Ladies and gentlemen, thank you for standing by and welcome to the American Express Second Quarter 2016 Earnings Call. And as a reminder, this conference is being recorded. I'll now turn the conference over to Toby Willard, Head of Investor Relations. Please go ahead, sir.
Thanks, Kathy. Welcome. We appreciate all of you joining us for today's call. The discussion contains certain forward looking statements about the company's future financial performance and business prospects, which are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward looking statements are set forth within today's presentation slides and in the company's reports on file with the Securities and Exchange Commission.
The discussion today also contains certain non GAAP financial measures. Information relating to comparable GAAP financial measures may be found in the Q2 2016 earnings release and presentation slides as well as the earnings materials for prior periods that may be discussed, all of which are posted on our Web site at ir. Americanexpress.com. We encourage you to review that information in conjunction with today's discussion. Today's discussion will begin with Jeff Campbell, Executive Vice President and Chief Financial Officer, who will review some key points related to the quarter's results through the series of presentation slides.
Once Jeff completes his remarks, we will move to a Q and A session. With that, let me turn the discussion over to Jeff.
Thanks, Toby, and good afternoon, everyone. Earnings per share for our Q2 was $2.10 and as expected included a number of discrete items, creating some complexity in our results. This complexity included a $1,100,000,000 pre tax gain for the sale of the Costco co brand portfolio, a continued slowdown in Costco related volumes leading up to the date of the sale, a $232,000,000 restructuring charge related to our ongoing cost reduction efforts and an elevated level of investment spending. Looking beyond these discrete items, our underlying results for the Q2 were solid and consistent with the outlook we provided at our Investor Day in March for both 2016 2017. Excluding the impact from Costco related volumes and FX, billings and adjusted revenue growth were generally consistent with recent quarters and our Investor Day expectations.
On the expense side, provision and rewards were both modestly better than our expectations as write off rates have remained steady and growth in rewards has been slightly slower than growth in build business. As expected, marketing and promotion expenses continued to reflect an elevated level of investment spending. While operating expenses were also impacted this quarter by the Costco gain and the restructuring charge, underlying expenses remain well controlled. And during the quarter, we continued to use our capital strength to create value for shareholders, including repurchasing $1,700,000,000 of outstanding shares. We also made progress on our key initiatives to accelerate growth, including driving new card acquisitions across our global consumer and commercial portfolios, expanding merchant coverage and driving strong momentum across our lending growth initiatives.
In addition, we continue to make good progress on the steps needed to reduce our cost base by $1,000,000,000 which drove the $232,000,000 restructuring charge. Beginning now with the summary of our financial results on Slide 2. Bill business increased by 3% year over year during Q2 and was up 4% versus the prior year on an FX adjusted basis. Revenues decreased by 1% versus the prior year and increased 1% on an FX adjusted basis. As you know, our agreements with Costco ended on June 19 and we completed the portfolio sale and related transition.
Primarily due to the Costco related impacts, we did see a sequential decline in build business and revenue growth rates versus the Q1 in line with our expectations. Net income was up 37% versus the prior year due primarily to the gain from the Costco portfolio sale, the majority of which fell to the bottom line during the Q2. The gain was offset in part by the restructuring charge and the continuation of the elevated level of spending on growth initiatives that we expect to maintain for all 4 quarters 2016. As I mentioned, we repurchased over $1,700,000,000 of shares during the quarter, which when combined with the $1,100,000,000 we repurchased in Q1 represents our highest ever level of share buybacks over a 2 quarter period. This higher level of share repurchases helped drive a 7% reduction in average share count versus the prior year.
Our net income for the quarter combined with the decline in average shares outstanding drove EPS of $2.10 which was 48% higher than the prior year. Since we have provided our 2016 EPS outlook excluding restructuring charges, I would point out that our EPS adjusted for the $0.16 restructuring charge was 2 point our reported ROE for the 12 months ended June 30 to 26%. Moving now to our performance metrics during Q2, starting with bill business on Slide 3. Worldwide FX adjusted billings growth slowed sequentially to 4% during the quarter, driven by the decline in Costco related volumes. Similar to last quarter, we've provided a trend of adjusted worldwide build business growth rates excluding both Costco co brand volumes at all merchants and non co brand volumes Costco on Slide 4.
Billings growth adjusted for Costco and FX was consistent with the prior quarter at 8%. So I would remind you that Q1 included an extra day for leap year. To put this metric into context, I would also remind you that a portion of the new cards acquired in recent quarters relates to Costco co brand card members who have signed up for a new Amex product. Our efforts around this began early last year and continued until the portfolio sale date. Although the ultimate outcome will play out over time, we are pleased with the demand for our products and the success we've had in putting cards into the hands of former Costco co brand card members, while of course closely following the terms of our agreements with Citi.
We expect to capture at least 20% of the out of store spending of the former Costco co brand card members as a result of our acquisition efforts prior to the sale. This spending is helping to provide a lift in the adjusted billings growth rate shown on Slide 4 and will create a number of lapping dynamics as we move forward. Stepping back, the sale of the Costco co brand portfolio highlights the continuing evolution of the competitive landscape and why we have been adapting our strategy to meet the needs of our customers and accelerate growth. We plan to continue to aggressively pursue the full range of growth opportunities that we discussed at our Investor Day in March. These efforts cut across all our businesses, customer segments and geographies, including our initiatives to grow lending, our push towards parity coverage in the U.
