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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by and welcome to the American Express Q1 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later on, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded. Thank you.
I would now like to turn the conference over to the Head of Investor Relations at American Express, Toby Willard. Please go ahead, sir.
Thanks, David. 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 the comparable GAAP financial measures may be found in the first quarter 2018 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 website 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’ll move to a Q&A session.
And with that, let me turn the discussion over to Jeff.
Well thanks, Toby, and good afternoon, everyone. Earlier today, we published our first quarter results and we are up to a solid start to the year 2018. Our FX adjusted revenue growth was 10% in the first quarter and earnings per share was $1.86.
At our Investor Day in March, we took you through our plans to build on our strengths and to continue to invest across our four key focus areas to drive growth and capture opportunities across our business. When you look at our first quarter results, you see our focus and these investments paying off.
We are expanding our leadership in the premium consumer segment, showing strong growth globally. We are building on our position in commercial payments, particularly with SMEs across the globe. Our digital efforts are accelerating as we integrate recently acquired digital capabilities and make steady progress on digital engagement with our customers. And our network is bringing it all together, powering revenue growth across our many customer segments and geographies.
So with this context, let me turn to the financial performance on Slide 2. First quarter revenues of $9.7 billion grew 10% adjusted for FX and reflected solid growth across billings, loans, and fee income. Net income was $1.6 billion, up 31% from a year-ago. Earnings per share was $1.86 for the quarter, up 38% from the prior year.
I’d remind you that our first quarter results reflect the new U.S. corporate tax rate, which resulted in a significant reduction in our tax provision. And like many U.S. companies, we expect to see some modest adjustments related to the Tax Act throughout the year. However, if you take a step back from the tax impact and we're to just simply apply our lower Q1 2018 effective tax rate to the prior year, adjusted EPS growth would still have been in the double digits.
I'd also point out that despite the suspension of our share repurchases for the first half of 2018, our EPS also benefited from a 5% reduction in shares outstanding, stemming from the $3.5 billion in share repurchases we have done over the last four quarters.
Looking at the details behind our performance, I'll start with Billed business, which you see several views of on Slides 3 through 5. In total, worldwide Billed business growth accelerated sequentially to 10% on an FX adjusted basis. As you can see on Slide 4, the growth continues to be solid across all of our segments.
To get more specific on Slide 5, you see a view of billings by customer segment. This slide also serves as a helpful reminder that our global commercial and global consumer segments are roughly the same size comprising 41% and 42% of Q1 billings respectively, while global network services makes up the remaining 17% of billings.
Starting on the left, our small and mid-sized enterprise customers or SMEs continue to represent some of our highest growth opportunities. U.S. SME billings growth was 10%, up sequentially from last quarter's 9%, and international SME billings growth was 20% for a second consecutive quarter on an FX adjusted basis. The large and global customer segment growth rate was up to 8% on an FX adjusted basis this quarter compared to 6% last quarter.
On a related note, you can see in our earnings tables that for the Company overall both our global airline volumes and U.S. T&E spending were up sequentially compared to Q4. We also saw continued growth in B2B payments.
Moving to U.S. Consumer, which makes up 30% of the Company's billings, growth was 11% up from 8% in the prior quarter. This quarter we completed the acquisition of the portion of the Hilton portfolio that we did not already own, which contributed around 80 basis points to U.S. Consumer billings growth in the first quarter. We also continue to see strong growth in our U.S. Platinum franchise, but I would remind you that we will fully lap the value proposition changes we made in 2017 beginning with the next quarter.
More broadly, we saw acceleration in spend by our existing customers this quarter, reflecting both our continued focus on customer engagement and an increase in consumer spending and confidence within our premium customer base in the U.S. and around the globe.
In fact, moving to the right, you do also see an uptick in sequential growth at international proprietary consumer which is up 16% on an FX adjusted basis compared to 14% in Q4. We continue to have robust proprietary growth in key markets, such as, Australia up 27%, the UK up 20%, and Japan up 15% all on an FX adjusted basis.
Global network services is the one place where billings growth rates declined sequentially as they were up 3% on an FX adjusted basis in Q1 versus 6% in Q4. As we have said for some time, we expect the regulation in Europe and Australia to continue to impact volume in this business. Outside of these two markets, our GNS business experienced double-digit growth. Overall, we feel good about all the diverse sources of growth across our business segments and geographies.
