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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. Welcome to the American Express Fourth Quarter 2018 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions]. And as a reminder, today’s call is being recorded.
I would now like to turn the conference over to our host, Head of Investor Relations, Mr. Edmund Reese. Please go ahead.
Thank you, Lori. Welcome. We appreciate all of you joining us for today's call. The discussion contains certain forward-looking statements about the company's future financial performance and business prospects, which are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's presentation slides and in the company's reports on file with the Securities and Exchange Commission.
The discussion today also contains certain non-GAAP financial measures. Information relating to comparable GAAP financial measures may be found in the fourth quarter 2018 earnings release and presentation slides, as well as the earnings material for prior periods that may be discussed, all of which are posted on our Web site at ir.americanexpress.com. We encourage you to review that information in conjunction with today's discussion.
Today's discussion will begin with Steve Squeri, Chairman and CEO, who will start the call with some remarks about the company's progress and results; and then, Jeff Campbell, Chief Financial Officer, will provide a more detailed review of full year 2018 financial performance. Once Jeff completes his remarks, we’ll move to a Q&A session on the financial results, with both Steve and Jeff.
With that, let me turn it over to Steve.
Thanks, Edmund, and good afternoon, everyone. I feel really good about the company’s performance and our position as we start 2019. 2018 was a strong year. The investments we’ve made continue to strengthen many of the attributes that distinguish American Express from our competitors.
Unique breadth of services, benefits and rewards that we offer are helping us gain share and scale, which we believe drives sustainable top line growth. We saw continued momentum across the company and throughout the year.
Full year FX adjusted revenues grew 10% with the fourth quarter marking the sixth consecutive time revenues grew at least 8%. The total revenue we generated in 2018 was well above our initial expectations and gave us the flexibility to make additional investments in the business each quarter.
Our full year EPS of $7.33 after adjusting for tax items was a 24% increase over the prior year. We added 12 million new cards in 2018 and billings growth was strong, particularly with small and medium-size businesses and across international regions.
We expanded our merchant coverage around the globe adding over 1 million new locations in the U.S. for the second year in a row and posting double-digit growth internationally. These results demonstrate the advantages that come from our differentiated business model.
Our growth was broad based among consumers and businesses and it was well balanced across geographies and business lines. While over 80% of our revenue is coming from discount revenue and fees, we also generated strong loan growth.
Our 2018 credit performance was a little better than we expected and the data we derive and analyze from all the parties in our integrated payments platform helped us maintain industry-leading write-offs.
We have continued to control our operating expenses which as you saw throughout the year provides operating leverage and the flexibility to make investments in our brand, customer benefits and digital innovation.
Our performance strengthens my confidence in our ability to generate and sustain a healthy level of top line revenue growth which is the foundation for steady and consistent double-digit EPS growth.
Driving our performance was our focus on and investments in the four strategic imperatives that I established in October of 2017; expanding our leadership in the premium consumer 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.
In the premium consumer space, we continued to enhance the range of benefits we provide gold and platinum card members. Not just here in the United States but also in India, Mexico, Hong Kong, Australia, Singapore and Japan.
Our relationship with Delta Air Lines continues to grow and the value we are providing to our mutual customers is a major strength for both of us. Like Delta, the partnerships we expanded with Marriott and Hilton take advantage of the power of our integrated payments model harnessing the assets across our card, travel and merchant businesses. Centurion lounges at major airports around the globe continue to provide exclusive value to travelers and we are planning to add more of them in the year ahead.
The 2018 results reinforce our view that card members appreciate the unique benefits and services we provide.
They recognize and are willing to pay for value, which provides the foundation for earning even a greater share of their spending and borrowing needs going forward.
In commercial payments, we’ve built a global footprint that provides a terrific competitive advantage. Our relationships range from small neighborhood businesses to the largest multinational corporations and we continue to deliver value in each segment.
We added customized benefits on our business, gold and platinum cards. And as you may recall from last year’s discussion, we formed the strategic partnership with Amazon that includes a co-branded small business card and gives our mutual customers greater control and line-by-line visibility into their online purchases.
We are helping small and medium-size businesses grow not just by offering spend capacity but also with products that meet their working capital needs, help to manage their cash flows and handle expenses for temporary employees or contractors.
The investments we’ve made in commercial payments are one of the key reasons that small and medium-size businesses continue to be one of our fastest growing customer segments worldwide.
Moving on to our third imperative, we are making great progress towards virtual parity in the U.S. and expanding merchant coverage internationally. We’ve begun to leverage our progress with marketing offers that encourage card members to take advantage of the growing number of places where American Express is welcome. That’s good for merchants, it’s good for card members, it’s good for American Express.
The same holds true for our 2018 Small Business Saturday and Shop Small campaigns that drove business to merchants in the UK, Australia, Japan and the United States. Looking ahead we are the first foreign company with approval from the People's Bank of China to build a network to process domestic currency transactions. There is still a good deal of work to do but this has the potential to give us an important first-mover advantage.
Our fourth imperative making American Express an essential part of our customers’ digital lives cuts across all lines of business. Here again, our differentiated business model provides unique advantages in a world that is becoming digital at a faster and faster pace. More customers are engaging with us through mobile channels and our app, which placed first in the annual J. D. Power survey gives us new ways to serve them and deliver offers that leverage our merchant relationships.
Later this year, our expanded partnership with PayPal will provide innovative ways for card members to pay online and make fee-to-fee transfers. We are experimenting with blockchain, AI and other technologies and we are driving innovation through partnerships, acquisitions and enhancements to our own digital platforms.
