American Express Company

Ladies and gentlemen, thank you for standing by. Welcome to the American Express Q4 2020 earnings call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If you wish to ask a question, please press 1, then 0 on your touchtone phone. You will hear a message indicating you have been placed in queue. You may remove yourself from the queue at any time by pressing 1, then 0 again. If you're using a speakerphone, please pick up the handset before pressing the numbers. Should you require assistance during the call, please press star, then zero. As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Head of Investor Relations, 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 in our reports on file with the SEC. The discussion today also contains non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter's earnings materials as well as the earnings materials for the prior periods we discussed. All of these are posted on our website at ir.americanexpress.com. We will begin today with Steve Squary, Chairman and CEO, who will start with some remarks about the company's progress and results. And then Jeff Campbell, Chief Financial Officer, will provide a more detailed review of our 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. Good morning and belated Happy New Year to everyone, and hope you and your families are healthy and safe. As you saw, we earned $1.76 per share on $9.35 billion in revenues in the fourth quarter. And while we're still seeing the impacts of the COVID pandemic on our business, the trends have steadily improved as the year went on. At the beginning of the pandemic, we had little visibility into the future, but we did have a plan for managing the company through this period of uncertainty, focusing on four priorities, supporting our colleagues, protecting our customers and our brand, remaining financially strong, and at the same time, taking steps to structure our company for longer-term growth. We've made substantial progress against each of these priorities. As I talked about last quarter, we see this cycle playing out in three phases. Phase one has been about managing through the peak of the uncertainty, which is what we focused on for most of 2020. We are now solidly in phase two, which is about investing to rebuild our growth momentum. Our goal in phase two is to prepare us for phase three, a return to pre-COVID levels of earnings and our financial growth algorithm. Our progress in managing through phase one confirms the strength and resilience of our differentiated business model. Key elements of this model, such as the diversity and scale of our customer base, our brand, our global merchant network, and our integrated payments platform, have given us a solid foundation to build on as we move into the next phase. As we've seen throughout this period, our customers have been resilient and adaptive. Since the lows in mid-April, overall card member spending has steadily improved. Our card members quickly adapted to the current environment with an acceleration in their shift to online and card not present spending. Non-T&E spending recovered to pre-COVID levels in Q3 and continued to grow throughout the holiday season in Q4. Consumer holiday spending was up 11% globally year over year, exhibiting particularly strong online growth of 40%. In addition, our value propositions and brand continue to resonate with our customers. Attrition rates on our proprietary products remain lower than last year, and our customer satisfaction levels remain above pre-COVID levels We again ranked number one in J.D. Power's annual credit card satisfaction study of U.S. consumers for the 10th time in the 14 years the study has been conducted. Throughout the year, our merchant network continued to grow globally. We sustained virtual parity coverage in the United States, and we added more than 3.7 million merchant locations internationally in 2020. Credit performance continued to be outstanding thanks to our robust underwriting and risk management capabilities, and the quick adjustments we've made as the pandemic hit. Our Q4 delinquencies and write-offs are at some of the lowest levels we've seen in a few years and are best in class. Our business model has also helped to further strengthen our already strong capital and liquidity position over this period. And our colleagues have proven to be even more agile and highly engaged in moving the company forward, despite dealing with disruptions of the pandemic, which has been brought to their lives at work and at home. All in all, I feel good about all that we accomplished in 2020 and some of the highlights of which you can see on slide two. I am even more confident that our strategy is the right one to position us for growth going forward. That being said, the effects of the pandemic will continue to linger in the short term. The pace of economic recovery is dependent on the course of the virus and the speed with which vaccines can be distributed. For us, the timing of how quickly we can get to phase three and return to pre-pandemic levels of earnings depends is also tied to recovery in consumer travel and entertainment spending, and therefore dependent on how soon lockdowns ease, travel restrictions lift, and the general public begins to feel comfortable traveling again. We continue to be confident that consumer spending on travel and entertainment will come back to pre-COVID levels. We just can't predict right now how quickly. Given this environment, we are looking at 2021 as a transition year, during which our focus will be on rebuilding growth momentum. By rebuilding growth momentum, we mean firing up our core acquisition and retention engines, scaling key next horizon opportunities, and retaining the flexibility in our financial model. To accomplish this, we plan to aggressively increase investments in our core strategic business areas with a specific focus on the following. In our consumer and commercial businesses, we plan to continue to ramp up our card member acquisition activities, inject additional value into targeted products, and continue our strategy of periodic refreshes of our premium products. Additionally, in our commercial business, we plan to continue to invest in scaling our cash flow and supplier payment solutions beyond the card. A few examples of how we're doing this include the work already underway to integrate and relaunch Cabbage's suite of products, including a digital business checking account for small businesses, as well as continuing our efforts to expand the penetration of our AP automation solutions, where we have seen volumes double in the last year alone. On the network side, we plan to continue our focus on increasing coverage, as well as improving perceptions of coverage and welcome acceptance globally. We're also investing in enhancements to our network to deliver value to our various partners and to support the growth of debit capabilities in China Finally, we plan to continue investing heavily in new and expanded digital capabilities across our businesses. The nature of the pandemic has accelerated customer engagement with many of our digital features, services, and experiences we rolled out in 2020 and over the past several years, and we think these trends are here to stay. At a high level, those are the key areas where we plan to increase investments this year to generate the momentum that will help carry us through the recovery and into the future. Before I hand the call over to Jeff, let me end with a few words about how we're thinking about our financial performance in 2021 and beyond. On last quarter's earnings call, I talked about how my confidence in the long term was growing, though the near term remained harder to predict. Today, I'm even more confident about our growth potential in the medium and long term, so I'm still cautious about predicting the precise pace of the recovery in 2021. As I discussed, our plan for this year calls for maximizing investments in those areas that enable us to rebuild growth momentum. With this in mind, we will not be focused on a particular EPS target in 2021, though Jeff will provide you with some scenarios of potential outcomes in a few minutes. In reflecting on COVID's impact on the economy and our business in 2020 and where we are as we begin 2021, We look at this two-year period as a pause in the growth momentum we had been generating for the previous 10 consecutive quarters before the pandemic began. As a result, we will be focused on achieving our aspiration of being back to the original EPS expectations we had for 2020 in 2022, and for the company to be positioned to execute on its financial growth algorithm going forward. I believe we have the right plan for achieving this aspiration. The foundation of our business is solid. Our brand, customer relationships, and partnerships are strong. Our colleagues are focused and committed, and we have shown that we can adapt to rapidly changing conditions. I'll now hand the call over to Jeff to review our financial results, and then we'll take your questions after that. Thank you for your time. Well, thank you, Steve, and good morning, everyone.

