was about $600,000,000 So the ROE is calculated using net income for the 12 months ended March 31, 2013.
Therefore, it includes the Q4 of 2012 and that's divided by average shareholder equity. Excluding those three charges in the 4th quarter, adjusted ROE would have been 26% and you can actually see that calculation in Annex 6 to the slides. Moving to slide 3, which is a metric performance. You can see the bill business came in at $224,000,000,000 It grew at 6% on a reported basis, 7% on an FX adjusted basis. So the same FX adjusted growth rate that we had in the Q4 of 2012, despite the negative impact of having an extra billing day in the Q1 of 2012 because it was a leap year.
Cards and Force grew at 5%, the same as the 4th quarter. Proprietary cards grew at 2%, which is comparable to the growth rate we've seen over the last several quarters. Growth in average basic card member spending reflects continued strong card member engagement and cardmember loans continued modest growth growing at 4%. Moving to slide 4. So this is billed business growth by segment.
And as you can see on the chart, total FX adjusted growth, the red line, in the Q1 of 2013 was 7% consistent with the Q4 of last year. Each of the business segments is consistent with the Q4 of 2012 except for GCS, which is Global Corporate Services, that's the green line. And you can see here that the growth rate for that segment has moved down slightly. As T and E spending grew at a slower rate than total billings growth rate in the quarter. Now 2012 was a leap year, so we lost one day of billings year over year, which negatively impacts build business growth rate in the Q1 of this year by about 100 basis points.
Going to slide 5. So this is billed business growth by region. So you can see that the U. S, which is the dark blue line with the diamonds, grew at 7% consistent with the Q4 of 2012. And while each of the other regions had their growth rates slow a bit in the Q1 compared to the Q4, In aggregate, total FX adjusted growth rate of 7% is consistent with last quarter.
So now we have slide 6. So this is the U. S. Consumer managed cardmember loans. The bars are the dollar amount of loans.
The light blue line is the U. S. Consumer loan growth rate. And the new line is the green line and that's the U. S.
Industry revolve growth in each of the quarters. So the 4% growth in loans is driven by growth in bill business. Loans are growing at about half the rate of the growth in billings on lending products. Our loan growth continues to outpace the industry as you can see looking at the green line. So for example, in the Q4 of this year, we grew at 4% and the industry growth rate was 1%.
The last point I'd make is that while loans grew 4% year over year, loans decreased sequentially on a seasonal basis from the 4th quarter. And as you'll see in a minute, credit performance continues to be excellent. Slide 7, so this is our revenue performance. Total revenues grew 4%. That's 5% on an FX adjusted basis.
Discount revenue came in at 4% and this reflects 6% growth in bill business, partially offset by 1 basis point decline in the discount rate and higher cash back rewards. Net card fees increased 7% and this is reflective of higher average fees per card, primarily due to fee increases and a greater mix of premium products. Travel commission and fees decreased 3% as worldwide sales decreased 3%. Business travel declined 4%, while consumer travel sales increased 2%. Other commissions and fees decreased 2% and this is the impact of some modest cost of card member reimbursements, partially offset by higher loyalty partner revenues.
Other revenues is lower by 3% and this is primarily due to a favorable revision of our liability for uncashed TCs in international markets in the Q1 of 2012 and is partially offset by higher gains on our sale of ICBC shares in the Q1 of 2013. Net interest income increased 10% and this is a combination of 3% increase in average car member loans an increase in the worldwide net interest yield to 5.9% from 9.2% a year ago. Now a portion of this increase is due to the reversal of reserve for car member reimbursements that we set up in prior periods. And without it, the increase would have been slightly lower. That's also influenced by a decline in funding cost for our charge card portfolio.
Moving to slide 8. So this is provision for losses. You can see the total provision for losses increased 21%. Charge card provision increased 10%, primarily driven by higher receivables, which are 5% higher than a year ago. Card member loan provision increased 30% or 63,000,000 dollars and this reflects a 4% increase in cardmember loans compared to last year, a reserve release of about $100,000,000 in the Q1 of 2013 compared to a reserve release of $200,000,000 in the Q1 of 2012 and this had the effect of increasing provision by $100,000,000 partially offset by approximately $50,000,000 less in write offs in the Q1 of 'thirteen compared to the Q1 of 2012 due to improved credit performance.
This all nets to a $63,000,000 increase in the lending provision. So provision is increasing while credit metrics are stable and you'll see that over the next several slides. So slide 9 is charge card credit performance. And if you look at the left charge, this is the U. S.
Charge write off rate. Now this has ticked up and down slightly over the past few quarters, but I view this as stable over the period. On the right side, you see the International Consumer and Global Corporate Services net loss ratio and this also has remained stable. Both of these metrics are at historically low levels. Moving to slide 10.