S, our focus on accelerating growth in small business and middle market, continued strong growth outside the U. S. And of course, our efforts to grow our consumer business in the U. S. Where there will be many complex market dynamics in coming quarters.
These efforts all have the common goal of helping to accelerate the company's overall revenue growth, which is what we as a management team are focused on. Going forward, while we will provide the adjusted billings and revenue performance of the company for around former Costco co brand card members. If we turn now to the segment and regional billings performance on Slides 56, clearly, Costco had a significant impact on our U. S. Results as well as on the performance of our USCS and GCS segments.
Given that impact, I'll highlight a few of the other significant drivers of our billings performance during the quarter rather than reviewing the regions and segments individually. Lower gas and airline ticket prices remain headwinds across our U. S. Businesses and had a similar impact to the prior quarter. International volumes continued to be strong with FX adjusted growth of 10% and performance remained relatively consistent across most regions.
To turn to EMEA in particular, given the recent Brexit vote, I would remind you that the EMEA region constituted approximately 10% of our worldwide volumes in Q2. Our UK business constitutes 3% to 4% of worldwide billings and it has been growing in excess of 10% in recent quarters. We did see a noticeable slowdown in this growth in the 1st several days immediately after the Brexit vote, but that growth has since rebounded to its prior strong levels. From an FX perspective, we are relatively hedged naturally against the pound as the UK serves as the headquarters for many of our international operations. Like all companies with European operations, we are monitoring the situation closely to determine whether we will need to make any modifications to our business practices.
At this point, we continue to operate as usual. Turning now to loan performance on Slide 7. Our loans on a GAAP basis were down 13% compared to Q2 2015 reflecting the sales of the Costco and JetBlue cobrand portfolios in the first half of this year. To help understand the underlying trends, on the right side of the slide, we have excluded the Costco and JetBlue portfolios from the prior year and adjusted for FX. Adjusted worldwide loan growth of 13% is slightly higher than the Q1 and continues to outpace the industry.
Now similar to my earlier comments on billings, I would point out that a portion of the loan growth in recent quarters comes as a result of our efforts to have former Costco, Cobra and card members sign up for another Amex product. Taking a step back, we have been pleased by our steady growth in loans for several years now, and we continue to see opportunities to increase our share of lending from both existing customers and high quality prospects without significantly changing the overall risk profile of the company. Turning now to revenue performance on Slide 8. Reported revenues were down 1% but grew by 1% after adjusting for changes in FX. FX adjusted revenue growth reflected increases in underlying billings and loans offset by declines in Costco volumes and a decrease in the calculated discount rate.
I'll provide some additional details on the drivers of discount rate performance and the impact fees versus the prior year fees versus the prior year. The growth was again driven in part by strong performance within our Platinum, Gold and delta portfolios and is a clear indication that our value propositions continue to resonate in the marketplace. Net interest income increased by 2% during the quarter, though growth did slow sequentially versus the Q1, due primarily to the sales of the Costco and JetBlue co brand portfolios as well as the continued drop off in Costco loans prior to the portfolio sale date in As we disclosed previously, the JetBlue co brand portfolio constituted between 1% 2% of our worldwide loan balances. Looking forward and given all the recent uncertainty around forward interest rate expectations, I'd remind you that unlike most other banks, we benefit from lower interest rates and are negatively impacted by rising rates due primarily to the presence of our charge card portfolio. To turn back now to the drivers of our discount rate and revenue performance.
On Slide 9, we are again showing the trends in our reported calculated discount rates. As expected, discount revenue growth during Q2 was impacted by a larger year over year decline in the reported discount rate than in Q1 due to the prior year merchant rebate accrual benefit. On a year to date basis, the reported discount rate is down 6 basis points versus the prior year, which is at the low end of our 6 to 7 basis point expectations from Investor Day. Similar to last quarter, we are also seeing an impact on the discount rate from the continued expansion of Optiflu and merchant negotiations, including those resulting from the regulatory changes in the EU that went into effect late last year. We do expect to see a much smaller drop in the reported discount rate during the second half of the year due to the end of the Costco relationship.
Coming back to the calculated discount rate, it was down 10 basis points versus the prior year during Q2, driven in part by the 6 basis point drop in the reported discount rate. As a reminder, the calculated rate is influenced by contra revenue items, including cash rebates rewards, corporate client incentives and co brand partner payments, as well as by growth in our G and S volumes. Growth in cash rebate rewards continues to make up the majority of the year over year change, driven primarily by our strong cash rebate card acquisitions and billings growth in recent quarters. I'll note that while this is driving increased contra revenues, we are seeing an offset in the rewards expense line, which I'll discuss in a little more detail later in my remarks. Moving now to Slide 10, we've included our estimate of Costco related revenues.
I'll remind you that there is some judgment involved with this estimate. Based on our analysis, we estimate that Costco related revenues declined by approximately 32 percent versus last year during the quarter. Based on this estimate, FX adjusted revenue growth excluding discount rate benefit. On a year to date basis, FX adjusted revenue growth excluding Costco has been about 5%, slightly above our exit rate from 2015. As we discussed at Investor Day, adjusted for the impact of Costco, we remain focused on driving revenue growth above the 4% level that we generated in 2015 during the second half of the year.