Today, I'll discuss our fourth quarter results in the context of what was clearly an unprecedented full year 2020. I'll also provide you a sense of how we're thinking about the future with some scenarios, potential outcomes for 2021. Let's get right into our summary financials on slide three. Our results in the fourth quarter continue to improve sequentially. but were still significantly impacted by the global pandemic and the resulting containment measures that governments are taking around the world. Fourth quarter revenues of $9.4 billion were down 18% year over year, driven by declines in spend, lend, and other travel-related revenues, while card fee revenues continued to grow. Net income was $1.4 billion, and earnings per share was $1.76 in the fourth quarter, down 13% from a year ago. Now, as I've said over the past three quarters, the key drivers of our financial performance in this environment remain volume and credit trends. So I'll again spend the most time on these two topics. Turning to the details of our volumes first, let's start with build business, which you will see several views of on slides four through 10. The rapid pace of change in billings has slowed since September. And so we have returned to showing quarterly trends in our build business slide since we think looking at trends on a quarterly basis is more meaningful due to the noise you see in monthly trends from days mixed and the timing of holidays. Starting with slide four, overall build business declined 16% year-over-year in the fourth quarter. Our proprietary build business, which makes up 86% of our total billings and drives most of our financial results, was down that same 16%. and the remaining 14% of our overall billings, which comes from our network business GNS, was down 15% in the fourth quarter, all on an FX-adjusted basis. When you look at our billed business performance in 2020 and think about what this might mean for 2021, it's important to think about T&E spending and non-T&E spending separately, given the very different impacts the pandemic has had on these volume trends, as you can see on slide 5. Non-T&E spending, which has long been the majority of our volumes, hit a trough in the second quarter, but was back above pre-pandemic levels by the third quarter and grew 4% year over year in the fourth quarter, as our card members, particularly consumers and SMEs, have adapted their spending behaviors to the current environment. T&E spending, on the other hand, has remained down much more significantly, declining 65% year-over-year in the fourth quarter, though it did show some continued modest sequential improvement driven primarily by consumers. As a reminder, prior to the pandemic, non-T&E spending was around 70% of our proprietary billed business, and today it represents almost 90%, as you can see on slide six. Looking at the billings mixed by customer type at the bottom of the slide, you see that the majority of our T&E spending has historically come from our consumer business, and that is even more true today. Taking a closer look at T&E on slide seven, you see that consumer T&E continued to recover faster than that of SMEs and large corporations. We expect this trend to continue, given the pent-up demand for travel that we see in our consumer base and our expectations that corporations, particularly large ones, will continue to limit their T&E spending for some time. You also continue to see different paces of recovery within the categories of T&E. Cruises, which are a very small part of our business, have been slower to recover, followed by the airlines, though both showed modest improvements sequentially in Q4. Restaurant spending, on the other hand, has been the most resilient throughout decelerated slightly during Q4 due to colder weather in the U.S. and renewed dining restrictions in certain geographies. Moving on to global consumer on slide eight, we continued to see an acceleration in online and card not present spend growth throughout 2020, especially during the holiday season, which drove 5% growth in non-T&E spending in the fourth quarter. Turning next to our global commercial bill business on slide nine, non-T&E spending has returned to pre-COVID levels and grew 2% year-over-year in the fourth quarter. Within our commercial segment, you continue to see a tale of two very different customer types. Spending from small and medium-sized enterprise customers who historically have the highest mix of non-T&E spending has been the most resilient throughout 2020, whereas large and global corporate card spending, which historically has been primarily T&E, has been down the most during the pandemic. I will remind you here that spending from our SME customers now represents 86% of our commercial-billed business. You also see the impact of different mixes of T&E spend when you look at our international regions on slide 10, which have more travel-related spending historically and thus are showing larger overall declines in volume. More generally, it remains remarkable how much of the world is moving in a fairly similar pattern, which speaks to the global impact of this pandemic. To sum up on volumes, we feel good about the pace of recovery in non-T&E spending throughout 2020 and expect it will continue to grow steadily in 2021. But more broadly in 2021, Our overall volume recovery to pre-pandemic levels will be primarily driven by what happens with T&E, since non-T&E has already substantially recovered. While we currently expect spending in Q1 2021 to remain relatively in line with Q4 of 2020, outside of some impact from normal seasonality, our current assumption is that by Q4 of 2021, T&E spending will have recovered to around 70% of Q4 2019 levels. Moving next to loans and receivables, on slide 11, loan and receivable balances were up 4% and 7% sequentially in the fourth quarter relative to the third quarter driven by higher spending volumes during the holidays. However, loan and receivable volumes were down 17% and 24% year-over-year respectively in the fourth quarter driven by the continued declines in spending volumes that I just spoke of. We also continue to see higher paydown rates from revolving card members on our credit cards. Looking forward into 2021, I would expect the recovery in loan balances to lag the recovery in spending volumes if the higher paydown rate trends we saw in 2020 continue. In addition, I'd remind you that we typically see a modest sequential decline in balances in the first quarter of every year, due to seasonal spending patterns. Turning next to our traditional credit metrics on slide 12, you will see that the credit trends in the fourth quarter remained remarkably strong, with card member loans and receivable write-off dollars, excluding GCP, down 30 percent and 59 percent year over year, respectively. In addition, our write-off and delinquency rates continued to be down year over year and down sequentially in the fourth quarter, reaching the lowest quarterly loss rates we've seen in several years for both card member loans and receivables. Looking at the total balance of loans and receivables that are in delinquent status or in one of our financial relief programs on slide 13, those balances continue to decline sequentially to $4 billion at the end of Q4 and now stand $1.2 billion higher than they were pre-pandemic. Historically, the credit outcomes of card members that enroll in these programs are better than delinquent card members that do not, with around 80% of enrolled balances successfully completing these programs, and the repayment trends of the card members currently enrolled in FRP have been in line with our historical experience. It is unusual to see credit performance this strong in an environment like this. It all starts with the changes we've made over the last few years in our risk management practices, which gave us a solid starting position, as well as the way we mobilized our organization to ensure that we had the appropriate programs and people in place to support our card members who needed financial assistance. Of course, like others, our customers are also helped by external factors, such as record levels of government stimulus and the broad availability of forbearance programs. As a result, we do remain cautious about the potential for a significant downturn in the pace of economic recovery. And that caution is reflected in the macroeconomic outlook that informs our credit reserves. Moving on to slide 14, you will see that the macroeconomic assumptions that were used in the modeling of CISO reserves for the expected lifetime losses of the loans and receivables have modestly improved in both the baseline and downside scenarios since Q3. but the two scenarios do remain sharply divergent. In our reserve calculations for the fourth quarter, we continued to wait heavily towards the more pessimistic downside scenario due to the continued caution that I just spoke about. Despite this caution, the impact of this modest improvement in the set of macroeconomic assumptions on our reserve models