So this is the lending credit performance. The left side is the net write off rate and this metric continues to be stable. The right side is the 30 day past due and the same is true here. This metric continues to be very stable. So these metrics are at historically low levels and represent the best credit metrics in the industry.
Now as I say each quarter, our objective is not to have the lowest possible write off freight, but to achieve the best economic gain when we invest. Next is slide 11. So these are the lending reserve coverage ratios. So each of the metrics, whether it's reserves as a percentage of loans, reserves as a percentage of past dues or the principal month's coverage are lower in the Q1 of 2013 compared to last year based on the improved credit metrics and are trending slightly lower than the Q4 of 2012 as we continue to sustain historically low credit metrics. Our reserves in these metrics are appropriate for the risks that are inherent in our portfolio.
Slide 12. So this is expense performance. You can see on the bottom right that total expenses grew 1% year over year. Marketing and promotion expense decreased 2%, reflecting lower brand advertising, partially offset by higher card acquisition spending. And I'll cover this in more detail in the slide.
Next is cardmember rewards expense and this increased 4%, reflecting higher spending on rewards products, partially offset by slower growth in Membership Rewards ultimate redemption rate in the Q1 of 2013 compared to the Q1 of 2012 and I'll cover this in more detail on the following slide. Carmeber Services decreased slightly. Total operating expense grew 1%, well within our target of growing total operating expense less than 3% for the next 2 years and I'll have a slide on this later as well. The effective tax rate was 32.9% in the Q1 of 2013. This compares with 29.2% in the Q1 of 2012.
The lower tax rate in the prior year includes a tax benefit related to the realization of certain tax credits. Moving to slide 13. So this is marketing and promotion expense. So marketing expense in the Q1 of this year was $621,000,000 That compares to $631,000,000 in the Q1 of 2012, so down slightly. As you can see from the chart, it's also down slightly for marketing a percentage of revenue.
So all the way on the right, you can see the percentage for the Q1 of this year was 7.9%. And for last year in Q1, it was 9.3%. But we remain committed to our objective of having marketing and promotion expense to approximate 9% of revenues on an annual basis. While in the Q1 of 2012, this percentage was 8.3%, if you look at the chart on the right, you can see that we increased spending in the second through fourth quarter to achieve our annual rate to achieve our annual objective. And you can see on the left hand chart that 2012 for the full year came in at 9.2%.
We continue to invest in our business despite the slow growth economy. Slide 14 is Cardmember rewards expense. So rewards expense in the Q1 of this year was 1 point $520,000,000 that compares to $1,467,000,000 in the Q1 of 2012, a 4% increase. So core member rewards expense is a combination of rewards on co brand products and membership rewards expense. Within membership rewards is a combination of expense on points earned in the current period and this is included in the chart along with co brand expense in the dark blue section of the chart.
This section of the bar basically grows with the growth in bill business. Membership rewards expense also includes expense related to changes in the membership rewards liability for points previously earned. This is the green section of the bar. As you can see, this portion of expense in the Q1 of 2013 is lower than the Q1 of 2012 as the increase in the ultimate redemption rate in the Q1 of 2013 was less than the increase in the ultimate redemption rate in the Q1 of 2012. The ultimate redemption rate in the Q1 of 2013 is 94%, the same as it was in the Q4 of 2012.
Next slide is slide 15, operating expense performance. In the quarter, as you can see in the lower right, operating expense increased only 1% versus the prior year as we continue to focus on controlling expenses. Our expense performance is consistent with our aim to have operating expense grow at an annual rate of less than 3% over the next 2 years. Salaries and expense salaries and employee benefits decreased 1%, reflecting a decrease in employee count of 1100 people compared to the Q1 of 2012. Professional services increased 4%, reflecting increased investments in the business and higher legal fees.
Occupancy and equipment increased 8%, driven by higher data processing costs and software amortization. Other net decreased 2% and this is resulting from a favorable impact related to hedging our fixed rate exposures versus an expense in the Q1 of 2012. So this is an accounting adjustment we need to record. These hedges are functioning exactly the way we intended. And over the life of the hedge, it all nets to 0.
Now we'll go to slide 16. So this is expense as a percentage of revenue. Now adjusted expense means we're excluding credit provision. On the left side, you can see 6 years of history. And on the right side, you can see the most recent 5 quarters.
Now, 20102011 reflect elevated investment levels. In 2012, we committed to migrate this ratio over time back towards historical levels in 2 ways: 1st through revenue growth and second our plans to control operating expense while continuing to invest in the business. In the bars for 2012 Q4 of 2012, the dotted line on the bar excludes the restructuring charge and card member reimbursements in the Q4 of 2012. As you can see on the chart on the right, we are making substantial progress in reducing adjusted expense as a percentage of managed revenues. Moving to slide 17.