Turning next to loan performance on Slide 6. Our total loan growth accelerated 16% in Q1. Here again, I would point to the acquisition of the remaining Hilton portfolio as a contributor to the sequential acceleration. This acquisition contributed about 140 basis points to our total loan growth this quarter.
On the right hand side of the slide, net interest yield was 10.8%, up 30 basis points sequentially. As you know, we typically see a seasonal increase in yield in the first quarter compared to the prior year yield was up 50 basis points.
As we've been saying for some time, we expect net interest yield, which has been steadily growing sequentially to stabilize somewhat. As a result, we expect the year-over-year growth in net interest income to slow from current levels as we progress through the year.
Now before we turn to credit, I want to take a few minutes to talk about our interest expense and funding costs in more detail than I usually do as we have been getting some questions in this area. You all know that we are liability sensitive given that our asset mix includes charge card receivables that are not interest-bearing.
Our funding strategy is to be active in three markets; deposits, asset backed securities, and unsecured debt. We have about $67 billion of deposits with about $32 billion coming from sweep accounts and CDs, which tend to move in line with market rates. The remaining $35 billion in deposits is coming from our online personal savings program. In a rising rate environment, this is generally our least expensive source of funding.
We expect to continue to grow our online savings program steadily over the next few years facilitated by the recent consolidation of our two U.S. banks. In terms of rate sensitivity, since the Fed started raising rates back in mid-2016, our beta has been about 0.45, but trending up.
Of late, our beta is closer to 0.6 roughly in line with the 0.7 that we are using for our own internal planning. When you look at our other floating rate debt, we have recently seen some compression in the spread between our funding rates and prime, which is putting more pressure on net interest yields than we had originally anticipated in our planning.
Here, I would remind you of the sensitivity communicated in our 10-K that a 10 basis point change in the spread between prime and one-month LIBOR will have about a $33 million impact on our net interest income over the following 12 months.
Stepping back, I would just remind you that a rising rate environment generally represents a modest headwind for us usually mitigated in part by a stronger economic environment. As I think about the balance of 2018, the latest consensus for steady rate hikes by the Fed represents the modest, but growing challenge as we go through the year.
So let’s move on to credit metrics, which you see on Slide 7. Starting on the left with the lending portfolio, the loss rate for the quarter was 2.0%, up about 30 basis points from last year, and as you know from a sequential perspective, there is usually a seasonal increase in the first quarter. We have been saying for some time that we expect an increase in lending write-off rates primarily due to the mix shift of our portfolio over time towards non-cobrand products and the seasoning of loans.
On the right side, you can see loss rates in our charge portfolio as well as the global corporate payments loss ratio. Our loss rate on charge was 1.6%. Now we often look at our charge performance as one useful indicator, the macroeconomic environment given the short duration of these assets. While there is a movement from quarter-to-quarter due to seasonality, the charge write-off rate is in fact down from a year-ago, which we see as a positive reflection on the broader status of our tenured premium customer base.
Given these credit metrics and moving to Slide 8, provision was $775 million and we built reserves of $124 million in the first quarter. We have said that we expect provision growth for the full-year 2018 to be in the mid-30% range, which is exactly where we were this quarter at 35%.
The provision growth reflects the acceleration in loan growth and the increase in lending credit metrics, all of which were within our expectations. We remain focused on capturing more of our customers borrowing activities on attractive economic terms and believe that our provision outlook remains appropriate for the year. So we may have some variability in the growth rate from quarter-to-quarter.
Turning now to revenues on Slide 9. FX adjusted revenue growth was 10% in the first quarter. I would remind you that this is the first quarter in which we are reporting under the new revenue recognition standard. As we said at Investor Day, for us the new standard drives changes in P&L geography with minimal change to revenue growth rates or earnings. To be clear, all of our historical numbers that we are discussing today have been recast, so that they are on a comparable basis to our Q1 2018 numbers. I’ll spend a little time on the areas most impacted by the change in a few minutes.
Moving to Slide 10 for the revenue drivers, we see solid performance across all components of revenue. I would point out that we are benefiting from FX in our reported numbers across many of these lines. Our total reported revenue growth was 12%, 200 basis points higher than the FX adjusted growth rate of 10%. Discount revenue was up 9%, which I'll come back to in a minute. Net card fees growth was 11% driven by key international markets as well as Platinum and Delta in the U.S.