There are many things that make this business special and we’ve been reinforcing that. Not just with strategic business investments but also with the global marketing campaign that we launched in 2018. Our new platform does a terrific job of highlighting the powerful backing of American Express and illustrating why the American Express brand is one of our most important assets.
All-in-all, we have a great deal of progress to report, we are generating momentum and our investments will continue to focus on the four strategic imperatives. I believe this approach will help us to sustain the strong revenue growth that is at the heart of our financial model.
While there are mixed signals in the political and economic environment, based on what we see in the business we are starting 2019 from a position of strength. We expect full year 2019 revenue growth of 8% to 10% and EPS to be between $7.85 and $8.35. I’m excited about the opportunities that lie ahead and our ability to continue to deliver sustainable growth for our shareholders.
Now let me turn the call over to Jeff.
Well, thanks, Steve, and good afternoon, everyone. It’s good to be here today to talk about the fourth quarter of what was a great year for American Express and to layout our expectations for 2019. I will spend a bit more time this afternoon on our full year trends since it is our year end and since looking at our business on an annual basis is more in sync with how we manage the business.
Let’s get right into it with our summary financials on Slide 3. Starting with our full year results, our revenue exceeded $40 billion for the first time at 40.3 billion and was up 10% on a FX adjusted basis. Fourth quarter revenue was also up 10% on a FX adjusted basis. This is our highest level of annual managed revenue growth in over a decade and we feel very good about the consistency of our revenue growth over the entire course of 2018.
Moving down to net income, I do need to talk for a minute about tax. Our results this quarter contain a number of positive adjustments for some items related to the Tax Act as well as for some tax audit. In total, these tax items amounted to $496 million in 2018’s fourth quarter or a $0.58 EPS impact. And of course, as a reminder, in 2017’s fourth quarter we booked a $2.6 billion charge due to the passage of the Tax Act and Jobs Act.
If you adjust for all of these tax items, as we have done on Slide 3, full year 2018 EPS was $7.33, up 24% including the $1.74 of adjusted EPS in the fourth quarter. This is stronger performance than we initially anticipated for the year and comes along with our also having been able to fund more long-term growth oriented initiatives than we had originally planned. This sets us up well for the focus that Steve talked about of sustaining a healthy level of top line growth providing the foundation for steady and consistent double-digit EPS growth.
So let’s turn to the details of our performance starting with billed business which you see several views of on Slide 4 through 6. Starting on Slide 4, we’ve broken out our billings growth between AXP proprietary and global network services, our network business. Given the difference in trends right now, we think this is a helpful disclosure.
Our proprietary business, which makes up 85% of our total billings and drives most of our financial results, was up 11% for the year and 10% for the fourth quarter on an FX adjusted basis. The remaining 15% of our overall billings, which come from our network business, GNS, was down 1% for the year and 4% for the fourth quarter on an FX adjusted basis as a result of the ongoing and expected impact of certain regulatory changes.
Turning to Slide 5 to look at the billings by customer type for the fourth quarter, I would remind you that our global commercial and global consumer segments are roughly the same size representing 41% and 44% of Q4 billings, respectively, while global network services makes up the remaining 15% of billings.
Starting on the left with our small and mid-sized enterprise card members or SMEs, U.S. SME was up 10% as it has been in every quarter this year. We are a leader in the U.S. SME space and we feel good about the consistency strong billings that we have had for several years in this customer segment.
International SME remains our highest growth customer segment with 21% FX adjusted growth in the quarter. Given the low market penetration we see in the top countries where we offer international small business products, we continue to feel good about our long-term growth opportunity in this segment.
In the large and global customer segment, we saw 7% growth on an FX adjusted basis in the fourth quarter. As we’ve been saying for some time, our growth rate in this segment can vary a bit quarter-to-quarter given the large volumes a few customers can drive. So while growth is down from 10% in the third quarter, we see our fourth quarter results as solid.
As an aside, as you know, this segment is heavily T&E oriented. And you can see in the earnings tables that our growth overall in U.S. T&E and global airline billings remains strong at 8% on an FX adjusted basis.
Moving to U.S. consumer, which made up 32% of the company’s billings in the fourth quarter, billings were up 9% in the quarter. Moving to the right, international consumer growth remained in the high teens as it has been all year at 17% on an FX adjusted basis.
We continue to have widespread growth in key markets with continued double-digit growth in Japan and Mexico and over 20% growth in both Australia and the UK, all on an FX adjusted basis.
Finally, on the far right, as I mentioned earlier, global network services was down 4% on an FX adjusted basis driven by the impacts of regulation in the European Union and Australia where we are in the process of exiting our network business over time as a result of changes in the regulatory environment.
Although network billings are down in these regions, if you were to exclude the European Union and Australia markets, the remaining portion of GNS was up 7% on an FX adjusted basis.
To conclude our billings discussion with Slide 6, you see that across our proprietary business there was a modest sequential decline in the growth rates in the fourth quarter. You will recall that beginning with our Investor Day last March we noted that spending from our existing customers showed an additional increase beginning in Q4 '17 and becoming much more evident in Q1 '18. This occurred across geographies and across customer segments.
We attributed it to an increase in confidence with our customer base in the U.S. and around the globe. As we got to the end of 2018, we began to lap that step up. So while we continue to see strong billings growth from existing customers in Q4 '18, we did see some sequential deceleration in the growth rate due to this lapping. So overall, we continue to feel good about the breadth of the momentum we see throughout our business.
Turning next to loan performance on Slide 7, total loan growth was 13% in the fourth quarter. As we’ve said all year, we continue to be focused on driving growth with our existing customers, and about 60% of our growth in lending again came from existing customers this quarter.