So these are our capital ratios. In the Q1 of 2013, Tier 1, Tier 1 common and total capital ratios increased due to an increase in capital during the period, primarily driven by capital generation of $1,500,000,000 This is a combination of $1,300,000,000 in net income and $200,000,000 raised from employee plans, offset by capital distributions of $1,100,000,000 and this is $800,000,000 in share repurchases and $300,000,000 in dividends as well as a decrease in risk weighted assets mostly due to lower card member loans. Tier 1 common capital ratio of 12.6 provides the company with a strong capital position. Next to slide 18. This is the total payout ratio.
So this is the percentage of capital generated through net income returned to shareholders through dividends or share repurchases. On the left hand side, you see the past 5 years. On the right side, you see the most recent 5 quarters. In 2012, we returned $4,000,000,000 or 98 percent to shareholders. Now the share repurchase in the Q1 of 2013 was governed by our CCAR submission in January of 2012.
And so for the quarter, we returned 70% of net income. We plan to increase our dividend to $0.23 per share from $0.20 per share next quarter, a 15% increase for shareholders. We are also moving ahead with plans to repurchase common shares that would total up to $3,200,000,000 to shareholders during the remainder of this year for a total of $4,000,000,000 in 2013 and up to an additional $1,000,000,000 in the Q1 of 2014. Next slide is slide 19 of our liquidity snapshot. Our objective is to hold excess cash and marketable securities to meet our next 12 months of funding maturities.
As you can see, we have $20,900,000,000 in excess cash compared to funding maturities of $17,000,000,000 for next year, thereby meeting our objective. Next is slide 20. So this is our U. S. Retail deposit program and it shows you the deposits by type.
As you can see on the right, deposits increased by $1,100,000,000 in the quarter, with direct deposits increasing by $2,500,000,000 and you can see that on the left side of the chart. We remain committed to increasing direct deposits over time. So with that, let me conclude with a few final comments. We continue to feel positive about our performance, especially given the slow growth economic environment. In the quarter, spend growth continued to be healthy and was relatively consistent with the past several quarters despite the negative impact of having an extra billing day in the Q1 of 2012 because of leap year.
We also saw average loans continue to grow modestly year over year and outpace the industry. Moderate loan growth and slightly higher net yields led to a 10% increase in net interest income. At the same time, lending loss rates remain near all time lows. Revenue growth was 5% on an FX adjusted basis, consistent with last quarter. This reflects the sluggish economic environment and the negative impact of having one less day in the quarter versus the prior year.
In the quarter, operating expense increased only 1% versus the prior year as we continued to focus on controlling expenses. Our expense performance is consistent with our aim to have operating expense growth at an annual rate of less than 3% over the next 2 years. We are also continuing to invest in the business and expect full year marketing and promotion expense to be approximately 9% of total revenues, in line with our historical average. EPRS growth of 7% outpaced revenue growth reflecting the progress we have made on controlling operating expense and our strong capital position. We continue to return significant capital to shareholders in the quarter through dividends and buybacks, while maintaining strong capital ratios.
The results of the recent Fed stress test underscore our capital strength and our ability to remain profitable even under severe stress assumptions. This strong capital position provides flexibility for our planning to for a 15% increase in our dividend during the Q2 and allow us to balance the capital needs of our business with the potential for significant share buybacks. We recognize that our business is not immune to the economic environment, but we continue to believe that the flexibility of our business model enables us to deliver significant value to shareholders even in an extended slow growth environment. Thanks for listening and I am now ready to take your questions.
Our first question today comes from the line of Ryan Nash, representing Goldman Sachs. Please go ahead.
Hey, thanks. Hey, Dan. When you think about your outlook for revenue growth, it came in about 5% on an FX adjusted basis this quarter, a bit lower when you factor in the FX. So if you would assume that the revenue trends remain consistent over the next few quarters, how should we think about OpEx growth for the remainder of the year? I know you're saying less than 3%, but assuming revenues were to stay at the 5% level, do you think we should end up on the lower end of that range?
So as we talked about saying having growth of less than 3%, We really haven't factored in exactly where revenue growth is going to come in. So I don't think that's a factor
Got it.
And So at the FCN, we tried to give a variety of scenarios in there in terms of what the potential outcomes could be when you vary both revenue growth and operating expense growth and share repurchases to give you a sense of how those each of those items could affect EPS in several different scenarios.
Okay. And just in terms of the
spend volumes, can you give us a sense of how they progressed during the quarter? And at this point, have you seen anything that points to pull back on the part of consumers from higher tax rates?
So our spending levels on an FX adjusted basis have been pretty consistent over 2 quarters. And we didn't see any stark trends within the quarter. So whether the change in the tax rate is having any impact it's certainly something that we can discern within our numbers.