Others fees and commissions were up 10%. Other revenue was up 4%, returning to positive growth this quarter as we have now lapped the sale of a small business in Q4, 2016. And net interest income was up 23% driven by the growth in loans and yield that I just mentioned a few moments ago.
Now knowing that many of you have been focused on our discount revenue trends, I wanted to provide a bit more color around them on Slide 11, as this is our largest revenue source. I’ll start by noting that the new revenue recognition standard moves certain items from contra-discount revenue down to expenses. While this impacts the absolute levels of several of the numbers on the page, it does not materially change trends or themes.
Starting on the left, discount rate in Q1 was 2.37%, down 6 basis points from a year-ago, right in line with the expectations that we shared at our Investor Day. As you may recall from our Investor Day discussion, we are focused on driving discount revenue growth not on maximizing the discount rate, which has led us to selectively adjust the rate in order to drive higher volume growth and overall economics.
The results of this strategy are illustrated on the right side of Slide 10 where you see the benefits of such trade offs. In the last three quarters, our discount revenue growth has accelerated even as discount rate has declined with discount revenue reaching 8% FX adjusted growth in Q1.
We believe that our decisions to selectively adjust the rate to drive volumes by expanding merchant coverage and deepening relationships with key strategic partners have been important to achieving such strong discount revenue momentum. And more broadly, we are particularly pleased in Q1 to see that roughly 6 of the 10 points of FX adjusted revenue growth came from spend and fee portions of our business model. If you think about this in the context of the total P&L, 81% of our revenue in Q1 was driven by card spending and fee income illustrating the spend in fee centric nature of our business model.
Turning now to expenses on Slide 12. I’ll cover the components of Customer Engagement, Marketing and Business Development, Card Member Rewards and Card Member Services on the next slide. Now let me cover our operating expenses first. Operating expenses were up 5% on a reported basis, but only up approximately 2% on an FX adjusted basis in the quarter. The quarter contained a number of discrete items, such as the loss on a transaction involving our prepaid operations that we were expecting and that we first discussed last year.
These recharges were partially offset by valuation gains on our Amex ventures investment portfolio, stemming from the implementation of the new accounting guidance for financial instruments. Most importantly, we expect full-year growth in operating expenses to be consistent with our historical ability to drive operating expense leverage.
So now let's turn to Customer Engagement where you can see on Slide 13 that a $4.1 billion in the first quarter, it is up 12% from the prior year. As I talk you through the components, I’d remind you that there are several impacts to these numbers from the new revenue recognition standard. Starting at the bottom, we have the new Marketing and Business Development line. As we covered at Investor Day, it has two components. Our traditional marketing and promotion expenses and then payments we make to certain partners, primarily corporate clients, GNS partner banks, and cobrand partners. This line in total is up 5% versus the prior year.
Our traditional marketing however is actually down a bit year-over-year as we continue to make great progress underwriting steady acquisition efficiencies as we highlighted at Investor Day. Even with this spend down a bit; we acquired 3.5 million new cards during the quarter compared to 2.6 million in the first quarter of 2017.
Now obviously this quarter’s number includes cards coming from the recent Hilton portfolio acquisition. But even excluding Hilton, we still saw double-digit year-over-year card acquisition growth despite the lower marketing spending. So the increase in the overall marketing and business development line is driven by partner payments, primarily related to investments in our recent cobrand agreements as well as growth in our corporate business.
Moving up to Rewards. As I said at Investor Day, rewards are expected to grow roughly in line with billings which you saw during Q1 as rewards expense was up 14% from the prior year just slightly higher than the 13% growth in our proprietary billings. As a reminder, as a result of revenue recognition changes, our rewards line now includes all our rewards costs including those for cashback reward.
Moving then to the top of the Slide, Card Member services costs were up 29% driven by engagement with our premium services, such as airport lounge access and first bag free on our Delta cobrand. As I said in Investor Day, I expect card member services to continue to be the fastest growing expense line on a percentage basis, given our focus on providing differentiated services for our customers and others would find difficult to replicate.
Looking forward to the balance of the year, I do see Q1 as the low point for marketing and business development spend primarily for two reasons. First, as we talked about on our Q4 earnings call in January, we increased investments for 2018 by $200 million for the full-year as a result of the impact of the Tax Act. Given the late timing of that decision, we chose to allocate all of that spending to the latter three quarters of the year.