The Hilton portfolio acquisition that we completed earlier this year is again contributing about 120 basis points to growth this quarter. And I would remind you that we will lap the portfolio acquisition at the end of January.
On the right-hand side of Slide 7, you see that net interest yield was 10.7%, an increase of 20 basis points over the prior year. For some time we’ve been saying that these increases were going to moderate, we are pleased to see this outcome. The increase was driven by a number of mix and pricing impacts as well as by the fact that we’re continuing to grow our online personal savings program which helps moderate our funding costs in a rising rate environment. In fact, our online personal savings program had higher than expected growth of 24% in Q4.
Turning next to the credit metrics on Slide 8. Starting with lending on the left, you can see that the lending write-off rate was 2.0%, up 20 basis points for the prior year. On a sequential basis, we were down slightly and we’ve continued to come in better than our expectations throughout the year.
On the right side, you can see similar metrics on our charge portfolio. The charge write-off rate, excluding GCP, was 1.4% in the fourth quarter, down 10 basis points from a year ago and down on a sequential basis. I’d remind you though that there is typically more quarterly volatility in these charge rates through seasonality.
More broadly as we look at the fourth quarter, we do not see anything in our portfolio that would suggest a significant change in the credit environment. We continue to feel good about our ability to capture lending share from existing customers while retaining best-in-class credit metrics.
These best-in-class metrics led to the $954 million in provision in the fourth quarter that you see on Slide 9. As you know, the accounting for provision is complex which drives some significant quarterly volatility at times. This makes looking at provision growth on a full year basis more meaningful and for the full year 2018 our provision was up 21%. This is a better outcome than we originally anticipated as the provision growth reflects better than expected credit performance somewhat offset by their also being slightly higher loan growth than we originally expected.
Turning now to revenues on Slide 10, FX adjusted revenue growth was 10% for the fourth quarter as well as the fourth quarter. As Steve mentioned, this represents the sixth straight quarter of revenue growth of at least 8%, driven by steady growth from a well balanced mix of spending fees and lending.
The portion of our revenue coming from discount revenue and fees remained above 80% for the full year and the fourth quarter. I would also point out that the FX impact of our growth rate for the fourth quarter was larger than in Q3 given the strengthening of the U.S. dollar against the major currencies in which we operate. For those of you interested, I would remind you that we share our exposure to top currencies in the appendix of the earnings slides.
Moving to Slide 11, you see the components of our total revenue. Discount revenue was up 8% for the year and 7% in the quarter, both on a reported basis, which I’ll come back to on the next slide. Net card fees growth was up 11% for the year and accelerated to 14% in the fourth quarter. We feel especially good about the breadth products that drive our net card fees.
The increased engagement that we see with new and existing customers gives us confidence in our ability to maintain strong growth in this line. In fact, in recent months we have added value and priced for that value on card products around the world, including our gold cards in the U.S. and UK as well as platinum in Hong Kong, Mexico and India. Net interest income was strong all year and up 17% in the fourth quarter, driven primarily by the growth in loans and net yield that I mentioned a few moments ago.
Turning now to Slide 12 to cover the largest component of our revenue, discount revenue. On the right you see that we achieved discount revenue growth of at least 8% on an FX adjusted basis in all four quarters of 2018. We feel really good about our performance. And as you’ve heard, Steve and I say many times we are focused on driving discount revenue growth not on the average discount rates.
This type of discount revenue growth reflects our ability to optimize our integrated business model and our pricing flexibility. We may selectively adjust discount rate on certain types of transactions which impacts the average discount rate, but ultimately we are doing things that drive profitable economics and discount revenue growth.
So while you can see on the left that our average discount rate was down just 1 basis point to 2.36% for Q4, I will say that going forward our focus will continue to be on driving discount revenue growth not the average discount rate.
Turning now to expenses on Slide 13, let me first point you to operating expenses which were flat in 2018 even with strong billings growth. A key part of our differentiated business model is our ability to drive operating leverage and our performance in 2018 clearly demonstrates that benefit, and we feel confident in our ability to continue to generate operating leverage going forward.
This operating leverage is a key component of our financial model as it helps mitigate the margin compression we are seeing as we invest in our customer engagement costs which you can see on Slide 14 and which were up 14% on a full year basis.
Starting at the bottom with marketing and business development, I’ll remind you that this line has two components; our traditional marketing and promotion expenses as well as payments we make to certain partners primarily corporate clients, GNS partner banks and co-brand partners. While partner payments drove higher Q4 expenses, full year marketing and business development was up 13% reflective of our commitment to invest for the long term.
Moving up to rewards expense on a full year basis we were up 12%, roughly in line with proprietary billings. Continuing onto card member services, we were up 28% for 2018. As we’ve said throughout the year we expect this line to be our fastest growing expense category as it includes many components of our differentiated value propositions which we believe are difficult for others to replicate, such as airport lounge access and other travel benefits.
Turning last now to capital on Slide 15. We ended the year with a CET1 ratio of 11% which is at the top end of our 10% to 11% target range. During the year we were really pleased that we were able to increase our CET1 ratio by 200 basis points in just four quarters completely recovering from the impact of the $2.6 billion Tax Act charge that we took last year. We did this while increasing our dividend by 11% and while also resuming our share buyback program in the third quarter. This is a great outcome and a testament to the high ROEs that our financial model generates.
Looking forward, while there is some uncertainty around what this year’s CCAR process will look like, we feel that being at the top of our 10% to 11% target range positions us well for this year’s process.
And so in summary we feel really good about the momentum we built in 2018 with strong growth across our geographies, customer segments and revenue drivers. As Steve said, we are introducing our 2019 earnings per share guidance at a range of $7.85 to $8.35 which assumes revenue growth of 8% to 10% in line with the last six quarters.