Great. Thanks.
Question today comes from the line of Sanjay Sakhrani with KBW. Please go ahead. Yes. Thank you.
I was hoping if I could get like some specifics around the gain that you guys had from the sale of the ICB shares as well as kind of the benefit from the reversal of the reserve for card member reimbursements? And then secondly, I was just wondering how far we were into the restructuring that you guys have undertaken? And at what point during the year will we hit a level of operating expense ex marketing without that overhead? Thank you.
Okay. So we as it relates to the ICBC shares, we put a hedge on that in the past and have effectively locked in the game. As you have seen over the last several quarters, we're taking that over time. And the reason we're doing that is to enable higher levels of investment funding investment spending to help generate business momentum. So it's a locked and game we have and it's our time our plan to take it over time.
With respect to your second question about the reversal of a reserve we put up previously related to car member reimbursements. We had come up with an estimate in the 4th quarter. Upon further refinements, we realized that the amount that we're going to reimburse is actually lower than our estimate. It's a relatively small amount, but it did have an effect on the increase in the spread. So I didn't want people to think that that was a permanent increase.
It's really the only reason I spiked it out, but it's not really a large number at all as it relates to our income. In terms of restructuring, we announced restructuring in January. The impact of employees leaving American Express is actually going to take place over all of 2013. Some have left in March, but others will not leave until later in the year. So we're only going to get a portion of the benefit from that action in 2013.
And we'll get an additional benefit in 2014 as some people would have been here for a portion of 2013. So it's going to come to us very gradually over 2013 2014. And I would say most employees the 1st employees to leave were probably in the March time frame. So there's a limited amount of benefit from that in the Q1. So we really see it come to us over the next 7 quarters, I would say.
The very good control of operating expense is just our continued focus on operating expense, which we really started last year, which is rolling over into this year as we see the proper control on expense as a way of creating resources so that we can invest in the business, some of which takes place on marketing promotion line. Other portions of that actually take place on the operating expense line. So I know even though it was only one question, I hope I got you through the 4 parts correct.
The next question comes from the line of Bill Carcache with Nomura. Please go ahead.
Thanks. Good evening. Dan, I had a follow-up question on Slide 16 on the detail that you gave on the expenses. So you're clearly making progress on reducing expenses. But I wanted to kind of make sure that I was thinking about the commentary that you guys have made correctly.
You referred to how in the past that you intended to get that expense ratio down to historical levels. And I thought that you had said in the past that 2,007 was kind of a good benchmark. So that kind of 67% level and you're at 69% now in Q1 2013 and we see the progress you've made there. But should we be thinking is that in fact a fair way to be thinking about it that that 69% over time is going to move towards 67%. And I know you guys don't want to get locked into a timeframe, but let's call it the next 12 to 18 months or so kind of a reasonable time frame to be thinking about?
Yes. So we I think what we said is we want to move back towards historical levels. And 'eight and 'nine are low because it's during the crisis and 'ten and 'eleven are high because we had elevated levels of investment. So we don't lock in exactly on the 67%, but we certainly want to head back in that direction. How much we actually take this ratio down to will depend on lots of things including what our revenue growth is, what's being placed in provision and what we're aiming for in terms of what we want to free up for investment capacity.
So all those things work together in terms of the pace and the level that we take this ratio to.
Okay. Thanks. And finally as a follow-up, can you give a little bit more color on what drove some of the weakness in GCS build business? And then should we expect reserve builds for the rest of the year? Or should we be looking for more releases?
And then I guess the last part of that is the travel commissions and fees were a little bit lower than what we were expecting. So I wondered if there's any kind of maybe you could if there's anything behind that and any kind of impact from the restructuring that we should expect to impact this line item? Thanks.
Okay. So let me talk to GCS, so Corporate Services. So really across the board, we've seen lower spending in T and E categories, right? And we're seeing better strength outside of the T and E categories. Corporate services is primarily T and E type of spending and so that's where you're seeing it come down.
And it's relatively broad geographically. So I think it's just lower teening type of spending is what's causing them to be lower. Now that actually ties into travel commissions and fees, right? So if TV spending is lower, then that line is going to be impacted. Worldwide sales were down 3%.
That's the main driver. Now travel business travel was down 4%. Consumer was actually up 2%, but business travel is much larger than consumer travel. And so that's what's yielding the lower sales. So it's the activity in this particular category.
In terms of reserve, what's going to happen with reserves? So we've seen them come down for the last couple of years. Actually in the Q4, we had a slight reserve build, but a return this year to a release, but a release that's much lower. The way our models work, they use the last 12 months' worth of information to do the modeling. To the extent we get to a point where the quarter that's falling out is at about the same level as the metrics we have in this quarter, then you're going to have a relatively stable provision.