Moving now to credit performance on Slide 11. Our lending credit metrics have remained relatively stable on a year to date basis and remain best in class amongst large issuer peers. Overall, our credit performance is slightly better than our expectation at Investor Day that write off rates would begin to trend up a little bit given the seasoning of our loan portfolio. I would note that as part of the portfolio sale, we retained approximately $250,000,000 of loan balances from the Costco Cobrand portfolio, which related primarily to canceled accounts. These accounts are not expected to have a significant impact on provision as they are already reserved for at higher levels.
But they did increase our delinquency rate by about 10 basis points during Q2 and will impact our reported write off rate over the next two quarters. Turning to provision on Slide 12. Total provision decreased by 1% versus Q2 'fifteen as you can see on the left side of the slide. But this result reflects the impact of the held for sale accounting changes. Credit costs for the held for sale portfolios were accounted for through a valuation allowance within operating expenses.
When you exclude those credit costs for the prior year as we do on the right side of the slide, adjusted provision increased by 13%, which was relatively consistent with loan growth and our Q1 performance. Consistent with our Investor Day comments, we expect that both continued growth in loans as well as some modest upward pressure on our write off rates due primarily to the seasoning of loans related to new card on Slide 13. Total expenses decreased by 15% versus the prior year, but were impacted by several discrete items. Excluding the Costco portfolio sale gain and the restructuring charge in the current quarter, adjusted total expenses increased by 1% versus the prior year and continue to reflect an elevated level of investment spending. Looking at the individual expense line, M and P was up 4% versus the prior year as we continue to invest in growth initiatives.
As we've discussed, new card acquisitions has been one of the key areas of focus for our investments and we were pleased that these efforts drove 2,100,000 new card acquisitions across our U. S. Issuing businesses this quarter and 3,000,000 on a worldwide basis. As I mentioned, Costco co brand card members signing up for new cards has been a key driver of the increased acquisitions in recent quarters. We do expect acquisitions to slow somewhat during the second half of the year.
While we had previously expected our total spending on growth initiatives during full year 2016 to be similar to 2015, we now expect to spend at a somewhat higher level. The increased spending will support a range of initiatives across the company, including some of the potential opportunities within the U. S. Marketplace that I mentioned earlier. Our ultimate investment level will of course be driven by the opportunities that we see in the marketplace, but we now anticipate that marketing and promotion expenses during 2016 will be at least $200,000,000 above the 2015 level of $3,100,000,000 Coming back to the other drivers of expense performance, rewards expense decreased by 2% versus the prior year despite there being a 2% year over year increase in proprietary billings.
This trend is being driven by a shift in volumes from products that have their rewards cost classified as an expense item, such as the Costco co brand, to products that have rewards recorded as contra revenue items, such as cash back. Total rewards costs, including cash rebates were up 1% in the current quarter, which is roughly in line with the growth in proprietary billings. While it's a smaller expense line, cost of card member services increased by 16% versus the prior year. This line can be a bit volatile quarter to quarter due to timing issues. But due to increased usage of some of the card member benefits that we recently added, including new airport clubs and airline fee credits, I would expect it to be up around 10% for the full year.
Operating expenses were down 31% versus the prior year, but were impacted by both the portfolio sale gain and the restructuring charge. Excluding these items, adjusted operating expenses were flat year over year, reflecting our strong focus on controlling costs. We feel good about our progress on our effort to reduce our cost base by $1,000,000,000 on a run rate basis by the end of 2017. As a continuing part of that effort, we do expect to incur some additional restructuring charges in future quarters as we continue to roll out our plans, though I expect they will be smaller than what we incurred this quarter. We also anticipate that a portion of our increased investment spending will occur in operating expenses over the balance of 2016.
Turning last to capital on Slide 14. We continue to be pleased with our ability to return excess capital to our shareholders. During the quarter, we finished fully utilizing our 20 $600,000,000 of shares over the past 5 quarters, including $1,700,000,000 in the 2nd quarter. As you recall, our 2015 CCAR submission included a higher level of net income than our actual performance, since it assumed that our relationship with Costco would continue. However, given the performance of our underlying business and the benefits from the Costco portfolio sale, we were still able to fully utilize our CCAR 20 15 capacity while maintaining our strong capital ratios.
We were also pleased with the 2016 CCAR results, which were released last month, as the Federal Reserve did not object to our CCAR 2016 plan to return up to $4,400,000,000 in the form of dividends and share repurchases over the next 4 quarters. These potential payouts are aligned with our Investor Day expectations and will enable us to provide a steady return of capital to our shareholders. As you are all well aware, CCAR continues to be a very complex process. In general, capital plans are governed by the Fed's modeling, which can have very different results from a bank's own expectations. For example, in the current year, the Fed assumed that our risk weighted assets would increase in a severe stress scenario despite the loss of the Costco co brand portfolio, which is very different from our own projections.
I'd also highlight that we have the highest ROE amongst all the bank holding companies that go through the CCAR process. In combination with our high payout ratio, this results in a large reduction in capital levels over the CCAR period in the severely adverse scenario. For example, if we pay out 100% of base case net income, our capital ratios would be reduced by well over 50% in a severe stress scenario. Thinking more broadly, the 2016 CCAR results once again highlighted the strength of our business model and balance sheet as we generated the highest net income amongst all bank holding companies in a severe stress scenario and our capital ratios before the impact of capital actions were also in the top quartile. So let me now conclude by stepping away from some of the complexity I just took you through and going back to the key themes in our results and our outlook for the balance of the year.
