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American Express Co (AXP) Q2 2019 Earnings Call Transcript

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American Express Co (NYSE: AXP)
Q2 2019 Earnings Call
Jul 19, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the American Express Q2 2019 Earnings Call. [Operator Instructions]. As a reminder, today's call is being recorded.

I would now like to turn the conference call over to your host Head of Investor Relations, Ms. Rosie Perez. Please go ahead.

Rosie Perez -- Vice President and Head of Investor Relations

Thank you all and good morning, appreciate all of you joining us for today's call.

The discussions today 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 SEC. The discussion today also contains certain non-GAAP financial measures. Information relating to comparable GAAP financial measures may be found in the second quarter 2019 earnings release and presentation slides as well as the earnings materials for prior periods that may be discussed, all of which are posted on our website at ir.americanexpress.com. We encourage you to review that information in conjunction with today's discussion.

Today's discussion will begin with 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 our second quarter financial performance. Once Jeff completes his remarks, we will move to a Q&A session on the financial results with both Steve and Jeff.

With that, let me turn it over to Steve.

Stephen J. Squeri -- Chairman and Chief Executive Officer

Thanks Rosie. Good morning everyone and thanks for joining us. As our second quarter results showed, we continue to build on the broad-based momentum we had to deal [Phonetic] with. FX adjusted revenue growth in the quarter accelerated to 10% and earnings per share of $2.07 was 13% higher than last year. I feel good about these results as well as the breadth and consistency of our performance. This is the eighth straight quarter we posted FX adjusted revenue growth of 8% or better and our growth continues to be driven by a well-balanced mix of spending, fees, and loans spread across geographies and customer segments. We continue to see solid trends in Card Member spending led by consumers. This spending is occurring against the backdrop in the economy that is growing at a steady, but more modest pace relative to 2018. FX adjusted proprietary billings grew 8% on a consolidated basis and loan growth remained strong with over 60% of that growth coming from existing customers. Credit continue to perform at industry-leading levels, driven by the premium nature of our customer base, our strong risk management capabilities and the opportunity we have to increase our share of our customers' lending wallets.

The consistent growth we are seeing speaks to the strength of our differentiated business model and the success of our focus on our four strategic imperatives. It's been a busy first half of the year and I thought it would be good to take a step back and reflect on some of the progress we're making in each of our priority areas. In the consumer space, we're continuing our disciplined approach globally to upgrade our premium card products, enhancing our unique value propositions and pricing for the additional value that we're delivering to our card members. In the second quarter, we launched new or refreshed Platinum Cards in the UK, Italy, Finland, Norway and Sweden and in early July, we launched and enhanced Platinum Card in Germany. We also made several additional enhancements to the Gold Card in the US and earlier in the year, we launched a new suite of co-branded Marriott Bonvoy cards. In each case, we're leveraging our differentiated business model to offer unique benefits, services and experiences to our card members in categories such as travel, dining, and access to popular events and experiences. These are some of the aspects of our products that are more difficult for others to replicate and they are the ones that our card members most value and are willing to pay for. In fact, nearly 70% of the new consumer cards we acquired this quarter carry an annual fee and card fee revenue grew 17% year-over-year and accelerated sequentially quarter-over-quarter. In addition, we are seeing strong results in attracting next generation consumers to the franchise with our most recent US consumer product refreshes [Phonetic] more than 50% of our new card members are millennials or Gen Zers. I believe we have a long runway to continue this growth.

Turning to commercial payments, scaling our B2B payment offerings is one of our key growth strategies. Expanding our network of strategic partnerships is a key enabler here and we're making great progress. Our commercial customers increasingly want payments integrated into their procure-to-pay infrastructure and we're developing a range of solutions which do that for businesses of all sizes and complexities. For example, we're partnering with providers like Amazon Business, Tradeshift and most recently SAP Ariba to help large and global companies track and reconcile payments within their ERP systems. For larger SME customers who are looking for ways to increase efficiency and cash flow, we're working with companies like VAX and MineralTree on payment solutions that integrate into accounting and procurement systems. And for our small business customers, we're offering an AP Automation solution with Bill.com that makes it easier for them to pay their suppliers using our cards.