and our strong credit performance led us to release $674 million of reserves in the fourth quarter, as you can see on slide 15. This reserve release, coupled with our low write-offs, drove a provision expense benefit of $111 million in the fourth quarter. We ended the year with $5.8 billion of reserves, representing 7.3% of our loan balances, 0.6% of our card member receivables balances, respectively. We believe that the reserves on our balance sheet, which are up $1.5 billion from the pre-pandemic levels, are appropriate, giving the broad range of economic outcomes envisioned in our baseline and downside scenarios and our caution about the potential for a significant downturn in the pace of economic recovery. Turning now to the details of our revenue performance on slide 16, fourth quarter revenues were down 18% year over year, driven by declines in spend, lend, and other travel-related revenues, while net card fees continued to grow, as you can see on slide 17. Net card fee growth remained strong throughout 2020 and grew 12% in the fourth quarter, demonstrating the impact of the continued card member engagement that Steve discussed. But growth has been decelerating steadily because of our decision to pull back on new card acquisitions as we were managing through the peak of uncertainty during this crisis in the second quarter. Although we started to ramp up new card acquisition in the third and fourth quarter and will continue to increase investments in this area this year, it will take time for card fee growth to re-accelerate. As a result, I do expect card fee growth to dip into the single digits midway through this year before it starts to eventually re-accelerate. Moving on to the details of net interest income and yield on slide 18, net interest income declined 17% on an FX-adjusted basis, roughly in line with the loan declines we saw in the fourth quarter. Net interest yield on our card member loans increased 10 basis points year-over-year in the third quarter, driven by modest tailwinds from funding costs and pricing for risk, mostly offset by declines in revolving loan balances. Looking forward, I'd expect net interest income to be relatively flat to Q4 in the first quarter and then increase modestly as loan volumes recover. Turning next to our largest component of revenue, discount revenue, on slide 19, as expected, the contraction in discount revenue continued to be a bit larger than the decline in billed business due to the difference in T&E and non-T&E billing strands. This difference drove an 11 basis point decline in the average discount rate in the fourth quarter relative to the prior year since, as a reminder, we on average earn higher discount rates with T&E merchants versus non-T&E merchants. The discount rate was also down modestly sequentially due to the seasonal trend we typically see in the fourth quarter. Looking forward into 2021, I'd expect discount revenue to recover generally in line with billed business, with the discount rate trends impacted by the pace of T&E recovery. Coming back to total revenues on slide 20, you see that the overall revenue trends in 2020 have broadly moved in line with build business trends, given the spend-centric nature of our business model. While I would expect first quarter 2021 revenues to be broadly in line with Q4, outside of some impact from seasonality, if T&E spending recovers to around 70% of 2019 levels by Q4, as I mentioned earlier, you'd probably see overall revenue growth of around 9% to 10% for full year 2021. And if T&E recovers more slowly or quickly, you would see full year revenue growth that's somewhat lower or higher than that 9% to 10%. Moving on to slide 21, we're continuing to break out our expenses between variable customer engagement expenses, which move naturally in line with spend volumes and benefits usage, and marketing and OPEX, which are driven by management decisions. Variable customer engagement expenses in total were down 24% for the full year, driven by lower spending and lower usage of travel-related benefits. The year-over-year declines in variable customer engagement expenses provided around a 50% offset to the full-year revenue declines we saw in 2020. In the fourth quarter, that offset was closer to 40% as we began to see some higher spending and usage of travel-related benefits. And I would expect that relationship to continue into the first quarter of 2021. Moving on to the marketing expense line, we invested $1 billion in the fourth quarter as we ramped up our investments in new card acquisition and continued to invest in value injection. As Steve mentioned, in 2021, Our focus is on rebuilding growth momentum and maximizing our investments to do so. As a result, we could spend as much as a little over $4.5 billion in marketing this year. Our ultimate marketing investment levels will be governed by the universe of attractive investment opportunities that we see as we move throughout the year and the pace at which we wind down our value injection efforts as customers begin to experience again the full benefits of our existing value propositions. Turning to operating expenses, you can see that they were down 6% year-over-year in 2020 as we kept tight control over our expense base while selectively investing in areas critical for our long-term strategies. In 2021, we expect our operating expenses to be around $11.5 billion below 2019 levels, as we continue to keep tight control over our operating expenses while also investing to rebuild growth momentum. Last, while you saw some quarterly volatility this year on our effective tax rate, the final fourth quarter tax rate was a bit below 23%, and I'd expect around a 23% effective tax rate in 2021, absent any legislative changes. Turning next to capital and liquidity on slide 22, our capital and liquidity positions remain tremendously strong, as they have been all year. Our CET1 ratio ended the year at 13.5% after hitting in the third quarter our highest level since we began reporting this ratio. And our cash and investment balance ended the year at $54.6 billion and has been at record highs since the start of the pandemic due to our distinctly counter-cyclical balance sheet. We remain confident in the significant flexibility we have to maintain a strong balance sheet in liquidity in periods of heightened stress and uncertainty. Looking forward, we are committed to our dividend distribution and to our long-term CET1 target ratio of 10% to 11%. We plan to resume share repurchases starting this quarter up to our maximum Fed-authorized capacity of around $440 million in Q1. Beyond Q1, our capital distributions will be a function of the Fed's guidelines, our capital generation, and the growth in our balance sheet. To sum up, we feel good about how we've navigated through the unprecedented challenges of 2020, and we feel well-positioned to rebuild our growth momentum in 2021. We now know a lot about how our customers and our business are performing in this environment. The two areas that do remain hard to harder to predict for 2021, though, are the same two we have talked about since the pandemic began, the ultimate credit outcomes and the pace of the recovery in T&E spending, as I mentioned earlier. That said, the range of potential outcomes on credit and reserves is the most impactful to our performance in 2021. And so on slide 23, we have outlined two scenarios. Most importantly, scenario one assumes that the caution we have shown in our Q4 credit reserves about the potential for a significant downturn to the pace of economic recovery turns out to be warranted. Such an economic outlook would likely put some pressure on our current assumption of a 70% T&E recovery by Q4, and this would likely drive a somewhat weaker revenue recovery. The combination of these things could lead to an EPS outcome as low as around $5. Scenario two, most importantly, assumes that we do not see a significant downturn in the pace of economic recovery, leading us to continued strong credit performance and having no need to maintain our current level of credit reserves. This sort of economic outcome would also likely drive a somewhat stronger revenue recovery. The combination of these factors could lead us to a much stronger EPS outcome in the area of $7. In either scenario, our investment levels will be governed by the universe of attractive investment opportunities that help us to rebuild growth momentum, along with the trajectory of our value injection efforts, not by focusing on a specific EPS outcome. We run the company to maximize value for our shareholders in the long term. Although we can't predict precisely where 2021 EPS will land or provide an EPS guidance range at this time, we believe that our focus on managing the company to rebuild growth momentum is the right one to help us achieve our aspiration of being back to the original EPS expectations we had for 2020 and 2022. and for the company to be positioned to execute on its financial growth algorithm. And 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?