Second, I hope that all of you have by now seen that we have launched a new global brand campaign this month. We are excited about the long-term prospects of this campaign. But as you would expect, as a result we will spend significantly more on media and brand in the balance of the year than we did in Q1.
Turning last to capital on Slide 14. As we announced on our January earnings call given the $2.6 billion charge we took in Q4 related to the Tax Act, we suspended share repurchases for the first half of 2018. We are rebuilding capital and our common equity Tier 1 ratio has increased to 9.4% at the end of the first quarter.
Looking forward, we have now made our CCAR 2018 submission. Our CCAR ask is consistent with our aim to restore capital to our target levels and distribute capital to shareholders while supporting business growth.
Over time, we plan to move back to a steady state common equity Tier 1 ratio of 10% to 11%. We will hear back from the Fed on our CCAR submission in June. We expect to continue deploying capital to support our organic asset growth and feel good about our ability to generate capital well in excess of those business needs.
Based on what I know today, I would conclude by saying that we feel confident that we will resume share repurchases in the second half of the year. So that brings us to our outlook and then I will take your questions.
You have by now read in our press release that we now expect full-year revenue growth of at least 8%. Given our solid performance in the first quarter, we now expect full-year EPS to be at the high end of our EPS guidance range of $6.90 to $7.30.
To put this into context, let me make a few comments. First, we are only 90 days into the year, it is still early. Second, as we've said before, moving forward on the revenue side we well over time lapse the impact of our U.S. Platinum refreshes see a moderation of the year-over-year increases in net yield and face the likely modest headwind of a steadily rising interest rate environment.
On the expense side, you will see higher marketing in business development spend as we go through the year for the reasons I just went through a few minutes ago. So we feel good about our plans for the year and believe that as always they will allow us to balance the short and long-term growth goals of the Company while meeting our commitments to shareholders. We have a differentiated business model that positions us to win and we are focused on delivering steady and consistent revenue and EPS growth.
One final point, which relates to our Investor Relations team here at American Express, after three years leading Investor Relations, Toby Willard is moving to a new role within Amex as the CFO of our Global Merchant and Network Services Business. I'd like to thank Toby for leading the IR function during a pivotal time for the Company.
The last few years have been particularly challenging and Toby has faced them with an impressive show of steady and calm insights, wisdom and advice that we have all come to value. He has also picked a good time to take on his new role given the solid momentum that we have built as a Company and that you see in our first quarter results.
I'd also like to welcome Edmund Reese, our new Head of Investor Relations. Edmund was most recently the CFO of our U.S. Consumer and Global Consumer Lending Business and has had a number of key finance positions over his nine years with the Company. Edmund knows a tremendous amount about our business and brings towards every day a passion for making sure we succeed. I know I will enjoy working with Edmund, as I’m sure will all of you.
With that, let me turn it back to Toby one last time.
Thanks, Jeff and thanks for those kind words. Before we open up the lines for Q&A, I’ll ask everybody in the queue to please limit yourself to just one question. And with that, I'll turn it back over to you David. You can open up the lines for Q&A.
Thank you. [Operator Instructions] Our first question comes from the line of Sanjay Sakhrani of KBW. Please go ahead.
Thank you. And congrats Toby, and welcome Edmund. Jeff, it seems like you think that you can get the type of leverage you saw in Card Member acquisition cost as we saw this quarter going forward because of the cobrand renewal impacts and a slightly maybe more benign competitive environment relative to the past. Is that a fair statement? And then maybe just on the T&E spending, you mentioned the higher airline and T&E. Is that a function of businesses reinvesting money as a result of tax reform or do you think it's just improved sentiments?
Let me take those in order Sanjay. On the acquisition side, really the biggest thing I would point to are the themes that Doug Buckminster in particular spend a lot of time on at Investor Day and that is our relentless focus over the last couple of years on constantly driving more efficiency into our new Card Member acquisition efforts particularly by getting better every quarter, every year in terms of our digital acquisition efforts.
And that is really the largest most important and most sustainable aspect of what is allowing us to moderate marketing and promotional spend while still getting really terrific results in terms of acquiring new Card Members, and I really look to that as opposed to any particular change in the broader competitive environment, and as you know we believe we have a long run, we have continued improvement in those areas.