During the quarter, we made progress on our key initiatives to accelerate growth, including driving new card acquisitions across our global consumer and commercial portfolios, expanding merchant coverage, driving momentum on our lending growth initiatives. We also remain focused on our cost reduction efforts and continue to leverage our strong capital position to create value for our shareholders. During the past 6 months, we have said that our full year 2016 outlook was for adjusted EPS to be between $5.40 $5.70 We now believe that full year 2016 EPS will be at the high end of this range as our year to date performance has been better than our original expectations, driven largely by the favorability in our credit and expense performance. As a reminder, this outlook excludes the impact of restructuring charges or other contingencies. Given that we're only halfway through 2016, our outlook for full year 2017 EPS to be at least $5.60 remains unchanged.
We continue to anticipate that earnings will be lower during the second half of twenty sixteen due to the end of our relationship with Cosmo and the fact that we now expect to invest at higher levels during 2016 than we did in 2015. As we have discussed several times, there is a bit more uncertainty around our second half twenty sixteen assumptions. While we believe that we have taken a balanced approach, we will have an updated view on the complex dynamics within the U. S. Consumer marketplace as we progress through the balance of the year.
And of course, we will update our guidance at the end of Q3. We're focused on our plan to accelerate revenue growth, optimize investments and substantially reduce our costs. We continue to believe that the strength of our business model will allow us to drive profitable growth. With that, I'll turn it back to Toby, and then we'll take your questions.
Thanks, Jeff. As a reminder, our ongoing goal is to provide a greater opportunity for more analysts to ask a question during the session. With that, the operator will now open up the line for questions. Kathy?
And our first question will come from Don Fandetti with Citigroup. Go ahead please.
Yes, Jeff. Can you talk a little bit, I mean, we had a benefit from the new AmEx cards for the former Costco co brand cardholders. Is a lot of that in the run rate or should we see a continued incremental benefit there? And then also can you elaborate on what you mean by complex dynamics in the U. S.
Card market in H2? So I think the point I'm trying to make, Don, is we were pleased by our efforts over the last 1.5 years to put other Amex products into the hands of the former Costco co brand card members. And that's why we feel comfortable with my statement that we'd expect to track to retaining over 20% of the out of store spending of those card members. So I would say that in the run rate for the most part in the Q2. It continued to build even as we went through the Q2 and should stay in the run rate subject to the complex dynamics, which I'll come to in a second.
And I mentioned that 20% in the context of the disclosure we're making about our billings and revenue and for that matter loan growth rates where we pull Costco out of the prior year base. Some of the growth does come from the efforts and the success we've had at putting other Amex products in the hands of the Costco over end card members. Complex dynamics, when you look at the back half of twenty sixteen, it's a certainly not news to anyone on this call, it's a very competitive environment right now. And you have many changes that are wrought by the switch from Amex to city of the Costco co brand. You have many other competitors who have launched either new marketing efforts or new products that perhaps are targeted at some of the same types of card members.
In our case, we have a range of marketing efforts targeted at lots of consumers and lots of different segments of the consumer, worlds in the U. S, including the fact that the former Costco co brand card members who just dropped into our broader prospect pool at this time. You'll also for us have some complex dynamics around geographies and certain geographies where the Costco co brand card members, for example, might have been a more significant part of total AmEx cardholders. So all of those dynamics are complex. And then if you think about the broader external environment, you have tremendous uncertainty around interest rates.
I would point out to you, we as we thought about this call, originally thought I might want to talk about the potential of lower rates. When you think about the last 24 hours, you have the Fed sort of back talking about higher rates, we'll have to see. Certainly, all of the election dynamics here in the U. S. And for that matter, the dynamics in the U.
K. And the EU probably create more uncertainty than we're used to. So I could go on, but I think you probably get the point that there's a lot of different changes going on, but just make us a little bit cautious. So we've tried to be very balanced in the outlook that we've given you for the back half of 2016 and what that means for 2017, but we'll have to see where things really come out. Thanks.
Thank you. Our next question is from Betty Graseck with Morgan Stanley. Go ahead please.
Hi, good evening. Just wanted to touch base on the loan growth that you highlight on Slide 7. Obviously, it's on the ex Costco basis, but increasing accelerating growth rate over the last several quarters. Could you just give us a sense as to key drivers there and how much of this is new account acquisition versus wallet share increase and other key drivers and what the kind of trajectory is that you're anticipating?
Thanks. So I'm just making a few notes here, Betsy, so I don't forget any parts of the question. I think the first thing that's important to think about is we now for several years have been steadily growing loans at above industry rates and we've done that while maintaining best in class credit metrics and without seeing any significant increase in the credit metrics or changes in our overall risk profile. So this is a continuation of a trend. And that loan growth is coming from many different areas.
We have a nice loan portfolio that's been growing steadily in our U. S. Small business franchise open. We have a range of consumer products targeted at attracting more of our customers' borrowing behavior. And for us, because traditionally and we talked a lot about this at our Investor Day in March, because traditionally over the last probably 5, 6 years, we have probably underinvested in terms of our efforts to attract the borrowing behaviors of our own card members, both consumer and small business, as well as underinvested in terms of targeting prospects who from a credit perspective look just like our customers, but are a little bit more revolving centric.