Ladies and gentlemen, if you wish to ask a question, please press 1, then 0 on your touchtone phone. You'll hear a message indicating you've been placed in queue. You may remove yourself from the queue at any time by pressing 1, then 0 again. If you are using a speakerphone, please pick up the handset before pressing the numbers. Our first question will come from the line of Sanjay Sakrani with KBW. Go ahead, please.

Thanks. Good morning. I appreciate it. How are you? I appreciate all the context for 2021 and 2022 because I know it's pretty fluid. But I guess as we think about the assumptions you've outlined, how confident are you on the 70% T&E rebound in the fourth quarter of 2021? I mean, do you need a broad scale reopening or do you think just naturally the behaviors will be better this year versus last year when we were in shock kind of post-COVID? And then I'm just wondering how much of an uptake are you assuming from the new customer acquisitions that started last quarter? Could that be additive to your guidance? And then last one on the assumptions, just the reserve releases, like how much of that are you assuming in your $7 number in this year versus 2022? Thank you.

All right, well, we'll try those three questions.

It's all around one theme. Yeah, yeah, yeah.

Um, well, first, the first thing I will say is there was no real guidance. I mean, we're, you know, we, we gave sort of some scenarios, but let's, let's talk about the first part of the, of the string here. And then, you know, um, I think Jeff can jump in at the end with the releases, but we're, we're in a completely different spot than we were sort of last year. I mean, when we were talking, you know, last year at any given point in time, um, you know, we didn't have a vaccine. And, and so while the vaccine, you know, right now is, you know, what I would call it's fits and starts. I mean, is there enough that at the beginning, there wasn't enough places to, to sort of distribute, to do vaccine distribution. Now they have vaccine distribution points, but you don't have, um, you, you don't have enough vaccine to distribute hard to get appointments. There's, so there's a lot of disconnect that will sort itself out. Um, And, you know, it'll sort itself out over a period of a couple of months, not over a couple of years. And so we believe that by June or so, you will either have sort of a herd immunity or a perceived herd immunity. The other thing that we believe is that there is a huge pent up demand for travel. You know, it's probably nobody on this call that doesn't want to travel or go someplace or don't know their friends or family that want to do the same thing. And so So when we look at it, I don't think you'll see a widespread international travel, but you will see domestic travel, and domestic travel being domestic travel here in the United States, domestic travel sort of within the European Union, things like that. You're probably not going to see a lot of long haul this year. And so, look, I'm fairly confident that we will see the predictions that we have in come through as it relates to travel. I mean, we're talking about consumer travel potentially being back about 80%, with overall travel being back about 70%. Business travel will come back a little bit slower, but I'd be shocked if we're sitting here at this time next year and we say, geez, well, we really missed it on travel. I just don't see that happening. I have a lot of confidence in the vaccines, but again, you know, these vaccines are going to take some time to get into the marketplace. I mean, what do you have, like 20 million people in the United States at this point, you know, sort of vaccinated or something like that? And it's only January. And so I believe that as we get into this summer season, you know, there's June, July, August and September, you will see a rush for people to travel, especially air travel. I think cruise lines, you know, that's more of a 2022 trend. you know, phenomenon. So we feel really good about consumer, you know, consumer travel coming back. I think, you know, our airline partner with Delta, you know, Ed said the same thing on his earnings call. So we feel real confident about that. And, you know, as far as, you know, new cards, I mean, look, you know, new cards take a while to get, you know, to get back, to get into the mix. But what we have booked in our sort of our own internal forecast, not the scenarios, is that the cards that we booked last year will behave probably slightly slower than normal cards would behave just because, you know, you're not going to have those card members traveling right out of the gate. They'll probably be more of a second half phenomenon. And so their spending may ramp a little bit slower than normal. Having said that, we are really focused on getting, you know, we don't talk a lot about cards, but cards lead to build business acquired, which we do talk a lot about. We are really focused on ramping up our acquisition engine, and we believe there are a lot of good opportunities out there for us to acquire cards.

