Gentlemen, good afternoon. Thank you for standing by, welcome to the American Express first quarter 2013 earnings conference call. At this time, all lines are in listen-only mode. Later, there will be an opportunity for your questions, and instructions will be given at that time. If you should require any assistance today, please press star followed by 0, and an AT&T operator will assist you. 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, 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-K report and in the company's 2012 10-K 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 first quarter 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 Daniel 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&A. With that, let me turn the discussion over to Dan.
Okay, thanks, Rick. I will start on slide two. The first quarter of 2013 summary financial performance. Total revenues came in at $7.9 billion for the first quarter of 2013. That's 4% higher on a reported basis and 5% growth year-over-year on an FX adjusted basis. That's the same FX adjusted revenue growth that we've had for the past two quarters. Pre-tax income came in at $1.9 billion, up 8%. Net income came in at $1.3 billion, up 2%. Net income grew at a slower rate than pre-tax income in the first quarter because in the first quarter of 2012, it included a tax benefit realized on certain foreign tax credits, and we had no such item in the first quarter 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 first quarter of 2012. This is due to the three charges that we took in the fourth quarter of 2012, which was about $600 million. The ROE is calculated using net income for the 12 months ended March 31st, 2013, therefore it includes the fourth quarter of 2012, and that's divided by average shareholder equity. Excluding those three charges in the fourth quarter, adjusted ROE would've been 26%, and you can actually see that calculation in annex six to the slides. Moving to slide three, which is a metric performance. You can see the bill business came in at $224 billion. It grew at 6% on a reported basis, 7% on an FX-adjusted basis.
The same FX-adjusted growth rate that we had in the fourth quarter of 2012, despite the negative impact of having an extra billing day in the first quarter of 2012 because it was a leap year. Cards-in-force grew at 5%, the same as the fourth quarter. Proprietary cards grew at 2%, which is comparable to the growth rate we've seen over the last several quarters. Growth in average base account member spending reflects continued strong Card Member engagement, and Card Member loans continued modest growth, growing at 4%. Moving to slide four. This is bill business growth by segment. As you can see on the chart, total FX-adjusted growth, the red line, in the first quarter of 2013 was 7%, consistent with the fourth quarter of last year.
Each of the business segments is consistent with the fourth quarter of 2012, except for GCS, which is Global Commercial Services, that's the green line. You can see here that the growth rate for that segment has moved down slightly as T&E spending grew at a slower rate than total billings growth rate in the quarter. 2012 was a leap year, so we lost one day of billings year-over-year, which negatively impacts bill business growth rate in the first quarter of this year by about 100 basis points. Going to slide five. This is bill business growth by region. You can see that the U.S., which is the dark blue line with the diamonds, grew at 7%, consistent with the fourth quarter of 2012.
While each of the other regions had their growth rate slow a bit in the first quarter compared to the fourth quarter, in aggregate, total FX-adjusted growth rate of 7% is consistent with last quarter. Now we have slide six. This is the U.S. consumer managed Card Member loans. The bars are the dollar amount of loans. The light blue line is the U.S. consumer loan growth rate. The new line is the green line, and that's the U.S. industry revolve growth in each of the quarters. 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 by looking at the green line.
For example, in the fourth quarter 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 fourth quarter. As you'll see in a minute, credit performance continues to be excellent. Slide seven. 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 a one basis point decline in the discount rate and higher cashback 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 a liability for uncashed TCs in international markets in the first quarter of 2012. It's partially offset by higher gains on our sale of ICBC shares in the first quarter of 2013. Net interest income increased 10%, and this is a combination of 3% increase in average Card Member loans, an increase in the worldwide net interest yield to 9.5% from 9.2% a year ago. A portion of this increase is due to the reversal of a reserve for Card Member reimbursements that we set up in prior periods.
Without it, the increase would've been slightly lower. It's also influenced by a decline in funding costs for our charge card portfolio. Moving to slide eight. 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 million. This reflects a 4% increase in Card Member loans compared to last year. A reserve release of about $100 million in the first quarter of 2013, compared to a reserve release of $200 million in the first quarter of 2012. This had the effect of increasing provision by $100 million. Partially offset by approximately $50 million less in write-offs in the first quarter of 2013 compared to the first quarter of 2012 due to improved credit performance.
This all nets to a $63 million increase in the lending provision. Provision is increasing while credit metrics are stable, and you'll see that over the next several slides. Slide nine is charge card credit performance. If you look at the left charge, this is the U.S. charge write-off rate. 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 Commercial Services net loss ratio, and this also has remained stable. Both of these metrics are at historically low levels. 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.