On the subject of T&E spend, certainly in many areas we saw a tick-up sequentially in what we would call internally organic spend growth, so the rate of growth amongst our existing customers. We saw that in U.S. consumer. We saw it in consumers spending outside the U.S. and you see it when you look at the airline volumes as well as the T&E spending.
So there's clearly something going on amongst our more premium oriented customer base. The only thing I'm reluctant, Sanjay, to go further on is, it’s difficult for us. We can type lots of anecdotes from discussions with individual consumers or individual corporate clients.
It's harder for us to comment on what's going on in all of their minds that’s driving this increased confidence. As you know, when you look at the broader external economic indicators right now, it's hard to see a big inflection point in economic growth or confidence. What I will tell you though is what we see in our numbers is when you consider the nature of our consumer and commercial Card Member base is not necessarily broadly representative, but it’s more premium oriented. There is clearly something going on with increased confidence and increased spending.
Thank you.
Thanks Sanjay.
The next question comes from the line of Eric Wasserstrom with UBS. Please go ahead, sir.
Hi, Eric.
Hi. And Toby thanks very much for all the help over the years. I really appreciate it.
Great.
Jeff, thanks very much for the explanation on the cost of funds, but would you mind maybe just going back through for this period maybe doing an attribution in terms of how much of the increase was attributable to change in yields or what was occurring in terms of the asset side and maybe what was occurring on the deposit side more specifically intra quarter?
Well let me take a stab, and if I’m not answering exactly what you are after maybe we’ll let you stay on and follow-up, even though we’re trying to follow Toby’s rule of one question. Most simplistically if you think about this at start at the top, we had 23% growth in net interest income on 16% growth low.
So you've obviously got a 7% added lift there from what's happening on yield, net interest yield was up 50 basis points. When you look at that net interest yield increase of net 50 basis points in the quarter year-over-year for us, the impact of rising rates was fairly close to neutral.
So the 50 basis point increase in rates is really coming for us in this quarter from the evolving mix, so we have fewer people on introductory rates, more people who are paying full rates, as well as the continued effect of various pricing actions that we've been talking about for over a year now as we more thoughtfully price for risk and as we more thoughtfully price competitively. So that's really what drove the 50 basis points and the effect of interest rates in this particular quarter was pretty neutral. Is that helpful and is that what you're after?
Yes. That's very helpful. And just if I can just clarify one component of that. So as we think about the dynamics around deposit beta, which you’ve underscored and this – the issue of higher rates starting to take effect beginning presumably this quarter. Do I understand your guidance to be about a net-net year-over-year improvement over the course of 2018 in terms of net yield or is there some risk of a compression year-over-year?
Well let me be clear on what I said. So certainly if the Fed in fact raises rates as the current consensuses would call for, the pure interest rate component given where betas have been most recently is likely to become a modest headwind for us. So that then leaves you with the impact of the pricing actions, we will continue to be thoughtful about as well as evolving mix.
Now I clearly expect the 50 basis point year-over-year increase to begin to moderate. Our job Eric is to do everything we can to manage the Company in the way that the moderation is as small as possible and that’s what we're seeking to do as a team. So we'll have to see just how successful we are making the moderation very small versus large.
So operator, maybe we'll go to the next question. Thank you, Eric.
Our next question comes from the line of Mark DeVries with Barclays. Please go ahead.
Hey, Mark.
Hey, thanks. So my question has to do with – I just want to think through the pace of the moderation in the business growth that was – we should see a couple things there to deconstruct. I think you've alluded to several times, Jeff, the lapping of Platinum.
But I'm assuming that's not going to be – that's going to be kind of a gradual thing, right because you've probably had ramping engagement, you also had the delay and the imposition of the increased fee for certain customers. And then you also in response to Sanjay’s question, alluded to obviously some change in the organic growth. Are you seeing that continue to accelerate and potentially providing a bit of a tailwind to that lapping effect?
So good questions, Mark. First off, look on Platinum, I'm just being factual in that value proposition changes we made on the consumer side, we're all in by March of last year. So next quarter will be the first quarter where you completely lap them. The changes we made on the business Platinum side we've already begun to lap.
So look we've had tremendous performance in our Platinum portfolio and on the consumer side, where you saw us put a lot more value into the card and price for that value. We are now well over six months into applying the new fee to people as they renew the card and I will tell you the attrition rates have not moved at all. So we feel really good and I think our customers feel really good about the value proposition.