This outlook is based on what we know today about the economic, regulatory and competitive environment. To state the obvious there is some uncertainty about potential changes in the external environment. I would also add that we can have some volatility from quarter-to-quarter and what we are focused on is achieving the annual earning guidance that we have provided today.
Looking at the drivers of our financial results, there are few other key planning assumptions I would highlight. First, full year provision growth is expected to be less than 30%. We expect loan growth to be at levels similar to 2018 as we capture share with our existing customers.
And from a credit perspective we expect lending write-off rates and delinquencies to remain below the industry average although we do expect continued modest increases due to seasoning as we’ve seen for some years now. Second, our best estimate of the effective tax rate is around 22%. Also, as a reminder, EPS outlook is subject to the impact of any other contingencies.
As we close out 2018, we feel good about the business and are focused on sustaining strong revenue momentum. As we have said, driving 8% to 10% revenue growth does require investment. And as you saw in 2018 we are committed to invest to drive share, scale and relevance.
We look forward to providing more insight into our strategic opportunities in 2019 areas of focus during our Investor Day in March.
With that, let me turn it back over to Edmund to begin the Q&A.
Thank you, Jeff. Before we open up the lines for Q&, 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 comes from Don Fandetti with Wells Fargo. Please go ahead.
Jeff, so question about the proprietary billed business moderating in growth rate, I hear you on the tougher comps but is there also sort of a moderation in momentum just given what’s going on globally or are you saying you’re not really seeing any impact? And then as you sort of think into January and Feb, is there anything that you want to call out to us just given all the fears out in the market on the uncertainty?
Well, I think as I said, Don, we’ve been talking for almost a year now about what we saw happen late in 2017 and we said at the time while we’ve been doing lots of things to drive more organic growth in our business there is a noticeable step up in the middle of Q4 '17 that we couldn’t tie directly to things we were doing. That sustained itself but there’s a fairly simple lapping issue as you get into Q4 and yet we have passed that. Now obviously there’s a lot going on in the external environment. But when we look at the trend we saw in Q4, it ties pretty strongly to what I just described. Look, it’s early in January. We tend not to comment on results during interim periods or over a couple of weeks. But the fact that we exited the full year with the momentum we had, the fact that we’ve been providing guidance today for revenue growth of 8% to 10% for 2019 I think Don gives you a pretty good sense that we feel really good about all the things that we see within our business. As for the external environment, well, we’ll have to see how 2019 turns out.
Okay. Thanks.
Our next question is from Sanjay Sakhrani with KBW. Please go ahead.
Thanks. I guess a follow-up question to what Don had and maybe more related to the guidance. So when we think about the revenue guidance, is that assuming some continued moderation in the billed business expectation given the tougher comps as you moved into this year, Jeff? And then on the EPS guidance range, how conceivable is it that you get to the low end of that range on the revenue expectations that you’ve given? Is it in an adverse scenario from an economic standpoint or is there something else in terms of investment that you’re indicating? Thanks.
Yes. Two good questions. So let me start and Steve will add a little color. On the revenue side, yes, clearly we feel good about the overall momentum that we’re exiting 2018 with. The couple of revenue headwinds we’ve been talking about for a while are you’re lapping the Hilton portfolio and you’re getting a little moderation in our net interest yield. But we feel really good about our ability to sustain strong revenue growth. On the EPS side I think you’re asking a good question, Sanjay, and the point I would make is look there’s a little bit of uncertainty in the environment right now. So in a world where 2019 turns out to look something like 2018 in terms of the economy, you should expect this to be at the mid-to-upper end of the range and the lower end of the range is there when you think about things happening in the equity markets, government is shutdown right now, a little bit of uncertainty. So sure, if the economy weakens a little bit, that’s what the lower end of the range.
Yes. And the only thing I will add is, look, we feel really good about the growth algorithm that we’ve been communicating which is we’re really focused on growing top line revenue growth and to do that we will continue to make those investments that enhance our integrated model, enhance our differentiated business model and continue to make us unique. So I feel really good about 8% to 10% revenue growth guidance coming off six quarters in a row of 8% or plus revenue growth. And the EPS range is as Jeff described it. It’s there to provide a little bit of downside if in fact things don’t continue as we saw in '18 and it’s to provide the upside so that if we continue to have a year like we had this year where just to bring everybody back, it was $6.90 to $7.30 guidance at the beginning of the year and we came in at $7.33 which we feel is a great year for us. So there’s not much more to it than that.
Can I just ask a follow up? I’m so sorry but --
Ohhhhh…
Sorry, all right, fine.
No, go ahead. We’re teasing you.
All right. Just the 8% to 10%, like in that moderating scenario, is it conceivable to hit the 8% to 10% or would it come below that is I guess my question, because that’s tied to the --?
Well, Sanjay, now you’re getting in to discuss hypothetical. Look, we feel really good about our revenue momentum and we can hit 8% to 10% in an environment that weakens a little bit. If it weakens more than a little bit, if it weakens a whole lot, it’s going to get harder. But look, I’m not going to speculate about particular levels.
Okay. Thank you. I appreciate it.
And we’ll go next to Ken Bruce with Bank of America Merrill Lynch. Please go ahead.
Thanks. Good evening. I don’t think you want to start breaking your own rules two callers into the Q&A. It can get you into some trouble. So, look, you’ve had a number of great quarters. Momentum had been accelerating. This is the first quarter that we’ve seen some deceleration. I’m interested in terms of when you look at the business in the quarter, was it just the tough comps or was there a change in the confidence interval within the customers that kind of peeled off some of that spending? And to the degree that that continues, does that mean you have to essentially lean harder into the lending side of the equation which is clearly outperforming the rest of the business at the moment?