Our objective is to provide payment capabilities and financing solutions that help our customers manage and grow their business. We want them to view American Express as an essential partner [Indecipherable] single proprietorship or a Fortune 500 company. We're still in the relatively early stages of this journey, but we're making good progress in building out our B2B offerings and we'll continue to invest in this area going forward.

Moving on to our third imperative of strengthening our global integrated network. We're on track to achieve our goal of virtual parity coverage in the US by year-end. We're also making good progress in expanding merchant coverage internationally and building our network in China. In the second quarter, we announced the card members can now tap and pay with their contactless enabled American Express cards or digital wallets for subway and bus rides in New York City as part of the MTA's new pilot program. This is just another example of the vast array of opportunities in the payment space as contactless convert more cash transactions to mobile and plastic. Once consumers have experienced the speed, convenience and security of contactless payments in public transit, they're more likely to tap and pay at other establishments such as quick-service restaurants, retailers, and more. We'll continue to expand our contactless capabilities in the US and internationally both through third-party mobile providers and through the issuance of contactless enabled cards. We're also working with merchants to expand contactless acceptance in order to give our card members more options for easy and efficient ways to pay.

Our fourth imperative making American Express an essential part of our customers' digital lives cuts across all of our lines of business. We know that our card members spend much of their time online, particularly on their mobile devices. I want to help them manage more aspects of their lives by integrating more content, capabilities, experiences, and benefits into all of the ways we interact easily with them. We're making good progress on this front and to accelerate our efforts, we've acquired a number of digital companies over the past 18 months, including Mezi, LoungeBuddy, Cake Technologies, Pocket Concierge, and our newest acquisition, Resy, the US restaurant booking and management platform, which we announced in May. These acquisitions along with new digital features and content we're continually building in-house will enable our card members to do more with their American Express membership directly from their mobile device whether it's getting a recommendation for a new restaurant, finding tickets to the popular events, reserving a spot at the nearest airport lounge, redeeming rewards points for a wide variety of merchandise and experiences, saving money at some of their favorite merchants or book and travel. Today, our card members are engaging with our app more frequently and on a wider range of activities in addition to performing traditional transactions like checking their spending and paying their bills. We expect this to increase as we work to integrate more new capabilities and benefits.

In summary I feel good about the quarter and I like where we stand at the halfway point of the year. Our strategy of investing in shares, scale and relevance and leveraging the power of our differentiated business model is paying-off across the enterprise. This strategy is driving growth in spending, lending, customer acquisitions and engagement across businesses and geographies. Our results give us confidence that we're on the right track for delivering on our goal of consistent revenue and earnings growth. As we look ahead, we are reaffirming our guidance for the full year of delivering revenue in the 8% to 10% range and adjusted earnings per share between $7.85 and $8.35.

Now I'd like to turn it over to Jeff for a detailed discussion about our second quarter results and then we'll be happy to take your questions.

Jeffrey C. Campbell -- Chief Financial Officer

Well, thanks Steve and good morning everyone. And yes, we are having our call in the morning instead of our historical evening time slot. After trying it in the morning last quarter due to the holiday calendar, we felt the timing worked a bit better for us from a process standpoint and from feedback from many of you, it sounds like many of you prefer a morning call as well. With that, it's good to be here today to talk about another solid quarter 2019 and about another quarterly example of the consistent performance we have been delivering for sometime now.

Let's get right into our summary financials on slide three. Second quarter revenues of $10.8 billion, grew 10% on an FX adjusted basis. As Steve mentioned, I think [Indecipherable] repeating. This is the eighth straight quarter of having FX adjusted revenue growth of 8% or better. And importantly for the future, this growth continues to be driven by a well balanced mix of growth in spend, lend, and fee revenues across geographies and across customer segments. I would point out that we continue to see a stronger US dollar relative to last year against most of the major currencies in which we operate. So you will again see a spread between our reported revenue growth of 8% and our FX adjusted revenue growth of 10%. As you recall, the year-over-year strengthening of the US dollar against the major currencies in which we operate began in the third quarter of last year. So assuming the dollar stays roughly where it is today, you should see reported and FX adjusted revenue growth levels more similar to each other in the second half of 2019. Our strong top line performance drove net income of $1.8 billion, up 9% from a year ago and then aided by our resumption of a more typical level of share repurchases over the last four quarters, our EPS was $2.07, representing double-digit EPS growth of 13% in the second quarter.

