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Ladies and gentlemen, thank you for standing by. Welcome to the American Express, Q1 2020 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. 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, Ms. Vivian Zhou. Please go ahead.
Thank you, Alan, 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 material, as well as the earnings materials for the prior periods we discussed. All of these are posted on our website at ir.americanexpress.com.
We will begin today with Steve Squeri, Chairman and CEO, who will start with some remarks about the company's key priorities for 2020 in light of the COVID-19 pandemic; and then Jeff Campbell, Chief Financial Officer, will provide review of our first quarter financial performance. After that we will move to a Q&A session on the results with both Steve and Jeff.
With that, let me turn it over to Steve.
Thanks Vivian. Hello everyone and thanks for joining us on the call today. First of all, I hope you and your families are healthy and staying safe as we go through this COVID-19 crisis.
As we said on our investor call on March 17, we're in unprecedented times. Our results in January and February continued the strong trends we've seen over the past 10 quarters, but we’re now operating in a very different world.
The deterioration in the economy due to COVID-19 impacts that began during the first quarter and accelerated in April, has dramatically impacted our volumes. Looking ahead, it's impossible to know when the economy will improve. In the meantime, we are focused on supporting our colleagues and customers, while remaining financially strong so that we could be in a position to grow when the crisis ends.
Jeff will take you through some detail on how this environment is impacting various components of our financial results. My comments will focus on what we're doing to manage the company through the near term, so that we can be in a position to take advantage of the growth opportunities that will be available when the economy improves.
Last year, as many economists were predicting an economic slowdown at some point, we put together a plan for managing through a range of potential economic scenarios, and we modeled what our response might look like in those scenarios. Of course, the economic situation we're facing right now is nothing like those we modeled. However, we developed a framework that we're using to guide us in managing the company through this short term as we plan for the future.
Our framework for managing through this cycle is built on four principles you will see on slide two: supporting our colleagues and winning as a team, protecting our customers and our brands, structuring the company for growth in the future and remaining financially strong. I’ll spend a few minutes talking about each of these principles which represent our priorities for 2020.
Turning to slide three. From day one of this crisis, our priority has been to take care of our people; the 64,000 American Express colleagues around the world. We wanted to ensure our college felt secure in their jobs, which is why we committed to no COVID-19 related layoffs for the remainder of 2020. In addition, we're continuing to pay the salaries of colleagues who are affected by the virus without having to use their paid leave. We also committed to paying all out of pocket COVID-related medical expenses for colleagues in our U.S. medical plans.
As the virus spread rapidly around the world, we wanted to keep our colleagues safe and secure, so we moved quickly to a full time work-from-home arrangement in all our locations, including thousands of our front line service collogues.
A core value of our company from our earliest days has been supporting the communities from where we do business and where our colleagues live and work. When the COVID-19 pandemic hit, we committed over $6 million in grants to the American Express Foundation, to a number of charitable organizations around the world that are supporting frontline workers in this crisis. We also pledged to match more than $1 million in Card Member donations to feeding America when U.S. Card Members use their membership rewards points to donate to the organization through JustGiving.com.
In addition, we're working with our partners to support our communities. For example, we’re partnering with Hilton to donate up to 1 million hotel room nights to frontline medical professionals across the U.S., and we're backing Marriott's Rooms for Responders initiative to provide hotels [ph] for healthcare professionals in some of the hardest hit regions.
The next principle is protecting our customers and our brand. Our global customer base is one of our most important assets, and like everyone they're going through a difficult time right now. We're offering a range of financial assistance options to help our customers weather the storm adding new product benefits to be relevant in today's environment and continuing to provide world class customer service our customers expect and rely on.
Our consumer and small business card members are taking advantage of the various short term financial assistance options we offer to help them navigate through this period, including temporary payment deferrals, interest and late fee waivers, and protections from collection calls and negative credit bureau reporting.
We also offer a range of longer-term assistance programs for certain customers who require more time. We're expanding eligibility for these programs and enhancing them to provide for additional payment flexibility based on a customer's circumstances.
To enable our U.S. small business customers to obtain the financial assistance provided under the SBAs Pay Check Protection Program, we’ve been authorized as an SBA, PPP lender and began to accept applications from our customers earlier this week, which we will submit to the SBA as soon as that window opens.
In addition to our financial assistance initiatives, we’ve enhanced our membership rewards programs and we're adding new offers, benefits, and rewards to our premium products that are particularly relevant for the times we're in now. For example, since people are not currently traveling, eating out, or shopping in store, we’ve adjusted our MR program to include discounts on Amazon when you pay with points, and the ability to earn double points with orders from GrubHub and Seamless through the end of the year.
We're also adding a range of limited-time offers, credits, and rewards on stay-at-home services, such as wireless, streaming, grocery, and food delivery for our consumer and certain co-brand card customers, as well as business essentials like wireless office equipment and shipping for our small business customers.
For our co-branded customers, we are also working with our partners to extend Card Member benefits such as airline companion certificates and hotel free night awards, so our mutual customers will have more time to enjoy these benefits. And for our travel customers, we are waiving fees for any flight changes or new bookings made through American Express travel, now through May 31.
In addition to our Card Members, we are supporting small businesses as we have for many years through Shop Small initiatives like small business Saturday and many others around the world. During the COVID-19 crisis, we're continuing to promote the positive impact consumers can have on their local communities and small businesses through our Stay Home and Shop Small campaign.
Earlier this week, we launched StandForSmall in the U.S., a coalition of more than 40 companies across various industries that have come together to back small businesses by providing a wide range of offers, complementary services, access to corporate assistance programs, and other resources designed to help support them as they manage through the crisis. We look forward to many more companies joining this initiative over the coming weeks.
For our merchant partners, we are also temporarily extending the amount of time businesses must respond to disputes, and have increased contactless transactions thresholds to reduce physical contact at the point of sale in 28 countries.