Ken, let me just start by pointing out that our revenue growth was 10% in the fourth quarter which is what it was for the full year which is the same as it was in the third quarter. So from a revenue perspective, which is the end goal here, I wouldn’t call it a deceleration. Now, yes, volumes decelerated a little bit because of the step up in organic growth from a year ago which if you just think about the math here. Unless you get a further step up this year, which we didn’t see as you lap that, you’re going to see the modest deceleration.
Here’s what I would say and quarters drive me a little bit crazy, but you look at the whole year and with $7.33 from an earnings perspective and 10%, revenue was really steady for us. And I think what’s really important as a management team, we’re managing for the year. You have arbitrary cutoffs which happen to be quarters. But we’re really trying to manage for the entire year. We’re managing those investments across the entire continuum. And the reality is, is when we see good investment opportunities we will make those investment opportunities because they’re good for our shareholders in the medium and long term. So we feel – as I said, we feel great about 2018 and we feel good about the momentum that we have going into 2019.
And just in terms of leaning into credit?
I’m sorry. What’s the question --?
Leaning into credit to I guess either drive revenue, Ken?
That’s correct. Yes.
The portion of our revenues that come from net interest income were 19% for all four quarters of 2018. And in fact our lending growth slowed a little bit in Q4 because as you’ve heard us say we don’t set particular lending targets. We’re focused on the overall customer relationship. Part of that is capturing more of our existing customers’ borrowings. So there’s no leaning more into lending here. You didn’t see it into the fourth quarter and you won’t see it in 2019.
Okay. Thank you. I’ll let you get back onto your rule [ph].
Thank you, Ken.
Our next question is from Chris Donat with Sandler O’Neill. Please go ahead.
Hi. I just wanted to ask one more related to the cadence of spending just because particularly on the consumer side economists have debated for years whether or not there’s a wealth effect with stock markets and consumer spending and it seems like we’ve seen some evidence out of some high-end retailers of slower spending in December. But, Jeff, just to be clear when you’re talking about the lapping effect, that has nothing to do with any slowdown in year-on-year activity particularly on the consumer side from billed business. It’s just the effect of what happened in December 2017, right?
Yes, I guess I’d say two things. Correct. And so if the spending had fallen off in Q4 you would have seen an even bigger decline. All that said, look, let’s acknowledge that the equity market volatility if you want to talk about the wealth effect within the last 10 days of the year which is kind of rounding for our quarter and people are particularly focused on shopping between Christmas and New Year’s anyway. So I’m not sure we have a great long period to test your theory. Clearly, we feel good about the momentum we have entering 2019 and we feel good about the guidance we gave which assumes that spending will stay reasonably strong.
Okay. Thanks very much.
Thanks. We go next to Mark DeVries with Barclays. Please go ahead.
Thanks. It seems like one of the main reasons why you saw no deceleration in revenue growth despite the slowing in billed business was that acceleration, Jeff, that you highlighted in the net card fees line. And I heard you say part of that’s due to the fact that you’ve been pricing for increases in value props. But you’ve been doing that for the last couple of years. I’m just trying to understand what caused the acceleration this quarter and kind of how sustainable is that growth going forward?
Well, on net card fees itself we feel really good about the modest acceleration. I think it was 11% for the year and then 14% in the quarter. And what gives us confidence, Mark, in that is it’s not a product or two products. We have a long multiyear playbook of history here around the world, across our many different products, across consumer and commercial of every few years you refresh the product, you increase the fee, you add more value for consumers so they think it’s a great value. And we think we can keep running that playbook well into the future and that number will stay very strong. I would point out the discount revenue growth though in dollars still kind of dwarfs the net card fees in terms of offering the rest.
The only thing that I would say, Mark, is what’s really important is that continued investment in value propositions. You just can’t take fee for the sake of taking fee. And what we’ve really tried to do whether it’s investment in lounges or in other aspects of the value proposition just not within the U.S. but across geographies and across business lines is to continue to put more value into those cards, value beyond rewards value. And that enables us to provide unique value to card members and also to be able to price for that value, and that’s what’s really important.
Okay, got it. Thank you.
And we’ll go next to Moshe Orenbuch with Credit Suisse. Your line is open.
Great. Thanks. I guess I just wanted to kind of think about or come back to the entire kind of revenue discussion and maybe offer defense of the quarterly framework because we are looking at rates of change and the rates of change do kind of vary during the year and the one that – you’re going to start '19 pretty much at the rate of change that you exited '18. And as I look at it you did 10% revenue growth but you’ve got slower growth in assets as you pointed out, tougher comps on the margin and tougher comps in the early part of the year in spending. And I just was wondering whether you think about the Tax Cuts and Jobs Act and wealthier peoples’ withholdings kind of having an impact on their dilutive spending in '19 and kind of the ability to achieve that high end of the guidance range?
I think – let me – I’m going to give you a little color and then I’ll ask Jeff to jump in. I think one of the things that if you look at this year which was a great year for us was cards acquired. And we invested a lot more money this year than we probably thought we would invest at the beginning of the year. And our belief is while we are growing over higher revenue growth numbers and sure you may not have sort of actually – obviously the tax cut that you had going into this year, the investments that we made this year across multiple geographies, across multiple lines of businesses to acquire card members, to provide card member treatments, to enhance those value propositions we believe that will continue to help us drive the revenue growth not to mention the tremendous investment that we continue to make in coverage not only in United States but on a global basis. And that’s why discount revenue is so high for us. So we believe that investment that we made this year, the additional card members that we have and the treatments that we’re providing to our card members will provide that continued momentum from a revenue perspective.