As we have turned our efforts more to those kinds of customers, this is not trying to get more lending growth out of our existing customers, it's or excuse me, out of customers where we were already tapping into our fair share of their lending behaviors. It's really how do we tune our efforts to just attract an equivalent lending share to what we already have our customers spend share. So all of those efforts are what have led to the very steady performance you've seen. Now, I think it is fair to say this quarter last quarter you're getting a little bit of an incremental boost that will fade in the next couple of quarters as we have moved some of the lending behaviors that were being done on the Costco co brand cards onto other Amex products. And since you're looking at an adjusted number there where we pulled all the Costco amount out of the base, that increases that 13% by a little bit.
That will fade a little bit, but the broader trajectory, which we feel is the
very thoughtful outcome of several years of steady
effort in this area, outcome will continue for the foreseeable future.
Thank you. Our next question will come from Chris Donat with Sandler O'Neill. Go ahead please.
Good afternoon. Thanks for taking my question. Wanted to see if we could get a little more quantification around the elevated expense as you expect for the remainder of this year and what they mean for 2017? And I'm asking this because if we look at the implied EPS for the back half of the year, it looks like it's less than $1 a quarter. And then it seems like it would be a big leap to get from that to say $1.40 a quarter, which is what you need to do to do $5.60 a share in 2017.
So just on the elevated expense piece, I know there's a lot of other moving pieces there, but can you help us understand what's kind of elevated this year and might drop off next year?
Yes, that's a really good and I think import question, Chris. So a couple of comments. The investment piece to start with, as you point out, we have made a decision that as we look at all of the complex market dynamics, which I just talked about in response to the last question, We're going to increase somewhat in the second half of the year and increase for full year 2016 over 2015 our overall level of Those investments take many forms. Some of them are pure marketing and acquisition investments. Some of them are technology investments that are about building capabilities and infrastructure.
All of them are targeted at a mixture of very short term, medium term and long term benefits. And as we look at our performance in the first half of the year, where we've done a little bit better on expenses and provision than we expected and revenues are tracking as we expected, we felt very comfortable even going to the higher end of our guidance range in increasing the investments a little bit. Our view of 2017 though has changed. And then in 2017, our expectation would be that elevated level absolutely falls away. And particularly some of the capability building that we're funding here are projects that very naturally will fall away.
A question I get a lot is, see, how can you consider a more significant decrease in this investment level without thinking it's going to impact your revenue growth? Well, part of the reason is it's things like I just described where these are projects that we very discreetly decided to fund, they will naturally fall away. The other thing to keep in mind is that we feel we are making very good progress on our efforts to pull $1,000,000,000 out of the cost base on a run rate basis by the end of 2017. As we have said all along, sometimes to get to those ultimate positive outcomes, you actually have to spend some money, right? If you're automating things for a little while, you have to spend the money on automation before you can put the automation into place and take the costs up.
If you're right shoring things, you often have to have duplicate teams in place for a little while until everything is running smoothly. In the back half of twenty sixteen, you have some of those added costs actually working against us. We are very comfortable though with the tracked and the line of sight we have into 2017 and feel very good about the progress we're making on costs. So that will be a significant benefit in 2017 versus what you will see in the back half of twenty sixteen. So those are the components that go into what we mean when we say we're at an elevated level of investment is going to elevate that a little bit more.
Maybe that helps you a little bit think about the big moving pieces that help you get from the back half of twenty sixteen to the EPS guidance we've given you for 2017, which as we sit here today, I remain very comfortable with. Next question, operator?
Thank you. That will come from Eric Wasserstrom with Guggenheim. Please go ahead.
Thanks very much. Jeff, maybe just to understand the you made several comments about trends, but can you just help me think through how I should anticipate build business growth trends across the three business lines for the back half?
Well, let me focus on the global consumer versus the global B2B segment. For the most part, I would think of GMS, Eric, is just reflecting the entire company. And I think the nuances to think about here and I'll talk about all of these numbers taking Costco out of the base because it does affect both segments. In the consumer segment, you have had the biggest benefit from the phenomenon I described about the success we've had putting other Amex products into the hands of Costco co brand card members. As we finish lapping that, you will actually see some just due to that effect alone modest decline in the U.
S. Consumer rate. That's something we anticipate and is consistent with all the plans we've laid out. Going against that, you have the efforts we have across a broad range of products to drive more billings through a range of efforts in the consumer segment. In the B2B segment, you have continued as we talked about initially at Investor Day to have the tail of a couple of different segments of the market.
We are seeing really nice growth in the small business and middle market area. And in fact, I would expect to see some acceleration in the middle market area in particular as we get into the back half of the year. The wild card is in the largest corporate clients where as we pointed out at Investor Day that is not particularly a growth segment for us. And that continues to be a tough segment. I don't think there's many of the Fortune 500 who are going on calls like we're having right now and talking about growing their T and E budgets.
And for us in that large segment, we predominantly still have a T and E franchise. So we'll have to see how all those things play out. And of course, you have the whole range of external factors that I talked about earlier that are a little harder to handicap, but those are a couple of discrete things that I would watch for.
Thanks, Jeff. And as I recall, did you disclose that about 80% of the Costco volume was outside the store, is that figure about right?
