American Express Co ($AXP) Q1 2025 Earnings Call

Ladies and gentlemen, thank you for standing by. Welcome to the American Express Q1 2025 earnings call. At this time, all participants are on a listen-only mode. Later, we will conduct a question-and-answer session. If you wish to ask a question, please press star then one on your touch-tone phone. You will hear a tone indicating that you have been placed in queue. You may remove yourself from the queue at any time by pressing star then two. If you are using a speakerphone, please pick up the handset before pressing the numbers. Should you require assistance during the call, please press star then zero. As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Head of Investor Relations, Mr. Kartik Ramachandran. Thank you. Please go ahead.

Thank you, Donna, and thank you all for joining today's call. As a reminder, before we begin, today's discussion contains forward-looking statements about the company's future business and financial performance. These are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these statements are included in today's presentation slides and in our reports on file with the SEC. The discussion today also contains non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials as well as the earnings materials for the prior periods we discuss. All of these are posted on our website at ir.americanexpress.com. We'll begin today with Steve Squeri, Chairman and CEO, who will start with some remarks about the company's progress and results. And then Christophe Le Caillec, Chief Financial Officer, will provide a more detailed review of our financial performance. After that, we'll move to a Q&A session on the results with both Steve and Christophe. With that, let me turn it over to Steve.