Finally, our customer care professionals made a quick transition from a brick-and-mortar operation to home-based servicing one and we did so with minimal disruption. In fact, our servicing levels quickly came back to BAU levels and our customer satisfaction results improved during the crisis and are at significantly higher levels now than in January.
Our next principal is structuring the company for future growth. While we believe that the COVID-19 pandemic will generate certain changes in our business in the near term, and likely over the long term, it will also generate opportunity, and we intend to be in a position to take advantage of the opportunities as they present themselves. We are starting with the strong foundation, the access we have, our differentiated business model, particularly our brands, our customers, and our Merchant Network give us a great base to build upon.
In addition, the strategic imperatives we've been focused on over the past few years remain just as relevant today. While we make some adjustments considering the current environment, we’ll continue to pursue our overall strategies in the following areas: expanding our leadership in the premium consumers space, building on our strong position in commercial payments, strengthening our global integrated network to provide unique value and making American Express an essential part of our customers digital lives.
As the crisis unfolded, we knew that we had to reprioritize our investments in each of these areas to focus on those initiatives that are critical to retaining our premium customer base and strengthening our merchant network, while at the same time continuing to invest in those areas that are key to our long term growth strategy. This led us to a thorough and thoughtful process to identify activities that we should stop, slow, accelerated and continue.
What we are stopping for the time being includes items that are less critical in today's environment, including traditional advertising, marketing, sponsorships and customer acquisition activities. We are slowing down the development launches of some of the new products we had the pipeline this year. We're accelerating investments in mobile, servicing and credit and collections capabilities that are not only important today, but are also important for our continued growth over the longer term.
And we're continuing our activities in a number of areas, including acquiring new merchants globally, our ongoing efforts to launch our new network in China, our network replatforming initiative, our premium product refresh strategy in both consumer and commercial, and continuing to integrate and develop new digital capabilities, as well as making longer term enhancements in our servicing platform and other key areas that are important for our future success.
Finally, we entered this crisis with particularly strong capital and liquidity positions that will enable us to remain financially strong. While some of our expense categories such as rewards cost and the cost of Card Member services will decline automatically as spending declines and customer behaviors change, we are taking aggressive actions to reduce discretionary expenses across the enterprise by nearly $3 billion from our original plan in the areas I mentioned before, and we have redirected some of those funds into new product benefits and longer term investments I described a few moments ago.
Looking ahead, in the near term our earnings will be driven by the answers to two questions that no one can now – no one yet can answer. First, when and how strongly the spending rebound as the global economy recovers? Second, how long do the challenges of higher unemployment levels and small business shutdowns last, perhaps often by the record levels of government support, and what does that mean for our credit losses. Until we all get to the answers to these questions, we're reducing our spending in every area that doesn't make sense in the current environment, consistent with our intention to not have any COVID-19 related layoffs of 2020, and consistent with our intention of protecting our customers and the brand.
So, those are our principles we’ve established for managing through this period in a way that will position us to return to growth when the economy rebounds. Without a doubt, these are times that are unlike any that I've encountered in my 35 years in American Express. But while the magnitude and uncertainty of today's challenges are more intense, the lessons we’ve learned through other crises will serve us well as we work through this one.
As always, we’ll remain focused on what we can control in the short term, while keeping an eye on the long term, and like before, we intend to come back stronger. Our teams are working day and night all over the world to help our Card Members and our merchants just as we have done throughout our history, and when this is over, we intend to be in a position of strength, ready to capitalize on the opportunities ahead, because we’ve managed the short term challenges while remaining focused on growth over the longer term.
Thank you for your time and now I'll turn it over to Jeff.
Thank you, Steve, and good morning everyone. Today I’ll take you through our results with more real-time granularity on recent trends than I normally do. To help you understand how our business is performing in this rapidly evolving environment.
Starting with a summary of financials, I’d encourage you to look at slides four and five together. As you can see on slide five, while January and February were strong months, March was a very different month, and so the full quarter results are not so helpful for understanding our performance in the current environment.
As you recall, when we held our investor update on March 17, we said we expected first quarter earnings per share excluding credit reserves would be between $1.90 and $2.10 and that's where we’ve landed. We also said we expected FX adjusted revenue growth would be in the 2% to 4% range, but we came in a bit below that due to spending trends at the end of March deteriorating even faster than we had expected, as well as some of our ancillary revenue lines coming in a bit lower than expected.
Turning now to the details of our performance, I'll start with billed business. Clearly it is remarkable how much the world has changed in just the last month and half. What's most important as you think about the near term future is understanding what's happening today, and so we've included a different view of our billed business that our typical quarterly disclosures, which you can still find in the appendix on slides 25 to 27.
Instead, on slide six and seven we've shown you our weekly proprietary billed business growth trends through the latest date for which our data is complete, which is April 19. Looking at all this data, there are four key observations I think. First, the volume declines accelerated dramatically in March, whereas January and February results were still in line with our performance over the last few years back.
Second, T&E which was roughly 30% of our proprietary volumes in 2019 is down almost 95%. Third, non-T&E spending has declined more modestly. As you'd expect some areas such as grocery spending and some online commerce have held up quite well and even accelerated, whereas other categories such as other categories of more traditional retail have been much weaker. And fourth, you will see that our proprietary billings decline seen to have stabilized somewhat in April with overall proprietary volume growth down around 45%.
Turning next to loan performance on slide eight, total loans declined by 3% year-over-year in the first quarter driven primarily by lower spending. In today's environment where there’s so many questions around credit, we felt it would be helpful to remind you about the composition of our loan book. At the end of the first quarter 70% of our outstanding loan balances were with U.S. consumers, 10% were with international consumers and the remaining 20% were with small businesses, almost all of which are in U.S.
Moving on to slide nine, we wanted to spend a minute focusing on our charge receivables, because in an environment where spending volumes moved dramatically, these balances moved dramatically as well. As you can see in the chart on the left, with only one month of spend declines, our charged receivables are down 21% versus the prior year and $13 billion below the prior quarter. This dynamic is important as you think about liquidity and capital in this environment, which I will get to later in my remarks.