Now certainly as you fully lap all the changes, we would expect some moderation in some ways I'm going to give you an answer a little bit like I just gave Eric. We're doing everything we can to try to make that moderation in growth rates as we fully lap the value proposition changes as modest as possible, but there will certainly be some moderation. We’ll just have to see how great it is as we get into next quarter.
The other thing I would flag is I think at this point have been pretty clear that there was clearly something going on with organic spend growth across our customer base as you look at this quarter.
And here I guess I just point you back to my – we're only 90 days into the year. If there's one thing that probably surprised us a little bit in this quarter's results, Mark it would be that increase while we have been steadily seeing that number increase for many quarters now due to the things we've been doing.
There seem to be almost a little bit of an inflection point this quarter that well I’d like to take credit for it I think it's probably a little greater than anything being driven by our steady continuous effort. So 90 days into the year, I'm a little cautious about exactly what's driving that, is it going to sustain itself, we’ll just have to see. So those are probably the two biggest uncertainties I would say in our minds as I sit here on April 18 and think about the billings and volumes trends that we might see in the coming couple of quarters.
Our next question comes from the line of Craig Maurer with Autonomous. Please go ahead.
Hey, Craig.
Hey, good evening and let me add my congratulations for Toby. Just forward to the long-term question, if memory serves correctly, a few years ago you talked about in a steady state 6% revenue growth environment, OpEx – you felt you could hold the line on OpEx growth at 2% or less. Is that still something we should be thinking about with revenue growth higher; right now does that change, so just your long-term thinking on OpEx would be helpful? Thanks.
Well, Craig I’ll make a few comments. First off, our number one focus is driving steady and consistent revenue and earnings per share growth and we have lots of levers to achieve that. Second thing I would say is as you know we have a tremendous 10-year track record of steadily getting leverage on the operating expense side. And in many forums we will talk about the fact that if you look at the last 10 years, you've seen our operating expenses grow at a CAGR of 1% or 2% when volumes were growing at tremendous rates.
And I'd also point out to you that Steve Squeri in addition to his many other areas of focus and strength has always been a particular believer in the power of our integrated model and our ability to build scale economies given the nature of our integrated business model. So we are very confident in our ability to get steady operating expense leverage.
All I'm going to resist a little bit is being real precise about the exact number in any given year because there will be times when it will make sense to put more money into things like our digital capabilities, into things like the many, many sales forces that we run in many of our businesses across the globe.
At times those are things that will cause us to increase operating expenses frankly and allow us to pull down things like marketing expenses and get a better result. So I'm going to be cautious about giving you an exact number Craig. But under any circumstances, you should expect to see us continue to get steady operating expense leverage.
Thanks, Jeff.
Thanks Craig.
Our next question comes from the line of Don Fandetti with Wells Fargo. Please go ahead.
Hey, Don.
Yes, Jeff. I was curious if you saw any benefit this quarter delinquencies from the consumer tax reform? I think at the Investor Day, there was some commentary about possibly seeing some benefit? And then secondarily on credit, you've been growing an SME international consumer? How do you sort of compare and contrast the forecasting a rescue of those areas versus U.S. consumer?
Don, just sorry, can you give me a little more color on your second question and just what you're after and then I'll hit them both?
Sure. So you've been growing the SME small business has been growing pretty rapidly on the lending side, also international consumer and as you sort of think about forecasting credit and variability, how do you sort of think about those areas versus U.S. consumer and are they tracking in line with your projected loss curves as well?
Good. So let me start with the tax reform. It’s always a little careless, I think, Don, for us to speculate on what drives particular consumer behavior. Certainly the facts are that we saw in the U.S., a clear sequential uptick in spending by consumers and you can speculate on whether that's confidence or greater economic growth or something to do with the Tax Act.
When I look at the provision, I would tell you that relative to our expectations, while the provision on a percentage basis came in about exactly like we would have expected year-over-year. In fact the rate – the delinquencies, the rates were probably a tiny bit better than we’ve expected in our lending volumes were a little bit higher and they netted out to give you a provision that was right in line with what we expected. So those are the facts. I guess I'd be a little reluctant to try to draw direct lines between the Tax Act and any of those specifics.