Looking now at the details of our performance, I'll start with Billed Business, which you see several views of on slide four through six. Starting on slide four, our FX adjusted total billings growth for the second quarter was 7%, in line with Q1. As we continue to exit the network business in Europe and Australia due to certain regulatory changes, we think it's important to continue to breakout our billings growth trends between our proprietary and network businesses. Our proprietary business, which makes-up 86% of our total billings and drives most of our financial results was up 8% for the second quarter on an FX adjusted basis. The remaining 14% of our overall billings, which come from our network business GNS was down 2% in the second quarter on an FX adjusted basis. This is less of a decline in prior quarters as we are getting closer to lapping the impact of exiting our network partnerships in the European Union and Australia.

Turning to slide five, you will recall that during our last earnings call in April, we saw the full impact of lapping a step-up in the growth and spending from our existing customers that began in late Q4 of 2017 and became even more evident in Q1 2018. We attributed that acceleration which occurred across geographies and customer segments to an increase in confidence in our customer base. To bring this comment [Phonetic] up to date, our Q2 2019 results show a continuation of the Q1 2019 current solid and steady growth at a more modest pace relative to 2018.

If you then turn to slide six to look at the billings by customer type for the second quarter starting on the left with a large and global commercial customers, we saw a 5% growth on an FX adjusted basis in the second quarter, in line with Q1 and our small and mid-sized enterprise card members or SMEs in the US grew 7% in the second quarter. We feel good about our continued leadership position with both of these customer types. I would suggest that the growth levels here are reflective of the economic tone Steve discussed, stable and growing though at more modest levels than the very robust growth we saw in 2018. But also note that we will continue to watch these two commercial customer types closely to determine whether we are seeing perhaps a bit of caution in our commercial spending trends, which we are not seeing in the consumer segment at this time. International SME however remains our highest growth customer type with 17% FX adjusted growth in the second quarter. During Investor Day, we highlighted the long-term growth opportunity in this segment given the low penetration we have in the top countries where we offer international small business products and we continue to believe we have a long runway for higher levels of growth in this segment. Moving to US consumer, which made-up 32% of the company's billings in the second quarter, billings were up 8% [Phonetic], reflecting continued strong acquisition performance and solid underlying spend growth from existing customers and in general solid growth on the part of consumers. Moving to the right, international consumer growth remained in the teens at 15% on an FX adjusted basis. We continue to have widespread growth in our proprietary business across key countries with double-digit growth in Mexico and Australia and growth of 20% and 18% for the UK and Japan respectively. Finally on the far right, as I mentioned earlier, global network services was down 2% 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. Although network billings are down in these regions if you were to exclude the European Union and Australia, the remaining portion of GNS was up 6% on an FX adjusted basis. Overall, we continue to feel good about the breadth of our billings growth and the opportunities we see across the range of geographies and customer segments in which we operate.

Turning next to loan performance on slide seven, we continue as we have for years now to grow a little faster than the industry by taking advantage of the unique opportunity that our historical under-penetration of our own customers card-based borrowing behaviors creates. Total loan growth was 11% in the second quarter with over 60% of that growth coming from our existing customers. And on the right hand side of slide seven, you see that net interest yield was 10.8%, up 20 basis points relative to the prior year. What we've been saying for some time that these yield increases were going to moderate, we are pleased that our yield is still increasing year-over-year from continued impacts from mix and pricing the risk.

Slide eight then shows you the credit implications of our strategy. On the left, you can see that the lending write-off rate was 2.3% in the second quarter, up 20 basis points from the prior year and in line with the first quarter. On the right, you can see that the charge write-off rate excluding GCP was 1.7%, down 10 basis points for the prior year as well as the prior quarter. You can also see the delinquency in GCP net loss ratio trends. All of these lead to the same conclusion we have reached in recent quarters. We still do not see anything in our portfolio that would suggest a significant change in the credit environment, both on the consumer and the commercial side. In fact, all of these portfolios are performing better than we expected so far this year.