Of course our charge receivables also have a different risk profile than our lending book, and even within our charge receivables book, there are different types of credit exposure, and so we've included a breakout of where these charge receivables come from on the right hand side of the slide.
Around 35% of our charge receivables are from consumer charge Card Members and another 35% from small business charge Card Members. The remaining 30% is from Corporate Cards, which have a relatively lower risk exposure.
Slide 10 then shows our tradition credit metrics for our lending and charge portfolios. The trends in both write-offs and delinquencies in the first quarter were solid and remained best-in-class in-part due to all of our risk management efforts over the past few years to prepare for an eventual downturn.
You do see a modest increase in write-off and delinquency rates year-over-year and sequentially, primarily due to lower loan and receivable balances as opposed to any significant change in credit performance. Further, we had to look at our TDR disclosures in our Q1 10-Q. Those balances are also relatively in-line with the prior quarter.
Now, obviously our traditional credit metrics all look fine because not enough time has passed for things to show up in these traditional metrics. What we are all trying to manage going forward is the collision of record levels of unemployment, combined with record levels of government support.
So turning to slide 11, you will see the total balances that are enrolled in our customer pandemic relief program, which we established to support our customers that have encountered hardship due to COVID-19. Since we created this program in March, we've had nearly 845,000 accounts enrolled in the program globally through mid-April, just a few days ago.
I’d also note that over 88% of the U.S. consumer and small business loan and receivable balances enrolled in this program are from prime and super prime Card Members, and many of those Card Members have made some payments sense enrolment. In addition, we've seen the pace of new enrollment slow a bit from its peak a few weeks ago.
We are working hard alongside these customers to get to the best outcome for both our customers and our shareholders by providing payment deferrals, waving interest of certain fees, as well as protecting them from adverse bureau reporting and collections actions.
We are also working as people roll off these short term programs to develop new longer term solutions, as well as leveraging our pre-existing hardship programs to help them retain their membership, and to get to a good financial outcome. So one of the many uncertainties around the economic future is the outcome of those efforts, which will be one of the factors that influences our credit performance through this crisis.
So let's move on to provision on slide 12. The first point I would make is that just as our credit metrics were relatively unchanged in the first quarter, our write-off dollars were also in-line with our original expectations and do not yet reflect the incremental stress from the current crisis.
The growth in provision expense is all about the $1.7 billion credit reserve build, and the credit reserve build is all about the macro economic outlook as we close the books in early April, which was suddenly and significantly much more pessimistic than when we started the year. This outlook does attempt to incorporate all the uncertainties around the impacts of COVID-19, as well as any potential offsets from the unprecedented level of government stimulus.
So turning then to slide 13, you see that our reserves at the end of the first quarter are almost double the reserve levels we had on our balance sheet at the end of last year. The increase is from a combination of the $1.2 billion of reserves we built when we implemented the current expected credit loss accounting methodology, CECL, on January 1, as well as the $1.7 billion of credit reserves we added at the end of the first quarter as a result of the worsening macro-economic outlook due to COVID-19.
Today, our lending in charge credit reserves on the balance sheet represent 7% of our loan balances and 1% of our charge receivable balances respectively. So the key underpinning of these reserves or the macro economic assumptions that informed the $1.7 billion credit reserve build we took in the first quarter which we show you on slide 14.
As you know, we do not have an in-house economist and so we use an external provider and look at a range of macroeconomic forecasts that we weigh it together in our credit reserve models. When we close the books on the first quarter, those scenarios assume that GDP would be down 18% to 25% and the unemployment rate would rise to 9% to 13% in the second quarter, with a steady modest recovery after that.
It's important to note that the latest macroeconomic outlook today reflects an even more significant deterioration in U.S. GDP and unemployment than when we closed the books on the first quarter. If those forecasts were to hold or even worse by the time we close the books on the second quarter, we would expect to have another large reserve build.
So this gives you a clear view of the assumptions behind our Q1 reserve build, but only time will tell what the ultimate level of write offs will be given the completely unprecedented nature to global environment.
Turning next to revenue on slide 15, net card fees remained our fastest growing revenue with 18% growth in the first quarter. We expect this revenue line to decelerate less in the short term relative to other revenue lines based on our historical experience with strong card fee performance in the downturn, as well as the fact that we have roughly $2 billion of deferred card fee revenue already sitting on the balance sheet today.
However, it's also important to note that the majority of the card fee growth we've seen over the past few years has been driven by growth in our fee based portfolios with around 70% of our new card acquisitions in 2019 on fee based products. As the pace of new account growth slows in this environment, we would expect to see a modest slowdown in net card fee growth over time.
Net interest income growth of 13% was faster than the 3% average loan growth we saw in the first quarter, driven by a modest tailwind from interest rate reductions year-over-year, as well as continued yield benefits from mix and pricing for risk. The details around average AR and yield trends can be found in the appendix on slide 28.
In addition, as I mentioned earlier in my remarks, we saw softness in some ancillary revenue lines, particularly from travel related revenue streams that are relatively immaterial and typically don't change much quarter-to-quarter, but we are down significantly year-over-year in the first quarter.
Turning then to the largest component of our revenue, discount revenue. I move you ahead to slide 16. As you can see on the right, discount revenue declined 5% for the full quarter and 27% in the month of March. The contraction in discount revenue was larger than the decline billed business. On average, we earn higher discount revenues from our T&E merchants than we do from our non-T&E merchants.
So given the much larger declines we are seeing in T&E spends, the divergence in T&E and non-T&E billing trends drove a 3 basis point decline in the average discount rate in the first quarter and a 10 basis point decline in the average discount rate in March relative to the prior year. Looking forward, if the spending trends we see in early April persist with T&E spending down about 95% for the entirety of the second quarter, our discount rate erosion in the second quarter could be as much as 14 to 18 basis points.