Thank you, Steve, and good morning, everyone. In the first quarter, we generated 8% FX-adjusted revenue growth, with 9% excluding the impact of the leap year, and earnings per share of $3.64. These results are tracking in line with the guidance we gave for the full year. Key business indicators such as spend, retention, credit performance, and demand for our premium products continue to be strong and stable in the quarter. While the level of macroeconomic uncertainty has increased, the activity that we see across our customer base is consistent with, and in many cases better than what we saw in 2024. Turning to bill business performance, starting on slide three. I'd remind you that the growth over from leap year in 2024 drove a 1% point drag on year-over-year growth rates across segments and spend categories. As we look at spend trends over the next few slides, I'll speak to bill business growth rates that are adjusted for leap year, as well as FX. Total bill business was up at 7.5% year-over-year. This growth is around a percentage point higher than what we saw for the full year 2024. Goods and services spending sustained the uptick we saw in Q4 of last year, continuing to grow at a faster pace than what we saw in 2024. And T&E grew in line with the steady levels we saw for most of last year, reflecting continued strength in restaurant and lodging spending. We did see a deceleration in airline spending relative to 2024 trends. Although spending on front of cabin tickets remained strong, up around 11% in the quarter. As we break down spend trends across our business over the next few slides, there are a few key points I want to highlight. We continued to see solid growth across our affluent US consumer base. Spend was up 8%. Millennial and Gen Z customers once again drove our highest bill business growth within this segment. Commercial services spend was up 3% versus last year, consistent with the trends we saw in 2024. US SME spending at wholesale merchants saw a modest acceleration in growth over the quarter, possibly reflecting higher purchases in advance of potential price increases. International card services spend was up 14%. The strong growth was seen across geographies, with each of our top five markets growing by double digits. And we continued to see strong demand for and engagement with our products. Turning to lending performance on slide seven, loans and card member receivables increased 7% year-over-year on an FX-adjusted basis. Our premium products continued to be the primary driver of that growth with our pay over time and co-brand portfolios driving around 80% of growth in card member revolving loans in the first quarter. These products tend to attract high creditworthy customers supporting our model of growing lending while maintaining best-in-class credit performance. Turning to slides eight and nine, our credit performance continues to be very strong. Both delinquency and write-off rates were below pre-pandemic levels and flat to the prior year. The profile of the portfolio has strengthened over the past few years. Looking at our recent acquisitions, the delinquency rate of low tenure customers, defined as those with 24 months or less of tenure, is about 30% lower than 2019 levels for US consumer card members. This quarter, we had about $1.2 billion of provision expense. This included a small reserve release mostly reflecting the strong quality of the portfolio and the macroeconomic outlook as of quarter end. Turning next to revenue on slide 10. Total revenues were up 8% year-over-year on an FX adjusted basis or 9% excluding leap year. Before we discuss this quarter's trends, I'd remind you that the strengthening of the US dollar that occurred throughout last year continues to be a headwind to reported revenue growth. Although a bit less than we anticipated earlier in the quarter. Also, starting this quarter, we consolidated process revenue within service fees and other revenue. Starting with discount revenue, our largest revenue line was up 5% year-over-year FX adjusted and is mostly driven by the spend trends I discussed earlier. Net card fees were at record levels and increased 20% FX adjusted, as shown on slide 12, reflecting our 27th consecutive quarter of double-digit card fee growth. And we saw strong demand for our products as we acquired 3.4 million new cards in the quarter. A key driver of our strong card fee growth over the past few years has been the acquisition of new card members on fee-paying products, which accounted for around 70% of new accounts in the quarter. Another important contributor has been our ability to attract customers on higher fee products over time. Over the past 3 years, the average card fee per new account acquired has increased by around 40%, reflecting strong demand for our premium products, and our success in pricing for the increased value we provide customers as we refresh our products. Turning to slide 13, net interest income increased 11% on an FX adjusted basis, growing slightly faster than loans and receivables as we saw increases in net yield versus last year. Turning now to expense performance on slide 15. The VCE to revenue ratio came in at 43% this quarter. Rewards expense grew 16% year over year. As a reminder, this quarter we are growing over the benefit we saw in Q1 of last year from changes to our URR model. In addition, as we mentioned last quarter, some small changes we made to the program that are good for both customers and our overall economics are driving a small increase in the URR in the short term. Now that we have lapped the impact from the URR model change last year, we expect rewards to grow more in line with the historical trend for the remainder of this year. As you can see, marketing and OpEx continue to be key sources of expense leverage for our business. And our flexible model is an important advantage that allows us to dial up or down expenses as needed through different economic environments. Let me move to capital on slide 16. Our CET1 ratio was 10.7% within our 10 to 11% target range. We returned $1.3 billion of capital to our shareholders, including $0.6 billion of dividends and $0.7 billion of share repurchases. And this quarter, we increased our dividend by 17%. Our differentiated spend and fee-driven business model generates a strong ROE, which was 34% in the quarter, providing us with very strong capital flexibility. Before we turn to our 2025 guidance, let me talk about the trends we're seeing in recent weeks. As Steve discussed, looking at the first week and a half of April, overall spending trends are consistent with Q1. We are seeing this performance with both the T&E and business services, as well as across our US, consumer, international, and commercial customer segments. Given the environment, we have also seen SME purchases accelerate with wholesale merchants. Additionally, demand for our products is in line with our expectations. This brings me to our 2025 guidance. Given the stability of our performance to date, we are maintaining our guidance of revenue growth of 8 to 10% and earnings per share between 15 and 15.50. This guidance incorporates a macroeconomic outlook with a peak weighted average unemployment rate of around 5.7%, higher than the outlook as it stood at quarter end. Of course, there are clearly many uncertainties in the macroeconomic environment, but given the balance of factors, we believe this guidance is appropriate. And more importantly, we remain confident and focused on the long-term growth of the company. With that, I will now turn the call back over to Kartik, and we will take your questions.

Thank you, Kristoff. Before we open up the lines for Q&A, I will ask those in the queue to please limit yourselves to just one question. Thank you for your cooperation, and with that, the operator will now open up the line for questions. Operator?

Ladies and gentlemen, if you wish to ask a question, please press star, then one on your touch-tone phone. You'll hear a tone indicating that you've been placed in queue. You may remove yourself from the queue at any time by pressing star, then two. If you're using a speakerphone, please pick up the handset before pressing the numbers. One moment, please, for the first question. Our first question comes from Sanjay Sakhrani of KBW. Please go ahead.

Sorry, I was on mute. Good morning. So, Steve, we've heard a lot about pull forward of spending, and I'm just curious if you guys have seen any indication that that's sort of propping up spend volumes. And then just sort of along the lines, if we do see some volatility or weakness in spending and revenues, you know, how far do you want to go in terms of sort of protecting earnings? You know, how low does revenues need to go for you to sort of just cut the line in terms of expense reductions. Thanks.