You know, Sanjay, I'll add two things on cards and then talk about reserves. I would point out on cards, we were really pleased in the fourth quarter to see in the U.S. consumer business our platinum and gold new card member acquisition numbers were essentially at 2019 levels. That's a really good signed to us the other point i'd make is just to reiterate what steve said is that it's really a 2022 impact to a great extent 2021 is about rebuilding new card acquisition numbers it won't affect the 2021 results that much because the 2021 results then to go to your last question are all about what happens with credit and i i guess i'd encourage everyone to think about two numbers So I cited in my script that relative to the beginning of the year, we now end the year with $1.5 billion more in credit reserves. We also, relative to the beginning of the year, ended the year with $1.2 billion more in delinquent accounts and accounts in our financial relief programs. And yet I also pointed out that historically, 80%, of the dollars that go into our financial relief programs, we end up collecting and doing fine with. So what that should tell you is that our credit reserves assume a very conservative economic outlook. And so you have to see more bad stuff happen in the economy, small businesses going bankrupt, lots of consumers being laid off. You have to expect more bad things like that to happen for all of those reserves to be needed. So we're not making an economic call, Sanjay. We're saying, well, if all that bad stuff happens, like in the real downside scenario of our economic forecast, then, you know, we're going to need all those reserves we have on the books. And you're probably, that's sort of where the low scenario comes from. Conversely, if while rocky, there's a fairly steady recovery, We have a lot of excess reserves that you probably are going to release, and that sort of leads you towards the high scenario. So we'll have to see. But either way, our focus remains rebuilding growth momentum this year because it's all about 2022.

Our next question will go to the line of Betsy Grasick with Morgan Stanley.

Hi, good morning.

Hi, Betsy.

Okay, so the question I had was around your proprietary card acquisition trends, which you put in the deck, and I just wanted to get an understanding as to which programs are you, you know, seeing drive this kind of? Betsy?

Operator?

Operator? Your line, Ms. Grasick, your line is still open. Please check your mute feature.

Well, should we just go ahead and answer what we think Betsy was in the middle of asking, Steve? Yeah. Around new card acquisition.

Yeah, and I think Jeff just really answered it. I mean, you know, when we look at new card acquisition, you know, our platinum and our gold levels are, you know, we're at levels of 2019. And so we feel really good about that. I think, you know, our cash back cards were actually, you know, doing quite well as well. What we have not seen, and this makes all the sense in the world, is our co-brand, our co-brand acquisition. And our co-brand acquisition, I mean, look, the reason you do co-brand cards, you know, you do that to, you know, combine value propositions between us and our partners, but you also get tremendous distribution. And You know, right now, not a lot of people stay in hotels, not a lot of people take in flights, so you lose those distribution opportunities. Having said that, what our co-brand cards, though, are performing, you know, either in the United States or in other markets, at or better than our proprietary cards from a spending perspective because, as I've said all along, people – you know, spend, you know, to gather those points to take those trips because they have such a pent-up demand for travel. And our retention, you know, numbers on our co-brand cards are at the same level as they were in 2019. So, You know, we feel good about proprietary acquisition, which, again, is being driven by platinum and gold and some cash back. Our co-brand acquisition is not as ramped up because we depend on the co-brand, you know, channels. But having said that, our co-brand performance is really, really good. And, you know, Ed made that comment. Ed Bastion made that comment in his earnings remarks as well. So hopefully, Betsy, we've provided a little bit of, Somewhere around the answer, you answered the question you were trying to ask before you got cut off.

Our next question will come from the line of Mark DeVries with Barclays. Go ahead.

Yeah, thanks. Had some questions about the scenarios. Just clarifying the 2021 scenarios, the scenario two essentially, Jeff, all the things you kind of outlined for your expectations and such as the 70% rebound in T&E spend and the 9% to 10% revenue growth and everything from marketing and OpEx as well as benign credit. And then the second part of that is just 2022 aspiration. Kind of what do you guys need to see to get there?

Well, maybe I'll take the first part, Steve, and you should take the second. So on 2021, Mark, I guess the point is the overwhelming driver of of a low scenario or a high scenario are what happens or is going to be what happens with credit, as I said a few minutes ago. Now, sure, if credit turns out to be really strong, your revenue is going to be a little on the strong side and vice versa. But what we're trying to do, if you go throughout my remarks, is give you a very clear sense of how we're going to manage the company this year. And that's why I told you what we're going to manage OPEX to and what we might spend on marketing. And we're going to do those things because we're all about rebuilding growth momentum this year. The ultimate credit outcome and just how quickly discount revenues come back is going to be driven by the external environment. And that's why you have a low and a high scenario, but it really is not going to impact how we run the company this year, which of those two scenarios comes out. So that's what we're trying to communicate by calling these scenarios as opposed to a guidance range. And then, Steve, maybe you want to talk about that.

Yeah, look, I think 2022, you know, two top-line assumptions. You have consumer T&E fully recovered, and you have a reasonably healthy economy in 2022. So we're not expecting corporate travel to come back. I don't think that's going to be a driver of it. And so if you have that as your baseline, then I think we're right within where we want to be. And the key thing that we need to do is, and we've said this, you know, as we went through both our remarks, our investment levels will be higher than they've ever been. You know, that's our plan. We are planning, provided we have and we have light, you know, to – we will continue to invest and take advantage of all those investment opportunities that are available to us. If they're not there, we'll pull, we'll pull back, but we believe they will be there. Uh, we will look to ramp up our card acquisition. We will look at value injection early on in the year. We'll look at value proposition, um, you know, refreshes throughout the year. We're going to focus on welcome acceptance and keeping parity coverage in the United States. We're going to drive really hard at international acceptance. I mean, look, we signed 3.7 million merchants internationally last year, not including China. Take China off the table for a second, but we're going to drive international acceptance, you know, as we've said. We're going to continue to work and invest in our network. We're going to launch Cabbage in our small business checking account and get more primacy with our small business customers. And we're going to get some traction in China as well. So we are really focused in 2021 in investing across all dimensions of each one of our business lines and preparing ourselves for 2022 by building that strong foundation of you know, retaining card members, acquiring new ones, and building that merchant network and continuing to build up network capabilities and digital capabilities, we believe with the healthy economy, NT&E, consumer spending, you know, just about fully recovered, we'll be within our range.

We'll go next to the line of Rick Shane with J.P. Morgan. Go ahead.