So it's a relationship of what's kind of falling out of the model and what the new quarter going into the model is. So I think most people are anticipating that reserve releases are not going to be in 2013 what they were in prior periods.
Okay. Thank you.
The next question comes from the line of Mark DeVries with Barclays. Please go ahead.
Yes. Thanks. Dan, could you walk us through your thoughts behind your revised buyback request under the CCAR process? You only missed the Fed's Tier 1 common buffer by 3 basis points, but then in the subsequent request lowered the buyback request by $1,500,000,000 Was it communicated to you that you would not be allowed to return in excess of 100% of earnings? Or alternatively, did you just want to make sure that you had a really conservative request around 100% that you were confident that they would approve?
Right.
So we they never
said to us you can't
be above 100%. I think State Street is in fact above 100%. And they had said that before our submission and subsequently. So that was not it. Our initial plan, we asked for an increase in our dividend to $0.23 We asked for a share repurchase of $4,700,000,000 over the remainder of $13,000,000,000 and $1,000,000,000 in the Q1 of next year.
Our revised submission, we were asking for the same $0.23 dividend. We dropped our request from $4,700,000,000 to 3,200,000,000 this year and kept the request for the Q1 of next year the same. So when we prepared our initial submission to the Fed under the stress scenario, it was based on our own internal analysis. And that internal analysis yielded a minimum Tier 1 common ratio of 9.2%, which was above the 5% minimum threshold that the Federal Reserve has set. However, when the Federal Reserve did its own modeling, it generated a conclusion that dropped us below that 5% minimum amount.
Now the good thing is both under our scenarios and their scenarios even in this stress situation, we have a cumulative process over the 9 quarter period. However, the Fed's projection of the loan loss provision was $3,100,000,000 higher than ours and was actually $4,600,000,000 higher than the analysis they had done in the prior year, right? So in 2012, their estimates and ours were relatively close. Our estimates for 20 13 with similar assumptions were 2013 and 2012 were similar, okay? When defendants come out in the report that they published, they said that some of the reserve models that the Fed was using this year had changed substantially or were newly implemented.
So it was that change that caused us to fall below the 5% minimum. Now as we thought about our revised submission, we didn't want to put in a submission that just eat us barely over the 5%. And we said, when we go back to the request that we had made in 2012, we thought that was substantial in terms of what we were returning to shareholders. And that's what really drove us at the end of the day. And based on that, when you do that and reduce the share buyback request under the Fed's stress scenario, our Tier 1 common ratio comes in at 6 0.42%, a healthy amount above the 5%.
So that was really our thinking and how we set our resubmitted request.
Okay. Got it. And then on a separate tack, when I look at a year or so back, the delta between your bill business growth and loan growth was 10% plus. And I understand you were telling us then you would eventually expect lend to follow spend and
those would
converge. But now it's relatively tight. I guess there's only about a 2 40 basis point difference between your proprietary build business growth and your loan growth, which is actually a little bit tighter than I would expect it given your more spend based model. Is that relationship in line with what you would have expected? Or is it a sign that you're getting more growth from your revolvers than you are from your transactors here?
So if you went back to pre crisis, our loans grew at about the same pace as the growth in billings on lending products, okay? That separated wildly during the crisis as consumers simply decided to deleverage. What we have said, I think, is that what the growth of loan is going to be in relation to the business is totally dependent on our customers, right? They're going to decide what amount of leverage that they want to have. Although intuitively, at least in the near term, it didn't seem that we moved back to where we were pre crisis.
In the Q4, loan growth came closer to billings growth. But in the Q1, the growth in loans was about half the rate of the growth in bill business. And it's kind of been about that level for several quarters. Now whether it goes up or down from there, as I say, it's depending on the customers. We give products to customers.
We give them the opportunity to evolve if they choose. As you know, probably in the number of customers that we have that have lending products that are actually transactions pay off every month is in the high 20s, right? But if those customers choose to evolve, the product is designed to allow them to do it. So it will be driven not by us, but by the choice of the customer and we'll rely on the credit capabilities we have to properly monitor that. And you can see that while we're having loan growth even though really no one else in the industry is at the moment, our credit metrics are excellent.
So it's it will really be driven by the behavior of the customer. Okay. Thanks.
Question comes from the line of Don Fandetti with the Citigroup. Please go ahead.
Dan, sort of looking at build business in the U. S, I mean effectively your growth rates you could argue accelerated a bit and you've got the banks and JP Morgan sort of coming at the affluent side. I mean, I guess my question is, do you still think you're gaining share? How is growth so stable and good? I mean is there anything specific in terms of sort of income breakdown where the super affluent is maybe stronger?
I mean are you just seeing across the board decent numbers?