Thank you. The next question is coming from Mark DeVries of Deutsche Bank. Please go ahead.

Yeah, thanks. So, if some of these steeper tariffs go through as initially proposed, Steve, can you just talk about which segments of your business you would expect to be under the most pressure? And is there anything you can do from a risk management perspective to get out in front of that?

Thank you. The next question is coming from Don Eddie at Wells Fargo. Please go ahead.

Good morning. Steve, can you talk a little bit about, you know, card refresh and fee growth? I know one of your competitors recently raised fees on co-brand cards. And in this environment, do you still feel like you have the ability to sort of grow fees?

Thank you. The next question is coming from Rick Shane of JP Morgan. Please go ahead.

Hey guys, thanks for taking my questions this morning. Hey, Steve, you talk about investing across the cycle basically as a strategic initiative. I'm curious practically given where we are, where you see opportunities. And I'm curious sort of where you're going to be more aggressive, more where you're going to be more defensive. And I did note that the amount of capital you retained from first quarter profits was the highest it's been since COVID. So, I'm curious how you're looking at capital aggressive offensively, defensively as well.

So, maybe to add a bit of color on capital. There's not a lot to add as a matter of fact because you covered most of it. But, as you know, Rick, the governor here is our CET1 ratio. That is what will define the amount of share repo that we're going to do. And we target between 10 and 11. We're a little bit on the high side at 10.7%, but you shouldn't read anything in that. And if you look at over time, we've been at 10.8, 10.5. So, we're ending up a little bit on the high side at the end of the quarter and that's it. But we distributed exactly the amount that we had in our plans in terms of capital. I will mention though that this is the first quarter where we increased the dividend by 17%.

Thank you. The next question is coming from Erika Najarian of UBS. Please go ahead.

Hi, thank you. I just wanted to confirm, you know, the 8 to 10% revenue guide, you said something to the effect of that now takes into account a 5.7% unemployment rate. I just wanted to confirm that A, you feel like you can generate, you know, 8 to 10% revenue growth even in light of, you know, an unemployment rate that we haven't seen in a while. And to that end, I think, Steve, you mentioned that the stock market really didn't impact spend. I'd be curious to understand since your data is so good in terms of how spend progressed January through March, particularly in your affluent consumer segment. You know, as you had mentioned in the last call that January is off to a strong start. And then, you know, just wondering whether or not the resilience had sort of carried through even though we had all the headline risk and stock market volatility in March.

Let me maybe, Erika, give you a bit more color in terms of how to think about that 5.7. You know, we thought it would be useful to investors, to analysts, to share with you how we've been thinking about their credit reserve. And as you know, we run multiple scenarios. The math is very complicated. It's lifetime losses. So, the 5.7 represents the peak in unemployment rate for the purpose of this reserve calculation. So, it doesn't mean that we anticipate that tomorrow unemployment will jump to 5.7 and will stay there for the balance of the year, right? You have to think about it in the context of the seasonal calculation.

Thank you. The next question is coming from Jeff Ayleston of Morgan Stanley. Please go ahead.

Hey, good morning. Thanks for taking my question. Steve, I know the millennial and Gen Z cohort continues to be a source of strength for Amex. You're calling out the continued 60% plus of acquisitions, the better FICO and DQs versus the industry, and your spend growth is running higher there. But, just curious, are you noticing any sort of under the hood issues with that group from things like, you know, student loan repayments starting, there's been some reporting of some servicing issues for that group with the repayment starting. And I'm just wondering if there's any stats you can give on maybe spend per card or account for that cohort, just given that it's represented so much of your account growth so far. Thanks.

So, maybe what I can add to those if you're looking for numbers, their millennial and Gen Z combined spend about 20% less than the older generation. So, they do spend a bit less. They revolve a bit. The other data point that we have shared in the past as well that echoes what Steve has said is that at acquisition, the average FICO of this cohort is 750. So, very strong. Very strong.

Thank you. The next question is coming from Craig Maurer of FT Partners. Please go ahead.