Now let’s talk about our expenses. When you think about our cost structure, you got the cost that come down naturally, spend declined and certain behaviors change, and when you look at the three customer engagement expense line shown on slide 17, you see this dynamic and the sequential change in growth between 2019 and the first quarter of 2020. One way you might think about this dynamic in the current environment is that our – as our revenues goes down in the near term, you could see about a 50% offset to the revenue movement in these lines.
Other expenses such as marketing and OpEx move based on management decisions. As Steve discussed, in light of the current environment, we're aggressively reducing costs across the enterprise. In fact we're cutting discretionary expenses through the end of the year by $3 billion relative to our original plans. We are also choosing to selectively reinvest some of these savings in initiatives that are key to our long term growth strategy.
Looking at slide 18, you see that the environment in March changed too quickly for us to see a significant impact from these decisions in our first quarter marketing and operating expenses. So let me explain how we expect those cost reductions to impact these lines from a year-over-year standpoint going forward.
In the balance of the year we expect to dramatically reduce our proactive marketing efforts and reinvest in the additional product benefits that Steve spoke about in his opening remarks, while reducing many other costs. As a result, I would expect our operating expenses to be down about $1 billion year-over-year cumulatively over the next three quarters.
On the marketing line, we are funding the additional product benefit adjustments that Steve discussed with our other marketing cuts. The net of the two should result in a modest reduction in marketing investment levels relative to last year.
Moving last to capital one slide 19, as Steve mentioned earlier, we are entering the current crisis with a strong capital position. Our CET1 Ratio was 11.7% at the end of the first quarter, above our 10% to 11% CET1 target range. The sequential growth in our CET1 ratio was driven by the counter cyclical nature of our balance sheet.
As our balance sheet shrinks, with declining AR and loan balances in the current environment, our risk weighted assets drop according. I would also note that our first quarter CET1 ratio includes a roughly 80 basis point impact from the five year transition option made available under the fed rules delay any capital effects of CECL until 2022.
We repurchased $0.9 billion worth – $900 million worth of shares in the first quarter, that have suspended our share repurchase program as of mid-March and we do not expect to resume share repurchases for the time being given the current environment. However, with our strong capital position, we have the capacity and intend to continue to pay our dividend in the second quarter.
Turning to slide 20, the counter cyclical nature of our business is also reflected in our particularly strong liquidity position during the first quarter. Our cash and investments balance increased from $32 billion to $41 billion in Q1, driven mainly by the decline in AR and loans.
We also saw strong demand for personal savings deposits during the first quarter, even as we adjusted pricing given the current rate environment. Our personal savings deposit base is up 6% versus the prior quarter and up 16% year-over-year. Putting it all together, our capital funding and liquidity positions are strong and we have significant flexibility to maintain a strong balance sheet in periods of uncertainty or stress.
In summary, we are certainly in unprecedented times, and looking ahead it's impossible to forecast our financial results for the rest of the year without knowing the answer to the two questions Steve posed earlier, when and how quickly the economy improves, and what happens to unemployment in the pace of small business recovery. Until then, we're focused on supporting our colleagues and customers, prudently managing our risk exposure and expense base, and ensuring that our capital and liquidity levels stay strong, so that we can take advantage of the inevitable rebound for our customers, colleagues and shareholders.
With that, I'll turn the call back over to Vivian.
Thank you, Jeff. Before we open up the lines for Q&A, I will ask those in the queue to please limit yourself to just one question. Thank you for your cooperation and with that the operator will now open up the line for questions. Operator?
[Operator Instructions] Our first question will come from the line of Sanjay Sakhrani with KBW. Go ahead please.
Thank you. Good morning, and I hope you guys are well. I wanted to follow up on the cost production commentary, and I'm curious Steve and Jeff, you mentioned these are unprecedented times and a lot of the situation is fluid. I mean, if things continue to remain as depressed as they are or even get worse, how much more can you cut on costs because it seems like you are selectively still making some investments here. Is there room to take down costs further than you’ve outlined? And just on a related note, as we think about your card product orientation being travel and entertainment driven, I mean do you see people sort of shifting away to other cards as a result and are there any proactive strategies that you can employ as a result? Thanks.
Okay, so let me – it’s a very slick way of asking two questions, but let me answer the second one first.
I think what's important to understand with our card base is that 73% of our spending is on non-T&E, and while you look at the benefits that we do have on our card base, what our card members really appreciate is experiences of all type, great service, and our brand, and what you'll see coming out in early May is actual product refreshes to a number of our products, which will infuse additional value in addition to the value that a card may have.
So, if you look at our platinum card where you have fine hotels and resorts and you have Uber credits and you have other travel benefits and lounges and so forth, you will see other enhancements there from wireless to streaming to maybe some other types of travel credits which can be used in the future over a time period. But I think you know what you'll also see in the short term is card members using that and using the points.
In the longer term, I think here's where our product refresh strategy really does help us, because we will continue to modify products as the environment continues to change and morph, and so we think some of those benefits will come back over – some of the benefits that card members use will come back over time. So, I don't think that we will see people switch products. And just a comment on the co-brand product, [inaudible] of our co-brand spend is off the co-brand partner. So if you think about Delta, you think about Marriott, you think about Hilton, it's all – it's less than 10% of that spending is actually at those properties for those particular things.
And so, what I would say is we will continue to evaluate, we will continue to monitor, but you will see value injection going back into these products, and historically – and these are not historical times, but historically there's a tremendous resiliency in our fee-based portfolios, and so you'll see a lot of fee base – you'll see a lot of value injection into those fee-based cards as I had mentioned before.
The one thing I will say, and then I’ll let Jeff talk sort of technically to the cost. What I think is critically important for us is that we support our customers. I mean, you know I started out during this crisis. We moved rapidly to get our colleagues out of our facilities. Within a two week time period, we were basically 100% virtual around the world. The only people you'll find in our buildings today are security people and maintenance people, and not a lot of them, and so we’ve rapidly moved that.
Once we did that, our next focus really turned to our customers, and what was really important through this crisis and through any crisis, and I've talked about this over – you know over the last you know sort of 10 quarters or so, is that it was important for us to protect our brand, it was important for us to be there for our customers, and it was important for us to stick with those initiatives that inevitably would be important when this crisis ended.