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 rate, but to achieve the best economic gain when we invest. Next is slide 11. These are the lending reserve coverage ratios. Each of the metrics, whether it's reserves as a percentage of loans, reserves as a percentage of past dues, or the principal months coverage, are lower in the first quarter of 2013 compared to last year, based on the improved credit metrics, and are trending slightly lower than the fourth quarter 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. 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 Card Member 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 first quarter of 2013 compared to the first quarter of 2012. I'll cover this in more detail on a following slide. Card Member services decreased slightly. Total operating expense grew 1%, well within our target of growing total operating expense less than 3% for the next two years. I have a slide on this later as well. The effective tax rate was 32.9% in the first quarter of 2013.
This compares with 29.2% in the first quarter 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. This is marketing and promotion expense. Marketing expense in the first quarter of this year was $621 million. That compares to $631 million in the first quarter of 2012. Down slightly. As you can see from the chart, it's also down slightly for marketing as a percentage of revenue. All the way on the right, you can see the percentage for the first quarter of this year was 7.9%. For last year in the first quarter, it was 8.3%.
We remain committed to our objective of having marketing and promotion expense to approximate 9% of revenues on an annual basis. While in the first quarter 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 objective. 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 Card Member Rewards expense. Rewards expense in the first quarter of this year was $1,520 million. That compares to $1,467 million in the first quarter of 2012, a 4% increase.
Card Member Rewards expense is a combination of rewards on co-brand products and Membership Rewards expense. Within Membership Rewards, it 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 first quarter of 2013 is lower than the first quarter of 2012, as the increase in the ultimate redemption rate in the first quarter of 2013 was less than the increase in the ultimate redemption rate in the first quarter of 2012.
The ultimate redemption rate in the first quarter of 2013 is 94%, the same as it was in the fourth quarter 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 two years. Salaries and employee benefits decreased 1%, reflecting a decrease in employee count of 1,100 people compared to the first quarter 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 first quarter of 2012. 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 zero. We'll go to slide 16. This is expense as a percentage of revenue. Adjusted expense means we're excluding credit provision. On the left side, you can see six years of history, and on the right side, you can see the most recent five quarters. 2010 and 2011 reflect elevated investment levels. In 2012, we committed to migrate this ratio over time back towards historical levels in two ways. First, through revenue growth, and second, our plans to control operating expense while continuing to invest in the business.
In the bars for 2012 and the fourth quarter of 2012, the dotted line in the bar excludes the restructuring charge and Card Member reimbursements in the fourth quarter 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. These are our capital ratios. In the first quarter 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 $1.5 billion. This is a combination of $1.3 billion in net income and $200 million raised from employee plans, offset by capital distributions of $1.1 billion.
This is $800 million in share repurchases and $300 million 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 is slide 18. This is the total payout ratio. This is the percentage of capital generated through net income returned to shareholders through dividends or share repurchases. On the left-hand side, we see the past five years. On the right side, we see the most recent five quarters. In 2012, we returned $4 billion, or 98%, to shareholders. The share repurchase in the first quarter of 2013 was governed by our CCAR submission in January of 2012. 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 $3.2 billion to shareholders during the remainder of this year for a total of $4 billion in 2013, and up to an additional $1 billion in the first quarter of 2014. Next slide is slide 19, 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 $20.9 billion in excess cash compared to funding maturities of $17 billion for next year, thereby meeting our objective. Next is slide 20. 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 $1.1 billion in the quarter, with direct deposits increasing by $2.5 billion, and you can see that on the left side of the chart. We remain committed to increasing direct deposits over time. 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 first quarter 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 remained 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 two 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. EPS growth of 7% outpaced revenue growth, reflecting the progress we have made on controlling operating expense and our strong capital position.
We continued 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 afford a 15% increase in our dividend during the second quarter 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. I am now ready to take your questions.
Ladies and gentlemen on the phone lines, if you wish to ask a question, please press star followed by the one. You will hear a tone indicating that you have been placed in queue. You may remove yourself from queue at any time by pressing the pound key. Once again, for questions, please press star one. 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. If you were to 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 are 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?
As we talked about saying having growth of less than 3%, we really have not factored in exactly where revenue growth is going to come in. I do not think that is a factor in terms of our commitment to keep OpEx growth at less than 3%.
Got it.
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 each of those items could affect EPS in several different scenarios.
Okay. Just in terms of the spend volumes, can you give us a sense of how they progressed during the quarter? At this point, have you seen anything that points to a pullback on the part of consumers from higher tax rates?
Our spending levels on an FX-adjusted basis have been pretty consistent over two quarters. We didn't see any stark trends within the quarter. Whether the change in the tax rate is having any impact is 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.