The only thing I’d add just thinking about the pure financial model is 50% of our revenue is still discount revenue. And it shouldn’t escape notice if you look at Slide 12 of the slide deck that we are getting further and further from some of the things that we’ve been talking about for the last few years that have been pulling the discount rate down, the OptBlue program, regulation in the EU and Australia, some of the other strategic alliances. So for our largest revenue line we’re actually entering 2019 I might argue with more momentum than we’ve had in a while because discount revenue is the simple function of volume discount rate. Card fees were actually entering with more momentum as we talked about in response to Mark than we’ve had in some time. So on the 80% of our revenue that I think is probably most valued by our shareholders, the fee-based revenues I see us as having really good momentum and will bring net interest income along with it.
Great. Thanks very much.
Thanks, Moshe.
We have a question from Craig Maurer with Autonomous Research. Please go ahead.
Hi. Good evening. Thanks. So first, just curious on the expansion of merchants in the U.S., obviously a strong number. Are you seeing help from the rise in ISVs who are typically offering a flat price for all networks that I imagine is adding to the momentum that OptBlue is generating? And secondly, if you could just help us think about growth rates in professional services and the occupancy lines because they both were materially higher than I was thinking in the fourth quarter? Thanks.
So, Craig, if you look at the ISVs, the OptBlue program is embedded within, right. The objective with OptBlue was to take away any sort of arguments or issue in terms of operational or pricing that you might have from accepting American Express if you were a smaller merchant. And when the program first started out the traditional processors were in some cases offering different rates. The reality is now you’re seeing not only traditional processors, ISVs and so forth and aggregators, you’re seeing them offer bundled rates so it becomes a no-brainer decision for a merchant to accept all cards. And so when we started out with this program, it has now reached sort of strategically what exactly we wanted to have happen which is to take the rate conversation off the table. And I think that’s it. That was the essence of OptBlue. And having it embedded in every acquirer, every aggregator that exists in the United States is what’s driving that momentum and all that – we used to talk about as feet on the street. It’s obviously not as much feet on the street anymore, but that’s what’s driving us and will drive us to as we say virtual parity coverage by the end of 2019.
On your other question, Craig, I’d remind everyone that our OpEx was flat for the year and essentially flat for the quarter. There’s a little bit of P&L geography at work here. These are not the greatest names for these two lines as we’ve talked about in the past. Our professional services expense includes ironically some of what Steve was just talking about. So some of the fees that we pay to merchants, acquirers actually run through that line and we’ve evolved the P&L geography of some of those things and that caused a little increase in that line along with some of the things we’re spending on technology. Similarly, I’d remind people that the line called occupancy and equipment expense not very intuitively includes amongst other things our amortization of clear costs. And as the company converts to the agile method of development, like any, call it leading-edge technology companies that’s causing us to evolve some of the ways that we amortize those costs and capitalize them and that caused the spike this quarter. Again though I bring you back to OpEx overall because a lot of it is just where we tend to put the dollars is flat and that’s what we’re focused on.
Okay. Thank you.
Thanks, Craig.
We’ll go to John Hecht with Jefferies. Please go ahead.
Thanks, Steve and Jeff. As we entered this year I think the expectations were for some modest compression on the discount rate and it largely held fairly stable. Jeff, you mentioned the effects of OptBlue you have largely taken hold within that realm. Should we be thinking about a relatively stable discount rate this year within your guidance or is there any other factors to think about?
Well, I’d come back John to what I said in my script which is remember we are most focused on driving discount revenue and at times we make decisions that impact the average discount rate that drives discount revenue. So yes, this quarter where we only were down 1 basis point, that’s because we are not seeing that much year-over-year impact anymore from any of OptBlue or EU or Australia regulation or some of the big strategic deals we cut a while back. So that’s what happened in Q4. That tells you where the current trend is. We’re going to get out of the business of providing forward guidance though on the average discount rate because we want the flexibility if something comes up in the world that causes us to want to do something that might drive that average down but drives discount revenue, that’s what we’re going to do. So that is our focus. It’s the steady kind of discount revenue growth that you saw all through 2018.
I appreciate the color. Thanks.
We’ll go to David Togut with Evercore ISI. Please go ahead.
Thank you. Following up on the earlier question, Visa and MasterCard recently offered to reduce by as much as 40% their interregional interchange rate into the European Union at the request of the European Commission. Can you help us think about how you’re going to price your product in Europe both in terms of the proprietary business and through GNS in light of these changes by Visa and MasterCard?
Well, remember there is – when you look at the rules that are in the EU were viewed as a three-party system and Visa and MasterCard are viewed as a four-party system. To keep our three-party status, we have unwound our GNS business. So there is no pricing on our GNS business. In addition to that because we are a three-party system, we don’t have the same interchange caps that exist for Visa and MasterCard. So what they did was brought their inbound traffic down to their in-market interchange rates and what our inbound and our local rates are the same. And remember that’s the interchange caps. There were network fees, there were acquirer fees and those fees have actually probably expanded from a merchant perspective over time if you look and sort of look into it in detail. So, look, we price the value. We make sure that we have the appropriate premium. We have seen – as Jeff said, we saw some pressure in our discount rates not only in Australia but in Europe as a result of competitors bringing their rate down, because when there is regulation like that your value doesn’t go up, your gap to – the spread that you have. And as we’ve said many times on these calls, we still have a premium. Outside the United States our discount rate is still a premium and we provide a premium product and premium value and we’ll continue to do that whereas in the United States we’re pretty much at parity in an aggregate basis. So that’s the European story.
Thank you.