Merchant coverage will be important. Our efforts in China will be important. Our platform initiatives will be important, and so while we are very focused on staying financially strong, we're also focused on ensuring that when this crisis is over, we have been there for our customers and are ready to continue to hit the ground running.
And so, we talked a lot about what we stopped, what we accelerated and what we've slowed down, and I’ll tell you the $3 billion of cost that we cut out of our plan, and I've been doing cost cutting for decades at this company was probably one of the largest cost cuts that we've ever done, and this is not a run rate number. This was $3 billion out of the plan in the next eight months, and some of that money will be put back in for value injection.
So the reality is, is there more to go? It is always more to go; there will always be more to go. We decided to do no layoffs, and the reason we decided to do no layoffs is there's numerous reasons for that. Number one is the humanitarian aspect of this; number two, the disruption to try and lay off people in a virtual environment is nearly impossible; and number three, we don't know what the world's going to look like. And so, while we're not going to take layoffs off the table for the future, we certainly are taking layoffs off the table for the rest of the year.
I’ll let Jeff comment on sort of the technical aspect of where we have it, where we have that opportunity, but you saw a large reduction year-over-year in operating costs and most of your models assumed growth in operating costs, so that came right out as well, but Jeff, let me turn it to you.
Well, the only thing I’ll add Steve is to your point you can always react further Sanjay to the environment, and we asked ourselves two questions on cost. We took out everything we didn't need to support customers as Steve said, and we let things in or we cut everything that couldn't be put back quickly or that we made sure we weren't cutting things that couldn't be put back quickly in the inevitable rebound.
The other point I would make is we're not hiring people today, so the reality is when you have 64,000 people and you stop external hiring, with each passing quarter our costs will be going down and also with each passing quarter since you raised the question as what if the world really radically changes and stays down for a long time? With each passing quarter our view of what we might need to put back is going to change. So we will continue to react. So we should go to the next question operator.
It'll come from Don Fandetti with Wells Fargo.
It’s certainly good to see your billed business and growth stabilizing in April. I was wondering if you could talk a little bit about, you know coming out of the crisis in ’09 you guys took share. A lot of the banks were sort of in capital, were struggling with capital issues. Do you think – how do you think the competitive dynamic looks on the other side of this, and do you think that you can be opportunistic and take share?
Well Don, certainly that’s the intent. I mean that's the intent as Jeff just said about not shutting down these channels. If you shut down completely your acquisition channels, whether that be digital, whether that be direct mail; if you start cutting your sales organization and so forth, obviously it's going to be hard to do that.
You know it's hard to say where our competitors are overall in their overall business. Our business is as you know very monolithic. We are – the only piece of our business that we have to focus on is the credit card business, whether that is a corporate you know small business and premium consumer. How this whole pandemic plays out across all the other aspects of the financial services industry is yet to be seen, you know what's going to be the impact on commercial length, commercial real estate, commercial lending, car loans, you know mortgages, so forth and so on.
Traditionally what's happened is we have bounced back a lot quicker. Our card base tends to be a lot more resilient and there is pent up demand for our products and services. This is not a traditional environment that we're in, but our intent is to come out of this very, very strong, with our sales channels intact, with our acquisition engines pumping, and actually to take share as we did in ‘09 and as we did after the internet bubble.
That's the intent which is why we're sticking with a number of the growth initiatives and more importantly while it's easy to cut back on merchant acquisitions, when all of this is said and done, people are going to have a huge pent up desire to spend and we want to make sure we're able to continue to provide the access to all the alternatives that are available to spend at a merchant – from a merchant perspective.
Our next question will come from the line of Mark DeVries with Barclays. Go ahead.
Yes, thank you, and I just want to thank you for the new slides. There’s some very good – this is [inaudible]. So my question is on the loan, but if we see billed business at these levels, you know what sort of run option we expect and what are the implications of that for a need to maybe resume share repurchases to avoid getting too capital inefficient.
Well, its a good question Mark. I think, when you think about our loan book, there’s of course a fair amount of just transactors in there. So I think you will probably – if the world stays as it is today, I see a more significant decline in the loan book in the second quarter. Depending on how the world evolves, thinking past that might expect a little bit more stabilization.
From a capital perspective, the thing we are really focused on is making sure we stay really strong financially, so we can be opportunistic about some of the things Steve was just talking about, trying to gain some share in the inevitable rebound or other opportunities that might come up in the current environment.
The last point I make is that does mean when growth resumes, the balance sheet then goes to the opposite direction and it grows. So we need to make sure that we have enough capital to support very rapid growth when the inevitable rebound happens. And so you know what does that mean for share repurchase? Boy, I think like so many things Mark, we have to take that quarter-by-quarter and see where we are.
Okay, thanks.
Thanks Mark.
Our next question will come from the line of Rick Shane with JPMorgan. Go ahead please. One moment. Mr. Shane, your line is open.
Can you hear me?
Yes.
Okay, great. Thanks for taking my question and I hope everybody's well there. When we look at the change in reserve, under CECL charge was going to be treated – that was going to have a very favorable treatment and there was a pretty significant spike in the CECL, in the reserve this quarter. I'm assuming that that’s associated with small business? Is that correct? And the second part of that question, is there an opportunity to move some of the charge product to pay overtime to give some relief?
So you're correct Rick. That the charge reserves under CECL were actually to remind everyone a reduction from the reserves we used to have under FAS 5, whereas obviously the lending reserves went in the other direction.
You’re also correct that when you look at charge and when you look at our loan book today, I think it's fair to say that the sector that has shown the most immediate stress is small business, right. You’ve shut down small businesses and a savvy business owner is going to say ‘well, I need to go into cash conservation mode and in many ways what our pandemic relief programs are about, is trying to help people through that transition.