So given these credit metric and loan volume trends, you can see on slide nine that provision expense was $861 million in the second quarter, up just 7%, while loans as I said earlier were up 11%. As you think about this relationship, I would remind you that we have talked in a few forums about how we have been evolving over the past year a number of the things we're doing on the risk management side to create a greater margin of safety and position us well for any potential future downturn. These changes coupled with the stable economic environment and the fact that we are acquiring a higher percentage of new accounts on premium fee-based products are driving our provision costs to be below our original expectations. As you think about the full year, during our first quarter earnings call, we said we expected provision growth in the mid-20% range in 2019. Given the positive underlying trends we have seen in the first half of the year I would now expect to do better than this with provision growth below 20% for the full year.

While we're on this subject to provision, let me take a few minutes to step away from our results and talk about CECL. We've made good progress on our implementation efforts so there is a lot of work left before implementation on January 1 of next year. Based on our work so far, we estimate that if we implemented CECL this quarter, our current total reserves of $2.9 billion would increase by roughly 25% to 40%. This estimate includes roughly 55% to 70% increase in lending card reserves, somewhat offset by a significantly lower charge card reserve due to the extremely short-life of charge receivable. To be clear, the ultimate impact will depend on the loan and receivable portfolio compositions, macroeconomic conditions and forecast at the adoption date as well as other factors including the remaining management judgments as we finish-off our model. I would leave you on CECL with three important takeaways. First, remember that CECL still represents an accounting driven acceleration of estimated losses. There is no change to the underlying economics, our view of the risk portfolio or the ultimate expected losses in our portfolios. Second, for us, given our strong balance sheet, 30% plus return on equity and spend-centric model, the capital impact of the one-time implementation increase in reserves will likely be very manageable. Third, while the impacted implementation is getting the majority of the attention to-date, it is important to keep in mind that CECL will have an impact on our provision expense going forward. The ultimate impact will of course be heavily dependent on multiple factors, however the growth in our lending portfolio, which has been higher than the industry coupled with the increased reserve requirement for loans will very likely result in incremental provision expense under CECL relative to the current accounting methodology.

So now let's go back to our results and turn to the strong revenue growth of 10% on an FX-adjusted basis that you see on slide 10, we see our eight straight quarters of FX-adjusted revenue growth being at least 8% as evidenced that our focus on investing in share, scale, and relevance is worth. And this growth is driven by broad-based growth across spend, lend and fee revenues as you can see on slide 11. Importantly, the portion of our revenue coming from discount revenue and fees remained at roughly 80% in the second quarter, in line with the recent history. Discount revenue was up 6% on a reported basis and was up 7% on an FX adjusted basis, which I'll come back to you on the next slide. Net card fee growth accelerated to 17% in the second quarter. This is the financial outcome of the disciplined approach to product refreshment, unique value propositions and are focused on fee-based product that Steve talked about in his opening remarks and we feel good about our ability to maintain the strong growth in net card fees given the breadth of products that are driving our moment.

Net interest income grew at 13% in the second quarter, driven by growth in loans in net yield. Now I know that many of you are focused on the outlook for interest rates and what that means for various financial companies given that the latest rate projections are a bit lower than they were at the beginning of the year. I would remind you that for us the impact of modest changes in rates is fairly muted. Our sizable charge portfolio does mean that our balance sheet is a bit liability-sensitive, but we managed our funding stack to keep that sensitivity in a range. If you look at our latest 10-K disclosures it implies that 25 basis point increase in rates would cost us about $0.01 of EPS a quarter on a run rate basis over the ensuing year. All else equal, including a beta on our deposit account in line with the recent history, the impact of a 25 basis point decrease would be similar in size. Keep in mind as well of course that today's modestly lower rate outlook is caused by a view that the economy is a bit weaker, which would tend to move our overall results in the opposite direction of the rate impact itself. Putting this altogether, I don't expect current changes in interest rate expectations to have a material impact on our 2019 results.