Now you are correct. We're getting nice to grow in both our international consumer lending portfolio as well as our corporate lending, which mostly mean small and mid-size enterprise lending portfolios. I would point out to everyone remind you all that the U.S. consumer business is still the predominant portion of our lending.
But the SME lending is also still predominately in the U.S. and I’d say we really feel we have the same exact insights in handle there that we do on the consumer side. The only things I make on international consumer is that of course is done in multiple markets, which have very different characteristics. So there are some markets we operate in that are extremely attractive, but have by nature higher write-off rates and generally much higher yields that compensate for that and produce really good economics.
And so within any given market, obviously we feel we have a very good handle on the risks in the forecast and where we're going. When you look at that aggregate international number, I will say of the average of a lot of very different things. So it's a little tougher to generalize about it. So that's probably the way I would take you through the landscape.
Thanks Jeff.
Thanks Don.
Question comes from the line of Rick Shane with JPMorgan. Please go ahead.
Thanks guys for taking my questions. And Toby, it's really been a pleasure over the years. So thank you very much.
Thanks, Rick.
Jeff, I’d love to ask sort of – a little bit of a strategic question. Our view is that the reduction in tax rates is probably likely going to change the competitive landscape to some of those excess returns or completed the lag. One of the places is that at least historically and more recently we've seen that is on the reward side, which frankly when rewards raise really heated up, I think it adversely affected American Express. How do you see this evolving over the next year if the rewards will raise really picks up again?
Well, Rick, I guess I'd say a few things. We are focused on driving steady revenue and earnings per share growth for our shareholders. We’re focused on providing tremendous value propositions for our Card Members, and we think we have a lot of tremendous value propositions out in the marketplace today.
As I said here today, I feel really good about our value propositions. I don't feel the need to do anything dramatic in response to what else is out there. We feel fabulous about the progress we've made on Platinum and when you look at our growth rates in every customer and geographic segment this quarter, I think you have to conclude that we have great value propositions.
We have also really focused the last couple years on evolving our value propositions in ways that try to leverage the unique differentiated assets we have. And the growth you see in the Card Member services line is a part of that, but our global scale, the size of our premium customer base, our brand, we closely model, all of those things allow us to do things with a variety of partners and to do things like our global lounge program that are we believe difficult for others to match.
And as an aside, Rick I'd say it's often difficult for people to quantify in the many reward comparisons that people sometimes do. So our job is to do provide great value propositions to Card Members to produce steady returns for shareholders.
Frankly, I don't see anything about the Tax Act that should change strategies we are implying to do either of those two things. Obviously we'll have to see how the environment evolves, but we feel good about where we are today and we feel good about the results we just posted.
The next question comes from the line of Moshe Orenbuch with Credit Suisse. Please go ahead.
Great, thanks. Congrats to Toby and maybe some condolences over to Edmund. I guess maybe just following up on that point, in the last couple days we saw some new info both from yourselves and from Chase on the Marriott and Starwood’s programs, and I mean I guess the way it looked is that Chase is going to have kind of a head start of a few months and it's kind of going out with – back with 100,000 points which certainly something that grab some headlines. Can you talk about how you think about the competitive dynamics in that context both for that specific portfolio and whether that might kind of ignite a trend over the course of the next year?
I’d say couple things Moshe. First, we feel great about our relationship with Marriott, which is a broad multifaceted relationship cuts across our travel business, our cobrands, our merchant acceptance relationships, things we do with MR, very broad relationship produces a lot of value for us. We believe it produces a lot of value for Marriott and we believe it offers some great value to Card Members. We’ve run the company for the long-term in the grand scheme of things. We don't worry too much about a couple months in the marketplace one way or another.
Next thing I’d say is really broadly speaking; we have more different value propositions in the marketplace by far than any of our competitors. And we do that very thoughtfully because we believe that every Card Member has a little different set of things that they value and so that's why we have different tiers whether you want to look at our proprietary charge products, whether you want to look at our different proprietary credit products, that’s why when you look at many of our largest cobrand partnerships you see us offering multiple products because people do not all issue the same things.
And in particular with all of those products, our ability to offer a differentiated set of assets meaning on our brand, meaning on our global scale, meaning on some of the unique assets we can bring to bear, we think make our value propositions tremendously strong.