And so the question really is how long do shutdowns last? Can we help bridge our small business customers long enough to help them resume business and we're exploring every possible avenue about how you help them with payment terms and fee deferrals, etcetera, to help them come back strong and help the economy grow.
Yeah, I think you know the only thing from a small business perspective, these are people that are not used to being in this situation at all. I mean you think about every other credit crisis we've ever had, no one ever shut down – we never shut down the economy, right. I mean things got hard, things got tough, but we never shut down the economy and you know when you look at our small businesses and you look at sort of the credit profile of our small businesses, these are people that you know would have high FICO and you know their prime and super prime is well, much like consumers.
And you know if you look at our programs that we have, the programs are one to three months of relief, then we have short term programs and then we have you know our longer hardship program. So I think we’ll be in good shape there, because it's really getting people through you know this tumultuous period.
As far as the charge product, the charge product has a pay overtime featured; it’s called lending on charge, and so people could use that, but they could also use one of our hardship programs, and I think one of the things that we’re really focused on is retaining membership at the end of this.
So what is the carrot at the end? These are good customers who are in a bad time through no fault of their own and we’d like to retain them as customers. And so as you look at our programs and how we're structuring them, we're also structuring them with a way to return to the franchise over time, so you know that can answer to your other question.
Our next question will be from Bill Carcache with Nomura, go ahead.
Thanks. Good morning Steve and Jeff. Is there any indication that the customers who are filing for initial claims are broadly representative of the Amex customer base? There's been some suggestion that a disproportionate percentage of those filing are for example entry level restaurant employees who may not be representative of the Amex population and therefore you know some of the traditional relationship that we've seen between initial claims and returns only could break down. I would appreciate your thoughts on that.
Well, I think Bill I’d start by pointing back something I said in my remarks, which is – I think it’s worth noting that over 88% of the balance is U.S. consumer and small business rolled into a programmer from prime and super prime card members and this goes back I think Steve to your point, but these are not people who are used to being in stress. It’s just such an unprecedented environment, and so look, we'll have to see how this plays out. But these are you know good card members on the consumer side and thriving businesses, until they suddenly were forced by the government to shut down on the small business side, and that's why we're really focused on working hard with them to help bridge the current environment and also hopefully let some of the government programs kick in and help.
Our next question will be from Bob Napoli with William Blair; go ahead.
Hi. Good morning Steve, Jeff. Glad you guys are well and I appreciate the call and all the additional detail. You know the world is – I mean the post COVID world is going to change I think, at least somewhat. I'm sure we've all been on a lot of Zoom calls or Microsoft Team calls or whatever, but you know business travel’s been an important part of your business. I think consumer travel will return, but business travel may be less, materially less.
B2B payments, I think your involved in B2B payments and through several partnerships with the build.com or several other companies, MineralTree, etcetera. What are your thoughts on how the world is going to change and how do we prepare for that? On the B2B payment side are you seeing more demand for stuff like AP automation as well? I know it’s a small part of your business.
Yeah, so it's a great question and you know we obviously listened to Ed Bastian's earnings call yesterday and you know what Ed said, it’s probably going to take three years for travel to come back to where it is, and let's just put this in context I think, because I think that's really important.
When you think about our commercial payments business, the majority of our commercial payments business is small business, both in the U.S., international and middle-market and a majority of that is 80% non-T&E with a focus on exactly what you talked about. When you look at our corporate card business, our corporate card businesses between 8% and 9% of our overall billings, 60% of that is T&E. So you’re looking at about 5% of our overall business, which you know drives a lower proportionate share of not only revenue, but net income as well.
I think that will slow down, but remember in T&E you've got multiple components. You've got restaurants, you've got hotel, you've got car rental and you do have air. And so I think we've all learned in this environment how to work virtually. You know it is amazing, we don't use Zoom, but we do use WebEx, but it is amazing to see everybody on the WebEx screen and quite honestly, I think there’ll be more of that. There will be less of those trips that are needed and so I think you will see in an inevitable decline in probably air travel. You'll still see people making trips in car, you'll still see people going to restaurants, albeit restaurants will probably be reconfigured in the short term, but in the long term I think it comes back pretty much to normal.
And so when you look at T&E I think the travel piece of it in any of the appropriate stay and the meal that goes along will probably go down and it will be a little bit of a reset moment, but our focus really has been on large corporate and I've said this before, not a lot of people were so driving T&E high. I mean they were so looking to maintain T&E, to reduce T&E, and our focus with large corporate has been on B2B payments.
What we have seen, in this short period of time is more automation of B2B payments, it is a small part of our business, but with you know in a virtual environment it is gone up you know significantly. I mean not significantly enough to drive our overall volumes at this particular point in time, but it’s amazing how much it's going up from an automation perspective with our Acompay, you know acquisition with our integrations into Bill.com and MineralTree and Sage and others like SAP. So I think you'll see more of a focus on that, I think you'll see more spending there, and I think you will see an inevitable decline in some of the Business Travel Entertainment.
I think the consumer travel will come back over time and I think the other thing is, I am really happy with sort of the co-brand partners that we have and you know Ed talked about this on his call yesterday and that from an airline perspective safety will be defined in multiple ways now.
You know safety was defined from a maintenance perspective, but it's also now going to be defined on how you treat your customers within the plane. It’s going to be how you treat your customers within the hotel property, and I think – you know what I think about Ed and Arne and Chris Nassetta, we’re of equal minds there from a way to treat our customers. And so I think you'll see a premium in this return actually to air travel and I think that plays well for our customer base as well.
And I think in this time, I think our acquisition of Resy is going to play really well in the short term as restaurants will probably reduce capacity, and will be harder to get reservations and we’ll be able to utilize as we talk about access and experiences or assets to be able to help our card members get into and experience some of the great restaurants that are around this country.
Our next question will come from the line of Moshe Orenbuch with Credit Suisse, go ahead please.
Great, thanks. I wanted to follow-up on that Steve, because I think that you know you made some interesting points at the beginning about issues around your co-branded programs and the spending being cut around. You know outside of the partner and the comments about you know – that you just made about you know, about kind being special and at the top of the pile.