Turning now to slide 12 to cover the largest component of our revenue, discount revenue. On the right, you see the discount revenue grew in line with billings in the second quarter at 7% on an FX adjusted basis, making this the seventh consecutive quarter with discount revenue growth above 6%. We see this as continued strong evidence that our strategy of focusing on driving discount revenue, not the average discount rate that's [Phonetic] working.

Moving on now to the things we are doing to drive our strong revenue growth. Let's start with our customer engagement costs, which you can see on slide 13, were $5 billion in the second quarter, up 11% versus last year, a bit more than revenue. Starting at the bottom with marketing and business development, I'd 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. Marketing and business development costs were up 7% in Q2. There are two offsetting impacts to mention on this line. First, our marketing spending will be more evenly distributed across the four quarters in 2019, driving lower growth in marketing and business development in the second quarter relative to the first quarter as we grow over the launch of our global brand campaign in the second quarter of last year. Offsetting this impact this quarter is the expected $200 million increase in 29 marketing and business development, driven by the extension we signed in Q1 of our enterprisewide Delta partnership. This impact will be spread across three quarters beginning with our second quarter results. Moving on to rewards expense, you can see that it was up 9% relative to the prior year, broadly in line with proprietary billed business growth. Continuing on to Card Member services, as you have seen for sometime and as we continue to expect, Card Member services costs were our fastest growing expense line, up 35% in the second quarter as this line 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 and help to support the strong acquisition and engagement we are seeing on our fee-based product. Overall, we continue to be pleased with the level of customer engagement we see with our premium benefits and services.

That then brings us to the operating expense line on slide 14, which was up 7% in the quarter. Well, there's always some variability in OpEx quarter-to-quarter. I would say that some of the drivers of our strong revenue performance, growth in sales force premium servicing and digital capabilities what [Phonetic] causes for this year to see more growth in this line than we have seen in recent years. That said, we have a long track record of getting operating expense leverage by growing OpEx more slowly than revenues and we are confident that we have a long runway to continue to do so.

Turning to capital, on slide 15, our CET1 ratio in the second quarter was 11% at the top-end of our 10% to 11% target range and we returned $1 billion of capital to our shareholders. As you know in previous years, we've issued a press release at the end of the CCAR process announcing our capital plan. Since we were not subject to the CCAR process this year, we chose not to issue a press release in June. As we've said, the reality is, going forward our primary focus is on maintaining our CET1 capital ratio within our 10% to 11% target range as the governor of our capital distribution plans. Now, we've historically been very focused on maintaining capital strength while aggressively returning excess capital to our shareholders and you should expect us to continue that philosophy. In terms of what this means going forward, I'd reiterate the same philosophy we have talked about all this year. First, remember that our industry leading ROE, which was 32% this quarter means we generate a tremendous amount of capital each year. In deploying this capital, our philosophy is straight forward. You can expect the dividend to grow roughly in line with earnings as it has historically. Consistent with this, you may have noticed in our press release today that we intend to increase our dividend from $0.39 to $0.43 subject to board approval beginning with the declaration in Q3 '19 and payable in Q4 '18. We will then use a modest portion of our capital generated to continue to support our organic growth and if you look at the last 18 months, the occasional small acquisition and we will return the remainder of our capital to our shareholders while managing within the 10% to 11% CET1 target range.

To sum-up before we open the call for your questions. Our solid performance in the first half of the year reflects our investment strategy focused on share, scale, and relevance, delivering high levels of revenue growth in steady and consistent EPS growth. For the full year 2019, we are reaffirming our guidance of having revenue growth in the 8% to 10% range and having our adjusted earnings per share to be between $7.85 and $8.35. During our earnings call in January and Investor Day in March, we said that the lower-end of the EPS range is there if there is some more significant economic slowdown relative to 2018. Halfway through 2019, we continue to see a stable and growing economy, still not quite at the robust levels of growth we saw in 2018 as we put our 2019 plan together. In addition, we've had a few changes relative to our original outlook for the year. Most significantly, we have a $200 million increase to marketing and business development from the delta renewal which you saw beginning in our results for the second quarter and going in the other direction, we have more favorable credit performance relative to our initial expectations. Given where we are today, I would expect our full year EPS results to be more in line with the middle part of our original guidance range.