Well, I mean our customer base is primarily an affluent customer base. And as I said before, we don't see any discernible impact of taxes on our base. As you said in the U. S, we've had some pretty consistent performance over the last several quarters that we're pleased with given where GDP is and the fact that it's a sluggish economy. We've always had the fact that lots of our competitors want to be in our space and we need to continue to innovate and provide terrific service to customers to maintain the kind of performance that we have.
But we haven't done any analysis to distinguish by income level within our customer base. But it's pretty good performance over a broad base of our products that's giving us the stable growth. And then
I'm sorry.
In terms of the Chase Visa deal, I guess, some have suggested that maybe that could be a competitive risk to Amex because of the closed loop. I mean, is there anything specific that they could do that's incremental? Is there any sort of incremental competitive threat from that that you see today?
Well, they're trying to replicate our closed loop. I think people realize that that has value. But the number of customers that can actually operate within that space is limited, right? It has to be a Chase customer at a merchant that uses their merchant acquiring process. And when you add that all up, I don't think that's a very large piece of the total universe.
So is it something that will enable them to achieve growth? I think it likely is. But I don't see it as a large threat as our closed loop covers all of our merchants and all of our customers.
Thank you.
Now we'll go to the line of Ken Bruce representing Bank of America. Please go ahead.
Thank you. Good evening. Firstly, I appreciate the commentary in your prepared remarks as it relates to the marketing and promotion expense and expense levels in general. I want to make sure I understand some of your comments there and my question will tie in with some of the others. But firstly, you'd mentioned that marketing promotion expense running at 7.9% in the quarter, likely going to go higher just in terms of where you expect to run it on a more stable state basis.
And I'm trying I wanted to make sure that that's your outlook is for marketing promotion as a percentage of managed revenue to rise. And then within the context of your marketing and promotion expenses, you had pointed out that brand advertising was down and acquisition costs or acquisition spending was up. And I want to maybe you can dimensionalize if there's been any changes in terms of what is the discretionary side of the expense versus what is more card member behavior, if you've seen any change in the outlook for where you want to invest, whether that be geographically or within products and get a sense as to how you're looking at the investment horizon? If you could provide some color around those areas please?
So what we said is our objective is for marketing promotion on an annual basis to be about 9%. It's not a forecast, but that's our objective. I was just pointing out that last year we had brought marketing as a percentage of revenue down in the Q1. We've done that again. But again we aren't changing our objective of being at that 9% level.
The commentary to say we took brand down a little bit and acquisition up a little bit wasn't to say we've had a strategy change in terms of the mix. It was just to say during this quarter when we had lower expense, it was coming more from the brand side and that our acquisition engine to bringing customers was actually at or little above what we've had in the past. So it's really just to give you a sense of how we allocated within the quarter. Every year, we look at all of the opportunities we have in terms of where we spend our marketing dollars, whether it's on brand or charge in the U. S.
Or charge internationally or lending products or co brand products. And we have pretty refined models in terms of what the expected economic gain of each of those investments are. And that's what really drives where we put the dollars. Obviously, it's a lot easier to measure when you do an acquisition because you can see the actual cars that come in and we have a pretty good idea how they're going to perform. When it gets to things like brand advertising, we don't have that nice mathematical calculation.
We know there's a certain amount that you want to do. And if you do if you have good products and good brand advertising, that's where you want to be. But it's really driven by which investments give us the greatest economic gain that will drive what geography and what product we put the investments behind. And
as a follow-up, are you when you look at brand versus acquisition expenditures, it feels that the branding is very discretionary, but ultimately has a longer payback window versus the acquisition investments that you may be making, which are harder to pull back. So I'm trying to get a sense as to how much of this may be in reaction to to meeting some shorter term financial objectives versus any change in the overall outlook for investments in your business?
Well, I think we need some formal marketing and promotion just about maybe not 100%, but a very, very large. It's completely discretionary, right, that we can decide to either do or not do. So it's not like a fixed cost of having employees within the company. So it is just a matter of I think we recognize that we can take marketing promotion down in any quarter or for a couple of quarters in fact as we did back in 2008 and 2009 and there's really no negative impact to the franchise. We couldn't do that longer term.
So this is just in recognizing in the Q1, we've taken it down some. We're committed to hit the objective that we set. And we chose in this particular quarter to have brand come down and acquisition go up, but that can change from quarter to quarter depending on what we're endeavoring to achieve.
Great. Thank you very much.
And next we'll go to the line of Chris Brindler representing Stifel. Please go ahead.
Hi. Thanks. Good evening.
Dan, can
you touch on the lending business one more time? The margin seemed to pop up a little bit in the Q1. Anything going on there? Is it sustainable? And also just stepping back a little bit, the lending business also seems to be going fairly well.