Hey, guys. Thanks for taking my questions this morning. I'd like to start with a question about non-marketing, non-rewards expense. In Q4, that was literally the only line item that was comparable to 2019 levels. I'm curious if you think that there's going to be better opportunity for operating leverage on that metric and what sort of drove the normal rate there versus everything else you saw in the business.

Well, let me, Rick, take it up one level and then come back if you don't think this is responsive. I mean, what we are focused on overall is managing the operating expenses of the company, which is everything other than the variable customer engagement costs and marketing. And we have a very clear plan in 2021 to manage those to about $11.5 billion. That is below 2019 levels if you were to Look at some businesses we've sold over the years. It's frankly about where the number was a decade ago in 2012 and 2013. So we think we have a very long track record of being very disciplined about managing what I think of as the infrastructure costs of the company, which means that as revenues and billings recover and grow, there's tremendous leverage from holding that a little below 2019 levels. There's always a little bit of quarterly noise, particularly the Q4, some of the lines in OpEx you'll see every year if you go back and look at history, go up a little bit. But that's the disciplined approach that we're taking here. So I don't know if I got to the nub of your question, Rick, but that's probably how we think about it.

Yeah. The other thing I would add is that, you know, if you look at this number on the face of it, it's pretty much the same number we've had in 2012. from an operating expense perspective. But yet the business is very different than it was in 2012. You know, we're focused on different things. We've acquired a bunch of companies which are in here, and our focus has been, you know, completely different. So I think, you know, the team has done a really good job of, on an ongoing basis, taking expense out, and then putting investment back in. And so as you think about this, what you need to do is constantly look at this operating base. And the way we look at it, that's providing us leverage. So if we think about the core business that we had, We're getting enough leverage out that to fund other opportunities within the business, whether that be cabbage, whether that be the acquisition of a mezzy or a resi or a lounge buddy, so forth and so on. And yet you go back 10 years, we're at the same place. And so we believe, you know, when we look at it as managers of the business, we're getting tremendous operating leverage. because we're able to add these things on without layering on a lot of operating costs. And that's how we look at it.

We'll go next to the line of Ryan Nash with Goldman Sachs. Go ahead. Hey, good morning, Jeff. Good morning, Steve.

Morning, Ryan. So maybe a two-part question. So, Steve, you noted in your color that For 2022, you expect T&E to be on the consumer side to be fully recovered and a healthy economy. So maybe first, can you maybe just talk about what some of the drivers would be in terms of the shortfall from, you know, lower corporate travel and then potentially higher spending? You know, you outlined OPEX and, you know, marketing this year could be $4.5 billion. Will there be a pullback in spending or could we see revenues accelerating as card member growth picks up? And then secondly, you know, you talked earlier in your remarks about attrition being below pre-COVID levels. We're in this kind of weird transition period right here where consumers have pent up demand, like myself, but, you know, can't leverage anything in the near term. So can you maybe just expand on the comments about injecting greater value in and how you're thinking about product refreshes? And does the pandemic at all change the way you approach refreshes in terms of what's included in the value proposition? Thanks.

Yeah, so I think, you know, let's talk about the second one first. And if I remember the first question, I'll come back to it. It seemed like a couple of minutes ago. So I'm just teasing you, Ryan. But, you know, when we look at sort of value injection, I think because people couldn't travel, what we tried to do was to do two things, to not only provide them value in the short term, but to sort of shift their mindset on how they use the card. And so when you look at what we did with Platinum and with Open Platinum and Centurion, you know, by putting in, you know, things like streaming credits and wireless credits and some shipping credits, we had 78% of our U.S. Platinum card members take advantage of that value injection. We had about 50% of our small business customers take advantage of that. But the really interesting point, in consumer Platinum, 17% of our base was not putting wireless on their card. They are now. So we had an uptick of 17%. Now, this is something that any of you who have embedded your card in a payment stream to try and get it out is very difficult. Recurring billing is probably the stickiest thing you have. And so for the first time, 17% of our Platinum card base actually put wireless on a card, which is, you know, you might think surprising, but people put spending in compartments. And 10% put streaming on the card. So the value injection is meant for us to do two things. Number one, steer people where we want them to go. And number two, provide real value to them. And we did that. And I think that, you know, that has really helped us you know, from a retention perspective because, you know, obviously people want value. We'll continue to do that, and then we'll look at our overall value propositions just as we've had over the course of the last three years and continue to refresh those. And I think you'll see those refreshed, and we'll expand the aperture of that. So you will expand beyond traditional T&Es. you know, value proposition enhancements. We'll look at other T&E value proposition enhancements because safety and traveling will become even more important, I think, to our premium cardholders. And we'll work with our partners. A lot of the value we put in is either co-funded or merchant funded, and we'll continue to work with our partners to do that. So we have, you know, we feel really good about the retention that we saw, and we feel really good about the value injection because of the behavioral shift that it drove, and we believe that that will be sticky, which is why you see an increase in our non-T&E spending on a sequential basis, and we believe that will continue. So that's the first part. As far as the second part of the question is, Look, we do believe that, the first question was, we believe that consumer travel will be back because it is the pent-up demand. You know, I just, I see the vaccines working, we see herd immunity coming, and we certainly see that happening by the fourth quarter. If, God forbid, the vaccines, the efficacy proves it doesn't work, we got a whole different issue for the entire economy, and we're not talking about American Express traveling, we're talking about different things at this particular point, but all indications are vaccine will work. It will be distributed and off we'll go. As far as corporate spending, look, our corporate card business, which is, you know, near and dear to all of us, you know, drives about 9% of our overall billings and about 60% of that is T&E. There are companies that are still traveling and the T&E piece of corporate spending is is across multiple disciplines. It's across lodging. It's across restaurants. It's across car rental. And it's across air as well. And so, you know, we have, you know, pharmaceutical sales reps that travel by car. They stay in hotels and they spend food. That's still going on. where you see not a lot of T&E spending is consultants who cannot go actually to their clients. But when you think about industrials and manufacturing, that is still going on, and you think about local salespeople that still need to get out to some of their accounts. But having said that, we don't anticipate that coming back, but we don't believe that's a big driver of our overall profitability. As we've said, it's not a big driver of our revenue. That 9% billings does not equate to either 9% revenue or 9% profitability. And we believe that what we will gain from a consumer and our small business perspective will more than make up for any shortfall that would occur in our corporate card business.