So the particular competitor you mentioned certainly made a lot of noise in the marketplace with some offers that lot of people thought were pretty extreme about two years ago, we just finished the year 2017 with the highest number of Platinum card members we've ever had with the most spending by those Card Members despite raising the fees if we paid for that card. So we feel really good about our value proposition. We feel really good about the partnership we have with Marriott and we think that the marketplace over time will really recognize the value that we're putting into our Marriott value propositions.
Our next question comes from the line of Bob Napoli with William Blair. Please go ahead.
Thank you, and Toby, thanks for all your help, and Edmund, look forward to working with you, really appreciated Toby. On the international business and international small business, and consumers getting close to 20% of your business in the growth rates are – I popping in some regards, I mean Australia 27%, UK 20%, SME 20%? Can you just talk a little bit more about what you expect for those businesses, obviously you not those types of growth rates? Are you benefiting from regulation and not being you know having American Express regulated or is it merchant coverage? What do you think – what do your expectations for those businesses over the long-term, other growing very fast just still relatively small relative to the TAM that's out there?
Well, let me maybe take those one at a time and let me starts Bob with the small and mid-sized enterprise business. We have as you know in the U.S. a tremendously valuable franchise with small businesses. We see ourselves as being the first into that marketplace. We're very focused on providing all the kinds of specialized services and products that are value in that marketplace and that’s been tremendous thing for us.
I would say over the years, we probably haven’t replicated that level of focus outside the U.S. in that marketplace, until we made that decision as part of the many things we did to help reposition the company over the last few years to combine under one leader at the time, it was Steve, all of our global small and large commercial businesses. And it's really at that point that we began to refocus on taking all the learnings frankly that we have from the U.S. and bring them to the SME market in many other countries around the globe.
And outside the U.S., I would say we view this is still a pretty underdeveloped market, where – well in varies and each country that we're in, the competitive environment is probably not quite as developed as it is in the U.S. So we feel great about the 20% growth you’ve seen in the last couple of quarters and we would see a very long runway even focus we now have in this area to continue it.
Now on the proprietary consumer side, the bottom line as we also see a long runway to continue to grow above the market. If you look at the most recent quarter, it's too early to have all the comparative data. But I would suspect that in probably all of our top 10 markets now we are growing faster in the industry we're still small - those markets though and we actually put those two things together and say that's part of our gives us a long runway to continue to grow a little faster than the market and it's our ability to offer really differentiated value propositions versus the competition in all of those markets.
Now, I will say Australia you have some dynamics because Australia we are in the process of shutting down our network business and that is helping to create opportunities for us to find people who really value the American Express brand and what we can offer and put great proprietary products into their hand. But we more broadly see a long runway to grow outside the U.S. both with small businesses as well as in a consumer marketplace. So thanks Bob.
David, do you have any other question?
Okay, I believe if we have time for one more question. We'll take one from the line of Ken Bruce from Bank of America.
Thank you for sliding me in here before the end of the call. Toby, good luck. Thank you very much for all your help over the years. I am going to pick up really where you left off, Jeff, if I may. As I look at the proprietary businesses, you've had some fantastic growth rates. And obviously, the reorienting of the strategy back towards proprietary has had a lot of success and I think that's got momentum to it.
As we look at GNS, it looks like it's about to go into negative growth, you’ve pointed out Europe and Australia. I remember back when we first got into the network business and more size, it was always pointed out as to be a very high ROE business. And I'm interested in what you think the terminal size of that business may ultimately look like and what the impact will be on the overall ROE of the business or you think it’s just gets lost in the numbers at some point?
Yes. Well, Ken the real answer is what you just said, which is that we are focused on driving steady returns, no matter where we find them across the business. The GNS business, because of regulation in Europe and Australia will be a little smaller year from now than it is now that will not have any material impact on the overall companies ROE. And as I just pointed out in response to Bob’s question, there are some really great growth opportunities that we're pursuing in light of the shrinking of that network business in a few places.
So GNS is an important part of our broader long-term strategy and plays a critical role in many, many places around the globe, but it will continue to evolve. And we will not get locked into any one strategy, but we will always be looking for where we can find the best opportunities to deploy capital efficiency and produce great differentiated returns.
End of Q&A
Great. Thanks Jeff, and thank you everybody for joining tonight's call. David, we will wrap it up there.
All right. And ladies and gentlemen, that does conclude our conference for today. Thank you again for using the AT&T Executive Teleconference Service. You may now disconnect.