Okay. As it relates to the ICBC shares, we put a hedge on that in the past and have effectively locked in the gain. As you have seen over the last several quarters, we're taking that over time, the reason we're doing that is to enable higher levels of investment spending to help generate business momentum. It's a locked-in gain we have, and it's 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 Card Member reimbursements, we had come up with an estimate in the fourth quarter. Upon further refinements, we realized that the amount that we're going to reimburse was actually lower than our estimate. It's a relatively small amount, it did have an effect on the increase in the spread.
Okay. As it relates to the ICBC shares. We put a hedge on that in the past and have effectively locked in the gain. 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 spending to help generate business momentum. It's a locked-in gain we have, and it's 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 Card Member reimbursements, we had come up with an estimate in the fourth quarter. Upon further refinements, we realized that the amount that we're going to reimburse was actually lower than our estimate. It's a relatively small amount, but it did have an effect on the increase in the spread.
I didn't want people to think that was a permanent increase. That's really the only reason I spiked it out. 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. We're only going to get a portion of the benefit from that action in 2013. We'll get an additional benefit in 2014, as some people would have been here for a portion of 2013. It's going to come to us very gradually over 2013 and 2014. I would say the first employees to leave were probably in the March timeframe.
There's a limited amount of benefit from that in the first quarter. We'll really see it come to us over the next seven 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 the marketing promotion line. Other portions of that actually take place on the operating expense line. I know even though it was only one question, I hope I got each of the four parts correct.
You there?
Question. 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. You're clearly making progress on reducing expenses. 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. I thought that you had said in the past that 2007 was kind of a good benchmark. That kind of 67% level, and you're at 69% now in Q1 2013, and we see the progress you've made there. 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%?
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 timeframe to be thinking about?
Yeah. I think what we said is we want to move back towards historical levels. 2008 and 2009 are low because it was during the crisis, and 2010 and 2011 are high because we had elevated levels of investment. We don't want to 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 taking place in provision, and what we're aiming for in terms of what we want to free up for investment capacity. All those things work together in terms of the pace and the level that we take this ratio to.
Okay, thanks. Finally, as a follow-up, can you give a little bit more color on what drove some of the weakness in GCS billed business? Should we expect reserve builds for the rest of the year, or should we be looking for more releases? I guess the last part of that is the travel commissions and fees were a little bit lower than what we were expecting. I wondered 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. Let me talk to GCS, corporate services. Really across the board, we've seen lower spending in T&E categories, right? We're seeing better strength outside of the T&E categories. Global Commercial Services is primarily T&E type of spending, that's where you're seeing it come down. It's relatively broad geographically. I think it's just lower T&E type of spending is what's causing them to be lower. That actually ties into travel commissions and fees. If T&E spending is lower, that line is going to be impacted. Worldwide sales were down 3%. That's the main driver. Business travel was down 4%. Consumer was actually up 2%, business travel is much larger than consumer travel. That's what's yielding the lower sales. It's the activity in this particular category. In terms of what's going to happen with reserves.
We've seen them come down for the last couple of years. Actually, in the fourth quarter, we had a slight reserve build. 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, you're going to have a relatively stable provision. It's a relationship of what's kind of falling out of the model and what the new quarter going into the model is. 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.
Our next question comes from the line of Mark DeVries with Barclays. Please go ahead.
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 three basis points, in the subsequent request lowered the buyback request by $1.5 billion. Was it communicated to you that you would not be allowed to return in excess of 100% of earnings? 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?
They never said to us, "You can't be above 100%." I think State Street is, in fact, above 100%. They had said that before our submission. Subsequently. 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 $4.7 billion over the remainder of 2013. A billion in the first quarter of next year. Our revised submission, we were asking for the same $0.23 dividend. We dropped our request from $4.7 billion to $3.2 billion this year and kept the request for the first quarter of next year the same.
When we prepared our initial submission to the Fed under the stress scenario, it was based on our own internal analysis, 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. When the Federal Reserve did its own modeling it generated a conclusion that dropped us below that 5% minimum amount. The good thing is both under our scenarios and their scenarios, even in a stress situation, we have cumulative profits over the nine-quarter period. The Fed's projection of the loan loss provision was $3.1 billion higher than ours. Was actually $4.6 billion higher than the analysis they had done the prior year. In 2012, their estimates and ours were relatively close. Our net estimates for 2013 with similar assumptions, 2013 and 2012 were similar. Okay.
What the Fed has 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. It was that change that caused us to fall below the 5% minimum. As we thought about our revised submission, we didn't want to put in a submission that just eked us barely over the 5%. We said, "Why don't 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. That's what really drove us at the end of the day. 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 6.42%, a healthy amount above the 5%.