Yeah, thanks. Appreciating the questions. I wanted to go back to something you said earlier. You know, investors are spending time hardening their books for what is expected to be a significant change in the economy over the next sort of 9 to 12 months. So, you'd mentioned FICO scores, consumer confidence, wealth effect, you know, not to channel John Wick, but the boogeyman of the last recession was FICO creep, and companies getting caught thinking they were making better loans. Plus, with consumer confidence falling and the wealth effect, especially how that might impact the younger cohorts, maybe you can talk about what you're basing your view on that consumer confidence and wealth effect won't impact spend. And sorry not to sneak this in, but could you also let us know what percentage of SMB bill business is related to e-commerce businesses? Thanks.

I just one thing, Craig. You know, if you take a step back away from FICO and you look at, say, delinquency rate, as you would expect, the variability from a credit standpoint is higher with the low-tenure card members. And therefore, we are looking and that's why in my prepared remark, I shared this new data point for you guys to get an appreciation in terms of how we're thinking about that credit risk. If you look at the low tenure card members, so those who've been with us less than 2 years, and you look at their delinquency rate today for those balances versus what it was for this same group of customers back in 2019, the delinquency rate is 30% lower, right? So, that reflects a lot of things including the skew that we saw in the previous 5-6 years in terms of acquiring premium card members and managing the book very carefully. So, delinquency rate is just a good metric to look at and that looks much better than where we were pre-COVID. And at that time, we were already best in the industry.

Thank you. The next question is coming from Chris Kennedy of William Blair. Please go ahead.

Good morning. Thanks for taking the question. Steve, you mentioned the acquisition of Center that comes after a string of other deals, whether it's Kabbage, Inpendo, others. Can you just talk about that journey and kind of give us state of the union on the SME technology investments and then how can that translate into better organic spend over time? Thank you.

Thank you. The next question is coming from Terry Ma of Barclays. Please go ahead.

Hi, thank you. Good morning. Maybe to just follow up on your comments around the refresh strategy. You know, you called out about 35 to 50 planned product refreshes for this year last quarter. And I get that you want to invest in the long term and you don't want to stop the refresh strategy, but just given that there's so much macro uncertainty and maybe potential uncertainty around the ROI of those refreshes, do you kind of adjust or delay some of those until there's more clarity? And what does that mean to your marketing budget for the year? Thank you.

Thank you. The next question is coming from Gus Gala of MCH. Please go ahead.

Hey, good morning, Steve. Good morning, Chris. I want to ask around restaurants. It seems like a lot of the work done there has been key in winning Gen Z and millennial share versus other premium value props available in North America. How do you think about enhancing the value proposition there and similar vein can you talk about other categories where maybe your experiential differentiation where you're not really competing on the rewards, but more like the services could further help capture that Gen Z millennial base.

Thank you. The next question is coming from Rob Wildhack of Autonomous Research. Please go ahead.

Morning guys. I wanted to follow up a little bit more on the SMB technology side with Kabbage, Center, etc. Steve, I think you mentioned eventually having one ecosystem. Could you speak to the integration effort there? How do all these platforms come together? How that looks for the end customer today? And then when do you expect you could go to market with the full expanded product suite inclusive of Center? Thanks.

Thank you. Our final question today is coming from Mihir Bhatia of Bank of America. Please go ahead.

Hi. Good morning and thank you for taking my question. Stephen Squeri, you're all striking a pretty confident tone on the call today about the outlook in a variety of macro environments. Think you've also talked before about being more confident in achieving the mid-teens EPS versus maybe some noise in year-over-year revenue. So, I just wanted to go back to where we started the Q&A where Sanjay started the Q&A. Can you just talk a little bit more about the cost structure and the potential for cost optimization if things get choppy? Like I understand there's rewards costs and things like that that naturally get lower, but big picture, just talk a little bit about the expense flex in the model as you continue to invest. Thanks.

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

Ladies and gentlemen, the webcast replay will be available on our investor relations website at ir.americanexpress.com shortly after the call. You can also access a digital replay of the call at 877-660-6853 or 201-612-7415. Access code 1375-2401. After 1:00 p.m. Eastern time on April 17th through April 24th. That will conclude our conference call for today. Thank you for your participation. You may now disconnect.