So, on the Costco co brand spending, 70% of that spending was outside the store.
70%.
Correct. Okay. Thank you.
Thank you. We'll go next to Moshe Orenbuch with Credit Suisse. Please go ahead.
Great. Thanks. Jeff, I wonder if you could kind of come back a little on talking about the things that you're going to be doing actively in terms of expenses for 'seventeen. I mean, you talked about $1,000,000,000 worth of savings kind of run rated by the end of 'seventeen. But now it sounds like there's going to be some amount of spending in 2016 that won't be there.
And can you talk a little bit about that? And maybe you talked about those projects, but how you would think about in terms of obviously marketing to the existing Costco customers is probably somewhat easier. You already know who they are and where they live. Like how do you think about marketing in terms of that for 2017?
So kind of two questions there Moshe. Let me take them maybe in reverse order. On marketing to Costco co brand card members, I would remind you that we sold the portfolio and it's very different from our situation in Canada. So we no longer have any access or for that matter knowledge from a marketing perspective of the former Costco co brand card members unless they happen to have another Amex card. Now those people drop anonymously into the broader U.
S. Prospect pool that we constantly as our competitors are trying to target with attractive offers, attractive products, but we can absolutely not do any direct marketing to those people at this point. On the expense side, the way I think about it is that there's a couple of big components of the expenses. So people costs are the largest same components and the now three $15,000,000 or so of restructuring charges that we've taken will get at a big chunk of the people savings. When you look at those restructuring charges for the most part, those are for exits that occur over the course of 2016 with the overwhelming majority of them done by the end of 2016, but you don't necessarily really start seeing the savings until 2017.
17. You have other components of costs, so there's a big professional fees component where we think we can get some savings, one of which is in the area of application development where we do a lot of outsourced work. Part of the elevated spending or elevated investment spending that we've been talking about. This is a lot of technological or technology development work that we think is going to be really valuable long term. That's the kind of stuff where we can actually dial it up even as we go through the back half of twenty sixteen and very abruptly dial it down in 2017.
Then you have a variety of other fees, renegotiated contracts, travel, all those kinds of things that constitute the remainder of the $1,000,000,000 So while there are some savings that will begin to creep into the back half of twenty seventeen, mostly on the people side 2016, excuse me, To a great extent, those are offset by some of the other costs I talked about earlier, where we sometimes have to spend money to position ourselves to save it in 2017. So the net of all that is I feel very good about the progress we're making on the 2017 target and we're working real hard to see just how much of it we can get quickly and early in 2017 and we'll obviously need to give you updates on that in future quarters, but I feel really good about the progress.
Okay, thanks.
Thank you. Our next question is from Chris Brendler with Stifel. Please go ahead.
Hi, thanks. Good evening. I like to ask you a question about the rewards competition, both in the U. S. And the U.
K. The U. S. Seems to be getting more competitive, but I don't think Membership Rewards is going through any sort of revamp. It seems like you're sticking with your current strategy and letting customers who are reward sensitive just to try it if necessary.
But then in the U. K, you've had interchange reductions and I think a lot of competitors have pulled back on rewards. I was wondering if you're picking up share in the U. K, the 10% growth you mentioned because of the lack of rewards competition there? Thank you.
2 good questions. Let me take them in reverse, Chris. So the U. K, it is true that since the EU interchange regulations came into effect in early December, you have seen a couple of competitors pull back on some rewards, although it's not universal by any stretch of the imagination. What I would say is, while that may help us over time, the really good growth rates we're seeing in the UK have actually been there for quite some time and predate any of those changes.
So look, we always say that regulation in our industry we think is generally not a good thing, not consumer friendly, necessarily produce the best outcome and regulation around interchange will not directly impacting us, does have an impact that is on balance not a good thing. All that said, it does at times great opportunities. And the flexibility of our business model gives us a number of levers to pull to try to take advantage of different environments and different sets of regulation. So So we'll have to see over time. We feel good about our value proposition in the UK.
We feel really good about the growth rates that we've had for quite some time. And if we could even accelerate those further, that would be a tremendous thing. In terms of the U. S, certainly it's a competitive rewards environment. It has been for quite some time.
I would have to say I can't say that we've seen anything in the last 90 days that changes our view from what it would have been 90 days ago. And our broader strategy to compete in that environment, as you point out, Chris, is to have a wide range of value propositions because everybody's different, everybody has something different they value. That's why we co brand products, we have cash back products, we have membership reward products, we have fee based products, we have no fee based products, etcetera, etcetera. And we think that kind of targeting allows us to deliver the most value to each customer segment in the most efficient way from a shareholder perspective. Now I would have to say it, from our perspective, we are to have people trading out of membership rewards.
We fight for the loyalty and business and try to earn the business of every one of our card members on an ongoing basis. And the breadth of the membership rewards program, our ability to integrate it with other merchants and other offers we think allows us to do some really innovative and unparalleled things that are very difficult for others to offer and match and we think it's part of why we continue to see good growth in our membership rewards product and we're able to do it while still being able to manage the costs in a reasonable way.
Okay. Thanks so much, Jeff.
Thank you. And next we'll have Jason Harvos with Wells Fargo. Please go ahead.