That was really our thinking in how we set our resubmitted request.
Okay, got it. 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. I understand you were telling us then you would eventually expect lend to follow spend, and those would converge. Now it's relatively tight. I guess there's only about a 240 basis point difference between your proprietary bill business growth and your loan growth, which is actually a little bit tighter than I would expected given your more spend-based model. Is that relationship in line with what you would've expected, or is it a sign that you're getting more growth from your revolvers than you are from your transactors here?
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 loans 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 fourth quarter, loan growth came closer to billings growth. In the first quarter, 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 dependent on the customers. We give products to customers. We give them the opportunity to revolve if they choose. As you know probably the number of customers that we have that have lending products that are actually transactors, pay off every month, is in the high 20s, right? If those customers choose to revolve, the product's designed to allow them to do it. It'll be driven not by us, but by the choice of the customer. We'll rely on the credit capabilities we have to properly monitor that. 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. It'll really be driven by the behavior of the customer.
Okay, thanks.
Question comes from the line of Donald Fandetti with Citigroup. Please go ahead.
Dan, sort of looking at bill business in the U.S., 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 guess my question is, do you still think you're gaining share? How is growth so stable and good? Is there anything specific in terms of sort of an income breakdown where the super affluent is maybe stronger? Are you just seeing across the board decent numbers?
Well, our customer base is primarily an affluent customer base. 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. We haven't done any analysis to distinguish by income level within our customer base. It's pretty good performance over a broad base of our products that's giving us the stable growth.
Oh, 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. 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. 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. When you add that all up, I don't think that's a very large piece of the total universe. Is it something that'll 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 our merchants and all of our customers.
Thank you.
Now we'll go to line of Kenneth Bruce, representing Bank of America. Please go ahead.
Thank you. Good evening. Firstly, 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. Firstly, you'd mentioned that marketing and 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. One, I just want to make sure that your outlook is for marketing promotion as a percentage of managed revenue to rise. 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.
I want to understand, 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.
What we've said is our objective is for marketing promotion on an annual basis to be about 9%. It's not a forecast, that's our objective. I was just pointing out that last year we had brought marketing as a percentage of revenue down in the first quarter. We've done that again. 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 bring in customers was actually at or a little above what we've had in the past.
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. 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 cards that come in, and we have a pretty good idea how they're going to perform. When it gets to things like Brand advertising, you don't have that nice mathematical calculation.
We know there's a certain amount that you want to do, if you have good products and good brand advertising, that's where you want to be. It's really driven by which investments give us the greatest economic gain that'll drive what geography and what product we put the investments behind.
Just as a follow-up, 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. I'm trying to get a sense as to how much of this may be in reaction to meeting some shorter-term financial objectives versus any change in the overall outlook for investments in your business.
All the 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. It's not like a fixed cost of having employees within the company. 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. There's really no negative impact to the franchise. We couldn't do that longer term. This is just in recognizing in the first quarter, 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. That can change from quarter to quarter, depending on what we're endeavoring to achieve.
Great. Thank you very much.
Next, we'll go to the line of Chris Brendler, representing Stifel. Please go ahead.
Hi. Thanks. Good evening. Dan, can you possibly touch on the lending business one more time? The margin seemed to pop up a little bit in the first quarter. Anything going on there? Is it sustainable? 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 the weakness in other parts of the business, is there any desire to increase your focus on lending? Can you comment at all on your use of teaser rates currently? Thanks.
I'll start with teaser rates. Others are using balance transfers with zero for a certain period of time. That is not a strategy that we are following. We're not growing loans by putting teaser rates out there. The growth in our loans is coming as a result of Card Member s spending, billed 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? We wanted coming out of the crisis to be focused on premium lending, right? That was a change, but that's really a change that we put in place back in 2009, 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.
As a result of that premium lending strategy. We're focused on cards that have higher spending on them. We've also shared the percentage of customers who have a tenure of less than two and a half years with us. Today is a lot less than it was again five years ago, because we're bringing in fewer cards, right?
Right.
That's helpful from a credit perspective as well. I think we put in a number of metrics out there that 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 Member spending is from the [inaudible] is going up. That has been something of a change because of the strategy change that we made a couple years ago. Lending products for creditworthy customers are products that have very good economics associated with it, and we want to grow both charge card and premium lending. 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? Then also-
Oh.