But I guess the question I have is, you know the fees that you just raised on a lot of those co-brands, you know the high end cards. The actual benefits that the partner provides, whether it’s Delta or Hilton or the hotel chains, kind of are going to be less valuable to people at this point. How do you think about you know what people do, whether they down tier or actually you know shift the spending to another card. You know how does that process work?
Yeah, I think what you'll see in the coming week is you’ll see other benefits that'll be added to those cards to sort of balance out the value. I mean look, we're very focused on it obviously to go in a blog. A blog is very focused on what is the value that you get for what you're paying. And so you'll see enhancements to those cards that are not specifically you know either air or hotel related, and in particular to those cards where fees were raised, and so you'll see extensions on benefits, but you'll also see other things that are non-hotel, non-air related which will provide more utility to the card in general.
I mean people have those cards to accumulate points for hotel stays, for airline and for so forth. But I think you know as I said and you just pointed out again, 90% of that spend is in other areas, and so what we'll do is we'll enhance those products so that the value propositions are more in an equilibrium to what the environment is today, and that's what we'll continue to do, which is why I think having built the DNA in the company now to constantly refresh products is very important.
And not just constantly refresh them on a sort of a three to four year cycle, but the ability within a couple of months now to add all the benefits and to add all the credits and other access and things like that will serve us well as we go through this. Because we're going to watch it very carefully, we're going to work with our partners very, very carefully to put those benefits that will continue to maintain the value and continue to maintain the price value that we strive to have with these cards. So I think it’s a great question, and that's what the teams are working on with our partners.
Question will be from Betsy Graseck from Morgan Stanley, go ahead.
Hi, thank you. Good morning Steve and Josh.
Good morning Betsy.
I know we spoke a little bit earlier about small business. It is the single biggest question that I get on American Express, you know ranging from credit quality questions to you know persistency of the business as we go through the COVID crisis.
So I just wondered if you could refresh, you know your comments with more details around the – you know how you see the credit quality, the different industries that are really dominating your small business portfolios, and if you could help us understand how long you feel your partner's are – you know your small business customers are set up to endure the shut down that they have to deal with.
Well, maybe I'll start Betsy with a few comments and then Steve can chime in. So I am going to start by reciting for a third time the statistic I pointed out earlier, that when you look across both consumer and small business, because many of our small business card members or they run their small business on the card they still have credit score and personal cycle scores we can track. So 88% of those people are prime and super prime and I just think that's an important first thing to think about.
Second, we have I think a lot more diversity in our small business card members than perhaps many people realize. And so Steve you were just talking earlier about the importance of restaurants to our value propositions and our partnership with Resy.
If you look at our open card members, that’s actually restaurants are fairly an immaterial part of the card member base and in fact the Card Member base is in some places you might not think about intuitively Betsy like construction, building materials, professional services, lawyers, doctors. And if you think about many of those kinds of small businesses, those are the businesses that are going to come back and thrive, but clearly when the government tells them you got to shut the doors they would be I think financially irresponsible if they didn't say ‘Boy! For a little while I could pay American Express, but I just need to kind of hold onto my cash while I understand the environment’ and that's a lot of the antidotal dialog we are having with our customers.
So we'll have to see. As we said all along, the question is how long this unemployment state, the astronomical levels it appears to be at now, and how long does small businesses stay shut down. But Steve you can add a little more.
Yeah, I know. I think it's a great question and you know it's one that we look at all the time, but Jeff said a small percentage. It’s less than 5% of our small business customers that are actually restaurants and when you look at sort of almost 25% of our small business customers, it's things like contractors, plumbing, electrical work, air conditioning all those things are actually still continuing today, maybe a more reduced level because people don't want other people in the house.
But those people are not going to go anywhere and they usually have a lot of low overhead, but they may need that three months to get through it, and when you look at you know business services, it's legal, it's automotive repair, its beauty salons, barber shops, things like that and you know a lot of those will still be there and come back as they – a lot of them are single proprietor institutions.
The other thing that I'll point out about are small businesses. While we do have a very high share of the market from a spend perspective, when you look at the overall sort of loan books, whether that be working capital, whether that be mortgage loans, auto loans or small businesses have just their own loan servicing, we're probably less than 2% of the U.S. market when it comes from an exposure perspective.
So when I look at it from a credit perspective, I think you just can't look at the card. You need to look at the entire small business sort of ecosystem of what is out there and we are less than 2% of that. And I would also leave you with the fact, we are very, very diverse in terms of what our small business set is.
So we think it will bounce back, and you know we feel good about, we feel good about our small business portfolio, but it will go through like everything else. It'll go through a tough period of time until the world starts to open again, which is why we think our relief programs are ideally suited for small businesses.
Our next question will come from Eric Wasserstrom with UBS, go ahead.
Great! Thanks so much. Can you hear me okay?
Yes. Not clear, but we can get it.
Alright, good. So my question is about the COVID experience, just doing the quick back of the envelope, from your ACL ratio suggests maybe an expectation around a 4.5-ish kind of percent of peak loss experience, and I'm wondering if you can maybe put that in context of past downturns. I think as I recall from your peak quarter losses in ’09, something like 9.7, something like that. So I was wondering if you could maybe put that in context and maybe the broader question is, does this circumstance perhaps suggest you know or has it caused you to reconsider you know whether expanding lending is most value maximizing for Amex?
So let me maybe make a few comments about the credit reserve Steven and then you might talk about risk management in the current environment.
So you know Eric, gosh, if you think about past experiences, the great financial crisis, I think it took six quarters for the economy to get up to close to 10% unemployment rates and the current environment in six weeks we appeared to have gone way beyond that. So that makes it very hard to predict exactly how things are going to play out. Clearly if unemployment stays at the level it is at now, then you should expect lifetime losses across the entirety of the financial services sector that are greater than what you saw in the great financial crisis.