Hey, guys. Thanks for taking the question. So just wanted to get your outlook for credit, Specifically, as I look at the net write off ratio this quarter, looks like you benefited a little bit from the sale of the Costco portfolio. So I think stripping that out, you're closer to 1.8%. Is that a reasonable run rate as we think about the second half?
And then just to expand on that, I think at the Investor Day, you said you expected a bit of normalization probably in the 10 basis point to 15 basis point range over the next year or so. Is that
still realistic?
Well, we may need to take out I'm actually a little puzzled by the math you're doing, Jason. So on balance, the sale of the Costco portfolio didn't have a material impact on our metrics other than the phenomenon I talked about in my prepared remarks where because we retained a small amount $250,000,000 to $60,000,000 of the canceled accounts and those are heavily reserved. They impacted the delinquency rate by about 10 basis points this quarter and they'll have a modest probably similarly sized impact on the write off rate in the next couple quarters. Beyond that, what we laid out at our Investor Day was an expectation that you would see just because we're growing loans a lot, there's some seasoning of the portfolio. We expect that you would see some modest uptick in net write off rates and then we painted some longer term scenarios where we talked about maybe write off rates going up 10, 20 basis points a year.
We haven't seen that yet. The legacy parts of our portfolios in most cases continue to actually strengthen. And the loan growth that we've been doing, we've been doing while still maintaining a very similar credit profile to what we've had for years. If you look at our new card acquisitions this quarter, the FICO has averaged over 750 as they have for many, many quarters in the past. There's not really a material change there.
So look, I think we all are in the camp of saying credit rates will go up. They have to go up at some point. We're at seasonal lows. But we feel pretty good about the trajectory right now.
Okay, thanks.
Thank you. We have a question from Craig Maurer with Autonomous. Please go ahead.
Yes. Hi. Thanks for taking the question. Regarding the new loans that you're putting on, the yield was lower overall than what we thought it would be. So could you talk about how aggressively you're using things like deferred interest promotions and perhaps balance transfers to bring that on?
And what type of effect that could have on the NIM over the next few years?
Yes, it's a good question, Craig. So a couple of things I'd say. As you I don't know exactly what calculation you're doing, but it is true that if you look at the competitive environment right now, like others on a lot of our lending products, there is some kind of introductory period where there is an interest free period. When you suddenly, as you saw this quarter, lop off and affect all of the Costco loans, which were mature loans not in that intro period, the percentage of the remaining portfolio that is in that introductory period all of a sudden pops up compared to the combined portfolio before. Nothing has actually changed in terms of the dollars.
I think you see the proportion change. And so you do see a little bit of that effect this quarter. One of the complex lapping dynamics that I was referring to earlier in my prepared remarks is as we go through the next couple of quarters, the lapping impact of all of some of the offers and the customer behavior around the new Amex cards we put in the hands of the Costco co brand card members, well amongst other things caused billings to trend down a little bit because we've had this surge adjusted billings to trend down a little bit. We've had this surge as we brought those card members on. It will also though have a very positive effect on net interest income and on revenue in a few quarters as we get majority of those people past those introductory periods.
So when you think very long term, what I would say is that the mix overall mix that we're offering to new and existing card members from an interest rate perspective is not materially changing. This mix effect that I just described, we will work through in the next couple of quarters as we finish lapping all the effects of the last 5 or so quarters of some unusual dynamics around Costco. And once you're through all that, I wouldn't expect to see a material change from the prior trends.
Thank you.
Thank you. Our next question comes from Sanjay Sankrani with KBW Research. Please go ahead.
Thank you. I guess when we look at the relatively strong underlying growth ex Costco, how much of that is being driven by old accounts versus new? I guess when we think about some of these investments that you're making, you've talked about how it takes time for them to kind of spool to get you the growth you expect. Maybe you could just give us an outline of what today's investments will bring in the future and what the timeline would be based on your experience? Thanks.
That's a good and very complex question Sanjay, because of course the dynamics are a little different whether you're talking about a consumer lend card, a consumer charge card and open small business card or new corporate card relationships. But let me maybe make just a few comments. Certainly, our growth has been helped by the really nice progress we've made in the last 5 quarters on new card acquisitions. That growth manifests itself today, particularly in the billings line. And then as the next couple of quarters roll by, that growth will increasingly move from the billings line into the loan balance and net interest income line as balance is built for those who are revolvers.
And it will grow into the revenue line, as we lap various introductory incentives, etcetera. Now that's a general statement is part of why we have said for some time, although I guess I haven't repeated it today now that I think about it, that as we get into the last quarter of 2016 in particular, we expect to see some sequential increase in revenue growth rates. And part of the complex lapping dynamics I was talking about earlier is, may see a little bit of sequential weakening in the billings rate adjusted for Costco, but revenue will be going in the other direction as we get into the end of this year for all the reasons that you're asking about. So the other comment I would make is one of the things that Doug Buckminster in particular talked about at Investor Day is the fact that we have seen some modest share of losses amongst our existing customers. And one of our key initiatives in the consumer business is around a range of things we're doing to try to change that trend.
I feel really good about the things we're doing. What I would say is, it's a little early in the Q2 to say that they're actually having much of a material impact yet. I would say the Q2 is more impacted by what we've been doing around new card acquisitions. What I conclude from that is though, because I do feel good about those efforts is I think that is something that you will see the fruits of as we get into the coming quarters.