-separately, can you also comment on fraud? I'm starting 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. 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. 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% in the absence of those regulations with the changes we made in our products. We've achieved that and slightly more. On our lending products, we're getting good growth, low credit losses, and good yields. That's a pretty good combination to have. Right? 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. I think that's the benefit of having very good processes to monitor. It's probably one of the benefits of the closed loop. 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. I think gradually within the U.S. we put EMV onto our cards over a number of years.
No big rollout plan for this year then?
It's going to be a very gradual rollout over several years, I would say. No big push to do it in 2013. It's a gradual undertaking for us.
Great. Thank you so much.
Next up on the line of Betsy Graseck with Morgan Stanley. Please go ahead.
Hi. Good evening.
Hi.
A couple of questions. One is just on the travel segment. Travel segment had been relatively weak. I'm thinking about just airline and airline seat capacity. I'm wondering how much that may have impacted your first quarter in terms of bill business .
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&E spend compared to our average. We saw that in all of our products. It's a bigger percentage of corporate services, it had a bigger impact there. It was impacting growth in the quarter.
Okay. 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. Then on slide five, just looking at the different bill 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?
Yeah. 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 blooms again. Let's say that EMEA is slower than the other regions. Until 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. It's really very much going to be driven by the economies in those regions in large part.
Sure. Okay. 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.
Bluebird products or all reloadable products are accepted across our whole network. You can use any of those products, in any location where an American Express product is.
Right
accepted. The FDIC insurance we put on, because 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. 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?
It just went on, it's hard to measure. We are seeing healthy growth in Reloadable Prepaid across that product set.
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 in addition to the merchants that Amex has today?
That's possible. We do have an initiative to expand merchant coverage. Signing up small merchants is a particular initiative within 2013, where we're trying to expand it. That's very much in line. It'll be good for our customers who use Reloadable Prepaid, it'll be good for our customers who use our card as well.
Sure.
Move on to the next question, if we could.
Thanks.
This will be the last question. Oh, two more questions. Two more questions. Okay.
All right. Next we'll go to the line of Brad Ball with Evercore. Please go ahead.
Thanks, Dan. A lot of my questions have been asked. Just you mentioned that you were experiencing higher cashback rewards. Is that a contra-revenue item? What proportion of your customers are using cashback?
Cashback rewards is a contra-revenue. Cashback is a good product. I don't think we actually break out the percentage. It's still a reasonably healthy product within our suite of products.
Is it a product that resembles the products that are in the market, 1% type cashback on all spending, that kind of product?
Well, each product 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. One other. You had mentioned that other revenue were helped by higher Loyalty Partner revenues.
Yes.
Can you give us a sense as to the magnitude of the contribution there and just broadly, how are you tracking to the $3 billion target for fee revenues?
Loyalty Partner is a substantial business. However, it is one business in a very large company. They're performing nicely, very much in line with our expectations. It's one of the spots that we think is going to help us achieve our $3 billion target. As we said, we're kind of halfway through the timeframe of achieving that target, which we still think is appropriate. It will be different fee businesses like Accertify, Loyalty Edge, Loyalty Partner, Reloadable Prepaid, that we're looking for to get us there. As of 2012, we stood at $1.5 billion. That was up 15% from the prior year. We recognize $3 billion's an ambitious target, particularly in a sluggish economy. We have a fair amount of work to do as we go forward. Loyalty Partner, Reloadable Prepaid, are two examples of how we're diversifying our base.
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 billion.
That's great. Thanks.
Last question.
Our 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 you're releasing kind of over time when you said you needed the earnings for marketing purposes? I've got a follow-up.
We've taken gains, I think, over the past six quarters or so, seven quarters. The hedge still runs into next year sometime, probably towards the middle of next year. I would expect we're going to take gains pretty evenly over the next six or seven quarters.
Got it. All right. Just on the reserving, if you take the analysis that you described and look at what the kind of forward 12 months would have been at the end of this quarter versus at the beginning, you're kind of down three or 4% in terms of charge-offs.
Could you start the sentence again because I didn't catch it?
Yeah, sure. No problem. Basically, you had said that with respect to reserving, that you look at the forward 12-month losses and if a quarter drops out that had higher losses. In that exact analysis, taken literally, your losses are down 3 or 4%. With the reserve drop we saw 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 that 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. We use historical information to feed our models. That's what's driving the reserve.
Right. The loan growth has nothing to do with it? Expected loan growth?
No, we're looking at the behavior of our portfolio. If we have loan growth, we're assuming, I guess, inherently that loan growth will have a similar loss aspect to it as our existing book of business. In any event, we're not putting reserves on our books today for loans that we put on in the future. This is, what is the reserve you need for the loans that are on your books at this moment?
Got you. Okay. Thanks.
Okay. 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&T Executive Teleconference Service. You may now disconnect.