As you mentioned, you're growing receivables better than almost anyone in the industry. The margins are healthy, credit's at all time lows. Any change in strategy around lending? And given that that's the weakness in other parts of the business, is there any desire to increase your focus on lending? And can you just comment at all on your use of teaser rates currently?
Thanks.
Right. So I'll start with teaser rates. So we others are using balance transfers with 0 for a certain period of time. That is not a strategy that we are following. So we're not growing loans by putting teaser rates out there.
The growth in our loans is coming by as a result of card members spending, bill business spending on our products, which is what we want them to do. Coming out of the crisis, we did have a shift in our lending strategy, right? So we wanted coming out of the crisis to be focused on premium lending, right? So that was a change, but that's really a change that we put in place back in 2,009 and we've continued to execute against that. We've shared information about what percentage of lending customers actually are transactors and that has increased quite a bit over the last several years.
And as a result of the premium lending strategy, we're focused on cards that have higher spending on them. So we've also shared the percentage of customers who have a tenure of less than 2.5 years with us. Today is a lot less than it was again 5 years ago because we're bringing in fewer cards, right? That's helpful from a credit perspective as well. So I think we put in a number of metrics out there to show that we're not only talking about a premium lending strategy, but actually executing against it.
You can actually see that as average card number spending is and the whole base is going up. So that has been something of a change, but it's a strategy change that remained a couple of years ago. Lending products for creditworthy customers are products that have very good economics associated with it. And so we want to grow both charge card and premium lending. And as I said before, which ones we're actually investing against is based on the return that we think we'll get out of each investment.
Any comment on the net interest margin? And then also separately, can you also comment on fraud? I'm just trying to hear more and more concern about fraud with the lack of EMV in the U. S. And just your plans to start issuing EMV cards in the U.
S. An update there? Thanks.
Okay. So net yield is at 9.5% in the quarter, up about 30 basis points from last year. I made a comment that a part of that increase had to do with an adjustment of a reserve. So I wouldn't expect it to stay at exactly 9.5%. Coming out of the crisis or actually coming out of the new regulations that we had, we had said 9% was about our yield prior to those regulations and our intent was for our yield to be about 9% after those regulations with the changes we made in our products.
So we've achieved that and slightly more. So on our lending products, we're getting good growth, low credit losses and good yields. So that's a pretty good combination to have, right? So we're very pleased with how our lending products are performing. As it relates to fraud, our fraud losses are less than half of what we see across the industry.
And I think that's the benefit of having very good processes to monitor. It's probably one of the benefits of the closed loop. And we have not seen any notable tick up in fraud in our core business. As it relates to EMV, we have started to put EMV chips on some of our premium products or products for customers who travel extensively so that they have the best utilization possible, quite frankly, outside the U. S.
But I think gradually within
the U.
S. We put EMV onto our cards over a number of years.
No big rollout planned for this year then?
It's going to be a very gradual rollout over several years I would say. So no big push to do it in 2013. It's a gradual undertaking for us.
Great. Thank you so much.
Next we'll go to the line of Betsy Graseck with Morgan Stanley. Please go ahead.
Hi, good evening.
Hi.
Couple of questions. One is just on the Travel segment. Travel segment had been relatively weak, thinking about just airline and airline seat capacity. And I'm wondering how much that may have impacted your Q1 in terms of built business?
Yes. So as I think I mentioned before, the reason that corporate services was down in terms of growth rate, the growth rate was lower, was that we were seeing weakness in T and E spend compared to our average. So we saw that in all of our products, it's a bigger percentage of corporate services. So it had a bigger impact there. So it was impacting growth in the quarter.
Okay. But no sense of degree of impact?
It's hard to tease out exactly. I guess I would say that was lower, but overall we're very pleased with our aggregate growth rate given the sluggish economy.
Sure. And then on slide 5, just looking at the different build business growth rates per region, it's kind of interesting they're somewhat coming together fairly tightly. And I'm wondering how you guys are thinking about that. Is this new normal where distribution of growth rate across the globe is likely to be running more similarly? Or do you have a different outlook than what you experienced this quarter?
Yes. So I think there'll be times where it kind of moves together like it is now and I think there'll be other time where it bonds again. Let's say, EMEA is slower than the other regions. And so they kind of figure out exactly all the issues they have in front of them. It could well be that EMEA stays kind of in the lower part of the chart.
We think JAPA is being impacted by China. Still has good growth rates, but not the growth rates that they had in recent history. That impacts countries like Australia. So it's really very much going to be driven by the economies in those regions in large part.
Sure. Okay. And then just lastly, a couple of questions on Bluebird. Wanted to understand the impact of adding the checking feature and the FDIC insurance on Bluebird? And if there's been much in the way of any effort to expand the merchant acceptance to attract more Bluebird spend?