Thank you. We'll go next to David Togut with Evercore ISI. Go ahead please.
Thank you very much.
What impact do you expect to see on future merchant discount rates from the recent appeals court decision to overturn the merchant interchange litigation settlement between Visa and Mastercard and several million U. S. Merchants. And is that factored into your current guidance?
I would say we factor into our current guidance everything we know about a wide range of internal and external factors including the legal environment. I would remind you that is a case that we were not a party to. We don't see it as having a direct impact on our pending appellate case with the DOJ, which we have are still awaiting a verdict on and we'll have to see where it comes out. And look, we every day have to go out and negotiate with merchants and demonstrate the value we're providing and we've been doing that for many, many years in the face of all kinds of changes in the environment. In the grand scheme of things, I don't think that particular legal judgment has a significant or material impact on those ongoing negotiations.
Just as a quick follow-up to the extent the default interchange rate is reduced as part of the new settlement, wouldn't you expect that to have an impact on your merchant discount rates going forward?
Well, I let me be careful because I don't want to get in the middle of trying to opine on someone else's legal settlement. But I think we're always very clear and Europe is probably the best example, David, that when you have some kind of regulatory or other external intervention that drives down interchange, even though we don't we're not involved with interchange that generally puts downward pressure on us, as merchants say, well, you need to remain competitive. So Europe being a good example where in most of those markets, we have long had a premium, significant premium to the interchange rates. As interchange rates come down, we tend to keep our premium, but the premium sort of stays the same and we move down as interchange moves down. So anything that results in a sharp downward movement of interchange is generally going to have a tough or a follow on impact on us.
Thank you.
Thank you. Our next question is from Arren Cyganovich with D. A. Davidson. Please go ahead.
Thanks. I was just wondering if you could provide a little bit more granularity on your comments about the discount rate being less of a decline in the second half. I think you talked about it on a reported basis. How does that compare on a calculated basis?
Well, so the one big change between the first half and the second half is just Costco is no longer a merchant. And so we had a significant chunk, 6, 7, well, I guess we haven't given the 2nd quarter number. We had a significant chunk of our volume that was running through a merchant with a much, much, much, much lower than normal discount rate. All of a sudden, all that volume goes away and just the sheer math of it pops the average discount rate up. That's really the only big change between the first half and the second half.
And if you go back to our March Investor Day slides and you look at Andre Williams' presentation, he has a nice summary slide that kind of lays out the components of that, but that's the one big change. Thanks.
Thank you. We now have a question from Bob Napoli with William Blair Investments. Go ahead please.
Thank you. Just on 2017, again if you could, obviously, I mean American Express stock is way below its historical valuation. I guess the S and P is at 18 times. Historically, you've been around the S and P. Today, you're closer to 11 times.
And I guess to regain your multiple and be curious if you agree or disagree that American Express had historically you need to deliver 2017 earnings in a quality way and give a good view to growth in 2018. It sounds like you're really confident on the expense side. I was wondering if what's your confidence level and what you're expecting on that revenue side into 'seventeen and how you think of the medium term jumping off into 2018 and onward?
Well, it's a good question, Bob. We are laser focused as a management team on getting back to the kind of consistent and fairly simple financial performance and financial model that drove this company for years. We are in an industry and with a business model that should allow us to get very consistent revenue growth. We have a heavily fixed cost nature, which allows us to get steady operating expense leverage on that and we're not very capital intensive. So we get a little bit of a capital kicker on top of that.
We feel really good and I think we very consistently demonstrated that we can make real good progress on running the cost structure of the company more efficiently and we're very committed to the use of the balance sheet. I think it's fair to say that it was a competitive economic regulatory environment, what it's been, that is what has been a larger challenge for us like many in the industry. Now, as investors look at our results right now, there is a lot of complexity because of the evolution we're going through with Costco and we're trying to sort through that complexity, do all the various adjustments and try to help do all the various adjustments and try to help people understand the underlying trends. I would point out though that if you look at the first half 2016, you strip away Costco, you're at about 5% revenue growth, that's versus 4 percent last year. That 5% is benefiting a little bit from the Costco co brand members who we put other Amex products in the hands of.
That's our jumping off point and what we are very focused on a management team, what we really tried to articulate at our Investor Day in March is our goal, our belief is we can get that number up. In particular, our target is to get it to the 6% scenario that we showed you at Investor Day. And we have a wide range of initiatives across our consumer business, across our B2B business, in terms of how we're working with merchants, wide range of initiatives targeted at getting us there. I think what we are working hard to be able to demonstrate to you and to all of our shareholders is that we are getting real traction on those initiatives and you can see it in our results as we get into 2017 because I think we fully appreciate that this is not just about the EPS we put up in 2017, but it's about the way we get that EPS and the momentum it gives us as you go beyond 2017 into 2018. So that's why we have a very simple mantra at the company right now for over 50,000 people our priorities are accelerating revenue growth, while we reset the cost base, while we'd be really focused about what we do with our investment dollars.
So in many ways, Bob, that's a great last question. And I think we're probably going to stop there.
Yes. Thank you, Kathy. We're going to cut it off there.
Okay. Thank you. Do you have any closing remarks?
Sure. Just want to thank everybody for joining the call and for your continued interest in America Express. Thanks very much.
Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and fusing AT and T Executive Teleconference. You may
now disconnect.