And I'd just add two other things, Ryan, sort of the other leg of the stool is small business, where travel just isn't that big a piece of their spending. And those small businesses are already going strong, and we just need them to continue a steady recovery. The other thing I just want to clarify for everyone is reminding you that when we went into 2020 12 months ago on a January call, seems like years ago, we gave you guidance for 2020 of 885 to 925, and that's the kind of target that we're aspiring to achieve in 2022.

Our next question will come from the line of Chris Donat with Piper Sandler. Go ahead.

Good morning. Thanks for taking my question. In terms of the merchant discount rate, Jeff, you said that it would depend on the T&E spending. I'm just wondering where we are taking a longer-term view on OptBlue and some of the the downward pressure you'd seen on the MDR in recent years? Are we basically through that? And can we expect maybe the more likely scenarios that you see an increase in MDRs, you see more T&E spend, or is there any downside risk to the... So two things.

We're completely through any downward pressure from OpBlue. That's in the rearview mirror. And, you know, obviously, if you look at what's happened... At discount rate, discount rate has been driven down by mix. And, you know, it's like I've always said, I always focus on discount rate by industry and mix overall because, you know, if you look at sort of where we are right now, 225, or I think that's where we are right now is 225, you say, oh, my God, you're at 225. But you're at 225 with 65% T&E declines. And so, you know, as T&E comes back, that MDR will move back up, but Oplu will not have any pressure at all on that discount rate. So we expect as T&E moves up, overall discount rate will go up. But having said that, you know, if T&E, if non-T&E, you know, winds up, you know, going through the roof and that puts pressure on MDR, that's fine. We're okay with that because, again, we manage this industry by industry and And, you know, I can't control mix, but if in fact our non-T&E, which has a lower MDR on average than T&E, if that, you know, continues to grow and grow, I think everybody would be happy with that.

We'll go next to the line of Mihir Bhatia with Bank of America.

Good morning. Thank you for taking my questions. I did want to, you know, I appreciate 2021. You're looking at it as a little bit of an investment year and repositioning, you know, maybe positioning the company for growth. So EPS is not that much of a focus maybe in 2021. But is there another metric that maybe we should focus on, whether it's billing growth, new card acquisitions, something like that? As we go through the year, I guess, how will you or should, or do you think investors should judge American Express's progress towards that through the year towards the 2022 goal of getting back to, you know, call it $9 a share. Is there a bogey you could provide maybe on card acquisitions or something else? You know, maybe is it $2 million per quarter in new acquisitions, something like that? Anything you could talk about there? Thank you.

Well, I think it all comes back, Mahir, as you pointed out, to rebuilding growth momentum. And so that's a function of, Watch our success in bringing new customers into the franchise and in putting new products into the hands of our existing customers, and we'll talk about that every quarter. Watch our success on some of the longer-term things that Steve talked about, how we're doing with China, how we're doing with the cabbage acquisition. Watch externally what's happening with credit and what's happening with the recovery in T&E spending. And those are the key things that I think you want to watch, and it's what we're managing the company for and what we'll give you an update on each quarter.

Yeah, and we'll continue to update on those things as well as merchant acquisition, which is also going to be important. So, you know, sort of, you know, the things that I talked about in my first answer, exactly what Jeff just said, you know, again, as we said, we don't, I think as you see more card acquisition momentum, that is a good, that is a good sign. You see us put more value propositions in there, but also take a look at our, at our merchant network as, as well. And, you know, and then the macroeconomic and the, the, the sort of the health, the state of health, not only in the United States, but in the world in general.

We'll move on to the line of Lisa Ellis with Moffitt. Nathanson, go ahead.

Hi, good morning. Glad to be joining these calls. My question is on the Biden administration in two areas, stimulus and regulation. On stimulus, just given your overall experience with 2020, how would you expect the proposed next round of stimulus to affect 2021, meaning overall stimulus? like good because of the boost in spending and reduction in delinquencies or more bad because consumers are using a lot of these funds for debt reduction. And then second, on regulation, Biden has indicated an increased focus on consumer protection and other aspects of banking regulation. So what are, you know, what of his policy areas are you most focused on keeping an eye out for? Thank you.

Well, it's kind of hard to figure out at this point what, you know, what they will do, what will be done from a consumer regulation perspective. You don't know if that's going to be done on debt collection. You don't know, you know, where that'll be. But, you know, look, we've been around 170 years through lots and lots of administrations. You know, we started this sort of regulatory, you know, journey, I guess, over the last, really, really focused on our industry over the last 15 years or so. And it all started I think with UDAP. And, you know, look, we'll comply. We will comply and we will do what we need to do. And I don't think it's going to be a major deterrent to us running our business in any way. I mean, look, have we added more compliance people over the years? Yes. Do we spend more time with regulators? Yes. Could that be more? Yeah, it could probably be more. But, you know, when you think about the underlying economics of our business, I really don't think it's going to impact our spend. And if you think about our model, our model is a get the card, have a fee, spend, and then we have lend. We're not as dependent on lending revenues or lending profits as our competitors are, which is probably where a lot of regulation will come in if it does come in. So We'll just see how that all plays out. I've been through many administrations since I've been at American Express. We'll do what's required. We've moved on. We've demonstrated we can have success under all scenarios. What they're not talking about is consumer protection. We're really not talking about discount rate regulation. That has not been broached at all in any of these conversations.

You know, the only comment, Lisa, I'd add on stimulus is given the demographic of our customer base, clearly we are not, what we want are healthy consumers and healthy small businesses who are spending. Lending is not, as you know, a big part of our business model. So if the system being awash in liquidity results in higher pay down rates, well, that's We're happy to take that trade for a healthier economy and for more spending and for more recovery. So we feel good about the credit performance and the spend performance we've had thus far and more stimulus. Should that be the political outcome here? I have to view as a good thing for us.

We'll move on to the line of Bob Napoli with William Blair.