On the other hand the government is throwing unprecedented amounts of money at things here; we’ll have to see where that goes. I'm also not sure a peak write-off rates really made are a useful way to think about this, right. Under CECL we're trying to every quarter close the books and put on the books our reserve for the lifetime losses we expect for what loans and receivables are on the books, and that's what we did is we closed the books in April, and now we'll have to see where we are at the end of June, but I am going to close before I turn it over to Steve by saying you know unemployment today is worse than it was in the great financial crisis and worse than it was in any CCAR and DFAS test, and you've tacked on to that shutting down small business in the U.S. So we'll have to see how long that goes.
Yes, so let me let me answer the last part of the question. You know is there regret to be in lending and the answer is no. I don't think you could be in a payments business without providing a wide range of services, and so I think our strategy of you know lending to our customers and understanding who we’re lending through, I think that will play out for us well during this pandemic.
I think the other thing is, what’s important to notice is that, you know you go back a couple years, we really started to even invest even more heavily in our credit capabilities. And you know so the difference between 2009 and today is a chasm. I mean, we’re not even the same company as it relates to it.
When I think about what we've done from an external monitoring perspective, how we do modeling and risk assessment, you know whether it's machine learning and how we do more through the cycle evaluation, just our overall customer evaluation, our ability to flex up and down spend and lend capacity, the way we risk price and our credit collections capability are so much better including our hardship programs.
I mean we had no hardship programs through the great financial crisis and now you know we roll out the CPR program in a matter of weeks. We have other programs that are coming out in addition to our traditional hardship programs, which by the way we're not traditional in 2009.
I think the key thing as we move forward through this cycle will be our constant evaluation of our customers, our constant ability to modify the spend and lend that we have, and our credit and collections capabilities, and our ability to be able to talk to our customers to understand their situations and really work with them so that you know those customers that you know have the potential to be good customers when this is over, we ensure that we were there for them.
So I think, I don't regret sort of expanding our lending at all, and I think we are much better positioned, you know much, much better position than we were in 2009 and much better positioned than we were just two years ago.
Our next question will be from Ryan Nash with Goldman Sachs, go ahead please.
Hey, good morning guys.
Good morning, Ryan.
Good morning.
Maybe just a follow-up on the last question. So you talked about 88% of customers being primed, super-prime, but Jeff you also mention that unemployment is higher than where we were in the financial crisis. So I guess, do you have any visibility on where job loss is across your customer base? How that plays into your loss forecasting, and I guess broadly speaking just how do we think about the relationship between job losses and unemployment across your customer base? Thanks.
Well, I think we've said for a while, but certainly general levels of unemployment, while it’s just one of many, many, many factors that influences our ultimate credit losses, it’s probably the single most important factor. I think your question also goes to though, when we look at our consumer customer base, we would believe that the unemployment levels amongst our customers are well below the general levels of unemployment when you think about who's gotten laid off.
When you look at small business, you know small businesses, we talked earlier about the range of actual card members we have for our small businesses and there are lots of different industries, but you have probably a more representative sample amongst our Card Member base because we cut across all industries and if the small business gets shut down, that's a tough thing in the short run for them.
So we’ll have to see how this plays out, but I think, I'm going to go back to where Steve kind of finished his last answer. We've built tremendously stronger risk management capabilities over the last decade. We have taken many steps in the last couple of years to tighten up our risk management practices and we go into this, I would remind you with best in class credit metrics. We think we have best in class capabilities and we think we have a customer base, both consumer and small business that absolutely is more premium oriented that should help us depending on whatever the outcome is here economically.
Our next question will come from Craig Maurer with Autonomous, go ahead.
Yeah, good morning Steven and Jeff.
Good morning, Craig.
So, two questions. I was hoping you could update us on your U.S. regional exposures and secondly, in what I'm sure have been extensive conversations with Ed Bastian and others, you know can you provide a little bit of thought around how you expect travel to reemerge in terms of cross border versus domestic. One of the biggest debates we currently have with investors is the pace at which cross border travel can resume? Thanks.
So let me quickly hit the regional one Steven and you can talk about travel. The regional answer Craig is pretty short, which is I think as you would expect, where our heavy concentrations of our premium oriented Card Member base is well places like California, the Northeast Texas. All places have been fairly significantly hit within the U.S. When you go outside the U.S., particularly in the big urban areas, the London's, the Paris, the Tokyo's.
So I’d say we are right in the mainstream of the COVID-19 challenge when it comes to region. We don't particularly see any differences though when we look across all those regions and countries in terms of credit performance or volume performance. Its remarkably similar globally I would say.
Yeah, so look I talk to Ed probably once a week. You know not only are we good partners, but we're good friends as well and I think he would tell you that you will see more emergence of domestic travel before you see cross border and the reason you'll see that is I think, you know look, I mean how will countries open up their borders to inbound flights number one, and how will the psychology work from a consumer perspective.
I think there'll be a pent-up demand to do something in the summertime, you know in September, but I think a lot of U.S. consumers will probably do that, the United States may do that in the island. So I think travel will emerge more domestically first and it will internationally.
Having said that, I talked to Willie Walsh a couple weeks ago at BA and you know their flights to China are going back and forth and you know relatively full as those markets reopen as well.
So I think it's going to be, it will be interesting, but I think what is going to make the difference here is how safe you make your airline and how safe you make the travel experience. And you know certainly we will work with Ed and our other partners to do our part to help that, whether it's from a boarding process and he’ll take care once you are on the plane, they’ll do a fantastic job and he and his team are thinking about those things and I'm sure they will come up with a really high quality and premium product as they always do, so.
But I do believe a domestic will emerge more than cross border, and I think it'll take more time to get back to cross border travel, would be my sense and you know I think that’s obviously a better question for Ed and the other airline executives, but we do have a sort of a dog in this fight as well, so, but I think that's what will happen Craig.
With that, we will bring the call to an end. Thank you Steve, thank you Jeff. Thank you again for joining today's call and thank you for your continued interest in American Express. The IR team will be available for any follow-up questions. Operator, back to you.
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