Our next question is from Bob Napoli with William Blair. Please go ahead.
It’s actually Brian Hogan filling in for Bob Napoli. The question is on focus on China actually and your strategy there. One, why did you get the license ahead of Visa and MasterCard and describe your relationship with LianLian? And what’s your plans then to do there going forward? How big of an opportunity is it in your mind --?
Well, I can’t answer why we got it over Visa and MasterCard. That’s a question for the Chinese government. But look, we have preapproval. We are working with LianLian who we’ve worked with for many years. We’ve worked with them in the prepaid business and in a lot of those aspects. And from our perspective working with a partner that understands the market and working with a partner like that allows us to reduce risk, increases speed to market for us. And look, we think over the longer term it’s a good opportunity for us but in the shorter term we have to get full approval, we have to build out the network, so this is not a 2019, 2020 impact to our business. And it’s an ever changing political and regulatory environment and we’ll just see how big this could possibly be. But we’re very excited about being the only ones with the preapproval. We’re excited about our partnership with LianLian and we’re excited about the possibility here of working with many banks in China to issue cards and have them ride on our – in our domestic network in China over the medium to long term.
Did you have to give up any technology for that or any rights around that?
I’m sorry. Can you say that again?
Like the technology sharing, obviously it’s under a lot of scrutiny with the tight tariffs. But did you have to give up any technology rights?
No. We’re talking about really routing transactions and this is not the most sophisticated technology in the world. We’re not talking about our credit algorithms. We’re not talking about our fraud algorithms. In fact, we are not issuing cards in China. So the best way to look at it is we will look exactly like Visa or MasterCard looks in the United States and in other markets. That’s how we’ll look in China. We are not a merchant acquirer. We are not a card issuer. We are truly a network and the technology involved in network is obviously transaction routing and just some network fraud detection and things like that. I don’t want to underestimate the network technology. But certainly not as sophisticated as the technology that needs to exists to make the credit underwriting decisions that we make to make the note preset spending limit that we do to acquire customers and things like that. So that’s not what we’re doing and that’s not any of the technology that we will be sharing or plan to share.
Thank you.
We have a question from Betsy Graseck with Morgan Stanley. Please go ahead.
Hi. Good evening.
Good evening.
Hi, Betsy.
Hi. I just had a couple of questions. One, we talked a bit about revenue growth and the expenses in the quarter and I understand that software amortization costs are in the OpEx which is going to grow over time. I’m just wondering if the expense ratio that you presented this quarter has got any kind of likely nonrecurring items or is this a level that you think over time you’re going to be building towards or should we expect that you’ll be driving a little bit more efficiencies as we go into next year?
No, we feel really good Betsy about having our overall operating expenses. Within it there’s some things moving our geography. But if you look at it overall it’s flat year-over-year. It has been flat for several years. In fact, if you take a seven or eight-year view, it’s only up a couple percent. Not as a CAGR, it’s only up a couple percent. So we have a long, long track record of building upon the nature of our business model to every year get operating leverage and we see a long, long runway to continue to do that.
So you could just talk a little bit about whether or not the Marriott data breach or Starwood data breach had any impact and was there anything that you’re planning on doing going forward to work with partners on that potential risk? And then maybe if you could just let us know based on the tax event that happened this quarter if there’s any change to the outlook in tax going forward or not? Thanks.
Look, as far as the Marriott data breach and I think Arne Sorenson and his team have done I think a good job communicating not only to us but communication with the general public as well. And a lot of that was from Starwood data that existed in their reservation – in their old reservation system years and years ago. And so when you look at those – if that card data was breached and there was some cards that most of the data was encrypted, we saw no appreciable spike in fraud at all. And probably we would have seen it three or four years ago because that’s apparently when some of the breach occurred. So we saw nothing from that at all in our numbers. And look, this is something that is with us to stay. It’s why we’re trying to move as many transactions as we can to tokens and so that you take the pan out of the equation. But the reality is, is that this was not a breach that impacted us at all. And as far as – I think Jeff gave guidance on our tax rate for next year of 22%, so that’s that.
Okay. Thanks.
We have a question from Eric Wasserstrom with UBS. Please go ahead.
Thank you very much. Hello. Just maybe to follow up on some of the many questions that have been asked about the billed business trend. As you’ve covered there’s a bit of deceleration there, but that pace of deceleration is a bit more than the similar pace of deceleration in some of the marketing and acquisition-related costs. And I’m wondering if that in any way addresses or raises the issue of the efficacy of those acquisition synergies?
Well, the short answer is no. Remember, we just had a tremendous year for new card member acquisition and one of the things you’ve heard all of me, Steve, Doug Buckminster in particular talk about in various forms is the tremendous gains in new card member acquisition that we’re getting every year as they move to more and more digital methods and gains sophistication. So we feel really good about all of those trends. We are investing in value propositions. So when you look overall of what we call our card member engagement costs, those costs are growing faster than revenue. They did in 2017, they did in 2018 and I expect them to do so again in 2019 and that’s why the operating expense leverage that we just talked about with Betsy is a really important offset to that. And that’s really the financial model we’re running here.
And if I may just follow up on the capital commentary, Jeff, you talked about having a strong CET1 into this year’s CCAR. Obviously the other thing that’s going on this year is running the CECL accounting in parallel in anticipation of the implementation next year. And I’m sure it’s early to ask for an expectation, but as you’re contemplating CECL, is that going to have any influence on your appetite for capital management actions this year?
Okay. I think you need me to make about three hypothetical assumptions there, Eric, one about what this year’s CCAR process looks like; two, about what CECL does for us; and three, about how the Fed is going to react. Look, I think the short answer is CECL is not going to impact how we manage our CCAR process in this calendar year in all likelihood. We are working through CECL. I think for our credit cards, our results are liable to not be dissimilar to what you see at other banks.