Thank you, and good morning. Very good call. On the 2022 targets, I think a couple of the keys are the reacceleration of international. That was your highest-growing segment, I guess, geographically prior to the pandemic. And then also, I mean, I think the B2B payments, CABG, I think there's some comments, Steve, about watching CABG, So just some commentary around your confidence in what you're seeing internationally. I know you're adding locations, but are you confident you're at least maintaining market share or gaining share?

Well, here's what I would say. What's interesting, Bob, is that we are adding a lot of locations. Obviously, international is being a little bit more challenged than the U.S. Our international spending, our international cards tend to be a lot more T&E focused. And so they're down a little bit more. But we believe that will come back. And so, you know, we haven't run the numbers on sort of market share at this particular point. But as you know, we were certainly gaining market share in, you know, like eight of the key markets that we participate in. And we believe, again, that there's that pent up demand for travel. Our attrition numbers are the same you know, showing the same sort of signs that they show in the United States. When we talk about attrition, we talk about global attrition, and there really is no difference between, you know, international, how international is performing versus how the U.S. is performing. So we feel good that that'll come back, and both small business and consumer international, you know, were two of the fastest growing areas. As far as Cabbage goes, I think, you know, the thing that we're really excited about is Cabbage is it gives us a platform that we can interact with our small businesses. And so to be able to go to one platform to not only get a working capital loan, to get a term loan, to have now a business checking account, to be able to have your card product, to do cash flow analysis on the platform, it gives us you know, sort of an all-in-one platform to serve the needs of small businesses, which is why we did that. And what we've been shooting for over the last couple of years, it was just a very fortuitous time and a very fortuitous acquisition for us. And that'll be, you know, we'll be rolling that out end of Q1 into Q2 and continuing to make enhancements, you know, on Cabbage. So we're really excited about it. and the opportunities that it brings from a small business perspective.

We'll go next to the line of Bill Karkashy with Wolf Research. Go ahead, please.

Thanks. Good morning, Steve and Jeff.

Hey, Bill.

Can you tell us how the return on each dollar of investment spending today is trending versus pre-pandemic levels? On the consumer side, how do the acquisition costs and IRR of new accounts you're acquiring today compare versus historical levels? And on the commercial side, How are you assessing the profitability of those investments?

Well, I think what I'd say overall, Bill, is I'd take you right back to our comments that our investment levels in 21 are going to be driven by that universe of attractive opportunities, not necessarily by a particular budget. So we were really pleased with what we saw in Q4, citing the example of the U.S. consumer platinum and Gold Progress that we talked about earlier, and we also have some non-travel co-brands on the business side that have been very strong. So we feel good about the returns. I think you've heard Steve and I say for many years that we always generally have more good investment opportunities or marketing opportunities with positive returns than we can fund, and we're setting off in 21 to aggressively rebuild our growth momentum.

We'll go next to the line of Don Fandetti with Wells Fargo. Your line is open.

Good morning. Steve, on competition, you've leaned pretty hard into offense. Are you seeing the same thing from Chase? And then is there any significance to their CX loyalty acquisition? My sense was maybe it was just like playing catch-up, but was there anything more strategic to that competitively?

Look, I think, you know, when we think about competition, you've got to think about competition across a wide range of – you know, places that we compete. And, you know, there's no more competitive space than the consumer space in the United States. I mean, there's obviously we've got competition in the UK. We've got some competition, obviously, for small business here, corporate competition and so forth. So, you know, I think it's just important to understand you compete on many, many fronts. And while the consumer business is a large piece of it, um, and probably the most highly competitive. And it has been for probably 10 years. Um, you know, look, we anticipate that not only JP Morgan, but, uh, you know, bank of America city capital, everybody's going to, you know, be out there looking to, to get card members, to bring more into the fold and to drive, you know, top line revenues. So, um, you know, I, I don't think there's been a step down in competition. I think you will see a, uh, I think, you know, Jamie said on his call, he's stepping up his investments, and I think pretty much every CEO would say the same thing. So we anticipate that, you know, it's going to be just as competitive as it's been, as we have seen over the last few years. And, you know, look, we look forward to it, and we look forward to competing, and we believe our value propositions will continue to stand up well to our competitors. You know, look, I don't know about, you know, their acquisition and what it is that they're trying to, you know, trying to achieve. They've got a lot of smart people over at J.P. Morgan, and, you know, I think they do a really great job running their business and we've got a lot of respect for them. And so I'm sure they'll figure out how to integrate this into their value propositions to compete. in the most effective way that they deem is the right way to go about it. And we'll continue to do what we do, and we feel good about the hand that we hold, and off we'll go, and we'll see what happens. But, you know, I think for more color on that, I would ask Jamie and Gordon.

And our final question will come from the line of Craig Bauer with Autonomous Research. Go ahead, please.

Yeah, good morning, everybody. Hey, Craig. I wanted to ask quickly about trends you're seeing. UK, can you discuss how their lockdowns impacted volume at the end of the quarter and into first quarter? And secondly, what type of rebound are you seeing in Australia as that country has now become relatively COVID-free? Thanks.

Well, two comments. In the UK and Europe more generally, As you would expect, Craig, you saw in December and now into January some significant declines in restaurants and other T&E. But what you continue to see stability in, though, is the non-T&E spending. So it's an interesting observation that as Europe has locked down more, it has the expected impact on restaurants and lodging that people were doing locally. but it doesn't have an impact on non-T&E. And to go to Australia, you know, Australia, like many of our non-U.S. markets, was heavily, heavily or more heavily than the U.S. driven by T&E. And of course, T&E, that country has completely shut itself off from the world in terms of cross-border travel. And there are also many restrictions on cross-state travel within Australia. So non-T&E spending in Australia, as it does around the world, looks good. But the T&E spending, while restaurants are a little stronger there than you might see elsewhere in the world, that's not where the bigger dollars are. The bigger dollars are on other parts of travel, and that's going to be slower to come back and is going to await a lessening of the government lockdowns.

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.

Ladies and gentlemen, the webcast replay will be available on our Investor Relations website at ir.americanexpress.com shortly after the call. You can also access a digital replay of the conference call by dialing 866-207-1041 or 402-970-0847. Access code 7773895 after 12 p.m. Eastern Time on January 26th through midnight February 2nd, 2021. That will conclude our conference call for today. Thank you for your participation and for using AT&T Event Teleconference Service. You may now disconnect.