So Bluebird products or all reloadable products are accepted across our whole network, right? So you can use any of those products in any location where an American Express product is accepted. The FDIC insurance we put on because we've got for some customers it may matter and also to load certain checks like government checks or tax refunds on it had to be FDIC insured. And in terms of the check writing, we just want to have a full suite of options for customers, so it's the best possible product for them.
Have you seen any uptick in growth rate beyond what you were experiencing before post the FDIC announcement?
Well, it just went on. So it's hard to measure. But we are seeing healthy growth in renewable prepaid across that product set.
And then the question on the merchant acceptance. I get it that Bluebird is accepted at any merchant who accepts Amex. I guess the question is, does a reloadable prepaid card user seek a potentially different kind of merchant addition to the merchants that Amex has today?
So we so it's possible, but we do have an initiative to so we've always had an initiative to expand merchant coverage. Signing up small merchants is a particular initiative within 2013, where we're trying to expand it. So that's very much in line. It will be good for customers who use reloadable prepaid. It will be good for our customers who use our core products as well.
Sure. Sure. Next question if we could.
Thanks.
This will be the last question. Two more questions. Two more questions. Okay.
All right. Next, we'll go to the line of Brad Baul with Evercore. Please go ahead.
Thanks, Dan. A lot of my questions have been asked. Just you mentioned that you were experiencing higher cash back rewards. Is that a contra revenue item? And how many of your what proportion of your customers are using cash back?
So cash back rewards is a contra revenue and cash back is a good product. I don't think we actually break out the percentage, but it's still a reasonably healthy product within our suite of products.
And is it a product that resembles the products that are in the market, 1% type cash back on all spending that kind of product?
Leach products is a little different, but it's basically a percentage of spend you get and sometimes there's higher rewards in particular categories either on a product feature basis or on a promotion basis.
Okay. And then one other. You had mentioned that other revenue were helped by higher loyalty partner revenues.
Can you give us
a sense as to the magnitude of the contribution there? And just broadly, how are you tracking to the $3,000,000,000 target for fee revenues?
So, loyalty partner is a substantial business. However, it is one business in a very large company. But they're performing nicely very much in line with our expectations. And it's one of the spots that we think is going to help us achieve our $3,000,000,000 target. As we said, we're kind of halfway through the time frame of achieving that target, which we still think is appropriate.
It will be different fee businesses like certified, loyalty edge, loyalty partner, removable prepaid that we're looking for to get us there. As of 2012, we stood at $1,500,000,000 that was up 15% from the prior year. We recognized $3,000,000,000 an ambitious target, particularly in a sluggish economy. And we have a fair amount of work to do as we go forward. But loyalty partner, reloadable prepaid are two examples of how we're diversifying our base and we expect those to ramp up as we head towards the end of 2014, which is when we're shooting to be at a run rate of 3,000,000,000
dollars That's great. Thanks.
Last question.
The final question today will come from the line of Moshe Orenbuch with Credit Suisse. Please go ahead.
Great. Thanks. Just the comment about the bank stock gain, could you just tell us how much is left in that that you're releasing kind of over time when you said you needed the earnings for marketing purposes? And I've got a follow-up.
So the so we've taken gains I think over the past 6 quarters or so, 7 quarters. The hedge still runs for into next year sometime, probably towards the middle of next year. So I would expect we're going to take gains pretty evenly over the next 6 or 7 quarters.
Got it. All right.
And just on the reserving, I if you kind of take the analysis that you described and look at what the kind of forward 12 months would have been been at the end of this quarter versus at the beginning. You're kind of down 3% or 4% in terms of charge offs. But I guess
just start the sentence again because I didn't catch it. Yes. Sure. No problem. Yes.
Basically, you had
said that with respect to reserving that you kind of look at the forward kind of 12 month losses and if a quarter drops out that had higher losses. And in that exact analysis, I mean taken literally your losses are down 3% or 4%. So kind of the reserve drop we saw is seems reasonable. How do you factor in the idea of growth because you've gone from 14 months of coverage at the current rate to 13, which kind of implies you're not leaving as much room for either growth or any kind of deterioration in the existing rate?
We actually use 12 months looking back, right? So we use historical information to feed our models. That's what's driving the reserve. Right. And the loan growth has nothing to do with it, expected loan growth?
No. We're looking at the behavior of our portfolio, right? And if we have loan growth, we're assuming I guess inherently that, that loan growth will have a similar loss aspect to it as our existing book of business. And in any event, we're not putting reserves on our books today for loans that we put on in the future. So this is what is the reserve you need for the loans that are on your books at this moment.
Got you. Okay. Thanks.
Okay. So thanks everybody for joining the call. Take care.
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and using the AT and T Executive Teleconference Service. You may now disconnect.