For charge cards, the numbers will clearly be lower. The Fed has said they will give people three years to adapt to whatever the capital impact was. And something I think you need to keep in mind for us relative to others is nobody else has the kind of ROE that we have, right? We added 200 basis points to our CET1 ratio in four quarters this year through a variety of efforts. What that means is even in the worse possible scenario of how the Fed thinks about the capital implications at CECL, for us particularly over a three-year period it is not going to be a particularly significant barrier and I don’t see it having any impact this year.
Okay. Thanks very much.
We’ll go to Chris Brendler with Buckingham Research. Please go ahead.
Hi. Thanks for taking my question. Just wanted to maybe follow up a little bit on the discount rate and some of the improvements you’re seeing there. It feels like those pressures that are coming from Europe and regulation as well as OptBlue seem to be moderating a little bit, but the performance this quarter actually it seem to be even better than the normal rate of deceleration that you’ve seen in the gross discount rate and also I noticed the net discount rate after some of the cash back and other costs that go through actually ticked up year-over-year basis points. So is that some sort of mix issue that’s helping that sort of rebound a little bit? And does that play a key role in your 2019 revenue guidance at discount rate compression we’ve seen in the last couple of years maybe moderating significantly? Thanks.
Chris, I really wouldn’t call out anything we haven’t talked about which is we are getting further from some of the things that have been putting undue pressure. You’re correct that mix, industry mix, geographic mix always played a little bit of a role here in the discount rate. But in some ways I’ll go back to some of the comments I made to response to Moshe. We think we’re going into 2019 with great momentum around discount revenue and that of course by far is our most important revenue driver and that’s momentum on the volume side and frankly it’s momentum in terms of our relationship with merchants and where the discount rate is.
Just to clarify, does the -- regulation stuff, like you have these contracts get renewed with merchants, is that still an ongoing headwind that you’re offsetting with some of this momentum, or is that sort of to moderate a little bit as you sort of -- successfully after a couple of years of lower interchange rates in Europe and Australia sort of got into a new normal? I appreciate it, Jeff. Thanks.
Well, I think we first started about the impact – talking about the impact of European regulation two to three years ago. And we said at the time we’re in no hurry to get to a new steady state, but we’re certainly getting closer to it. I will say Australia moved much more quickly. And so Australia, we’re probably well through the process as we enter 2019. So yes, that’s exactly what we’re saying is that not that there was never an impact, but we’re just getting passed the majority or the biggest piece of it.
Fantastic. Thanks very much.
Our next question is from Bill Carcache with Nomura. Please go ahead.
Hi, Bill.
Thank you. Hi, Steve and Jeff. I had a follow up on your EPS guidance. It seems that with the revenue growth starting point of at least 8% and layering in capital return which by our math you guys can reduce the share count by about 3.5% in 2019 at the current share price assuming you maintain an 11% CET1 and then factoring in tailwinds from provision expense declining and converging with loan growth as you guys expect. And then finally some expense leverage that you guys also feel good about. You put all those pieces together that suggest that this is a very conservative EPS guidance range that you guys have given and that you’ll be positioned to raise the low end of that range as we progress through the year. Am I thinking about that the right way?
It’s a lot of thinking. Look, as we look at this what’s really important for us is that we continue to invest to drive top line revenue growth. And we have in our plan right now investments that we think will drive the appropriate consistent double-digit EPS growth and strong revenue growth. But we also do not have in our plan a lot of investments that we could continue to make. And so if the revenue grows even higher or to the higher end of the range, I will continue to make those investments that will continue to generate scale and more share and more relevancy which will continue to payoff in the medium to long term. So I think what’s really important, Bill, is that we really start with the growth algorithm which is not starting with EPS and working down to revenue but starting with revenue and generating an EPS number for us. And I want to make this company bigger, more relevant and even more scalable than we are today and that’s going to mean more cards, more coverage and more investment. And so where we are right now is to be quite honest is as far as I think I can take the investment plan without causing you guys to look at this and say, are we not making enough money. But we do have plenty of great investment opportunities that we will take advantage of if we get some more momentum in the economy and even drive revenue higher, and you’ll see us make even more investments.
That’s helpful. Thank you.
Our last question will come from the line of Dom Gabriele with Oppenheimer. Please go ahead.
Thanks for taking my question. Can you just quickly talk about what you’re hearing from USC? It was about their expectations for commercial spending and how that may have changed over the last few months for '19?
Yes, look, the conversations that not only we’re hearing from CEOs – that I’m hearing from CEOs, but more importantly what my corporate sales organization is hearing from the people that are authorizing purchases and purchasing, is there’s not a pullback. So when you start to look at large corporate and large global corporate and we have pretty good insight into that, and I’m not just talking about from a T&E perspective, I’m just talking from an aggregate spending and that includes travel as well, but we don’t see any pullback on the horizon. I have a lot of opportunities to spend time with the number of CEOs. And the reality is, is that they’re not contemplating a pullback. And so if the people that are spending the money are not contemplating a pullback, that gives me great confidence, especially from a commercial perspective because if they pullback it then dribbles down to middle market companies and small businesses and obviously then to consumers. But we don’t see that happening. And I haven’t heard any of that conversation. In fact, I’ve heard just the opposite from purchasing managers who are making those decisions.
Thanks so much.
So with that, we’ll bring the call to an end. Thank you, Steve, and thank you, Jeff. As you may have seen in our press release, we will be hosting an Investor Day on March 13th and look forward to seeing many of you then. Thank you for joining tonight’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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