With that, I'll turn the call back over to Rosie.

Rosie Perez -- Vice President and Head of Investor Relations

Thank you, Jeff. Before we open-up the lines for Q&A I'll 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?

Questions and Answers:

Operator

[Operator Instructions]. Our first question will come from the line of Sanjay Sakhrani with KBW. Go ahead.

Sanjay Sakhrani -- Keefe, Bruyette & Woods -- Analyst

Thanks, good morning. I guess I'll start off where you ended Jeff on the guidance. You mentioned the middle part of the range and thinking through the $200 million and the favorable provision. It would seem to me like the provision, given the credit trajectory has been trending better roughly in the $200 million. Perhaps you could just reconcile that for me. And then as far as the CECL numbers you gave in terms of the quantification, I was just doing the back of the envelope on the percentage you mentioned. And if we were to assume sort of a similar environment to this year, it would seem like the provision might go up low-single digits percentage-wise. I know there's a lot of assumptions. Can you just help us think through that. Thanks.

Jeffrey C. Campbell -- Chief Financial Officer

So two quick question Sanjay. Thank you for them. First on the guidance, I'd really say there's three things going on, all of which I talked about in our remarks are correct. UK added $200 million of cost this year due to the tremendous new long-term agreement we have with Delta [Phonetic]. Great thing for shareholders long-term. Offsetting that, provision is clearly much better than we had expected and I'd say you're right that that benefit is probably a little bit bigger than the $200 million, but I think the third thing to recall is if you go back Sanjay to the January call when we first talked about guidance, I said at the time that in a world where 2019 turns out to look kind of like 2018 in terms of the economy, you should expect us to be in the middle or upper part of the range. In fact, while the economy is stable, it is clearly growing at a more modest level than it was in 2018 [Indecipherable] we put our plan together based on the more robust growth you saw in 2018. So there is a little bit of softness in volume relative to our expectations and so that's really the missing 30s [Phonetic]. All that said, eight straight quarters of revenue growth of 8%, 10% revenue growth this quarter we feel tremendous about the momentum.

On the CECL side, boy, predicting the ongoing P&L impact of CECL Sanjay has so many moving parts right now, I'm reluctant to give you a number. All I was trying to do on the call at this point is to begin to focus people a little bit on the fact that for us the one-time increase in reserves given the strength of our balance sheet and ROE it doesn't have any material impact I think on our capital returns. But the ongoing provision cost depending on the environment is something that you will probably hear us continue to talk about and I think your back of the envelope is as good as any. I just caution you that there could be a lots of different factors that affect it going forward.

Well, thanks for the question, Sanjay.

Operator

For our next question, we'll go to the line of Don Fandetti with Wells Fargo. Go ahead.

Donald Fandetti -- Wells Fargo Securities -- Analyst

Hi, good morning. Jeff, I think most financial institutions have put out a buyback discussion. I know you provided some general background. Is there any reason why you're not talking specifically about that? And then secondarily, what is your general thought on operating leverage or lack thereof. Obviously your OpEx expense is growing at a more rapid pace but if you sort of layer in engagement costs, are your expenses going to grow faster than your revenues?

Jeffrey C. Campbell -- Chief Financial Officer

Yeah. So two things. First, on capital Don, we've said for a while now that the governor of how we manage our share repurchase is that we intend to keep that CET1 ratio in the 10% to 11% range and that is actually more important than where we are with the Fed and so depending on our earnings, depending on our levels of organic growth that's how you should expect us to move the share repurchase up and down. All that said, yeah, that means share repurchase at levels are very similar to what you've seen since we rebuilt the balance sheet post the Tax Act charge, but that's really the way I encourage everyone to think about our capital return, not that we are no longer in this world where the CCAR outcomes are governing what we're doing on capital and so we're going to return exactly that amount of capital.

On leverage point, I think we're just executing Don on the financial and business model that we've been talking about ever since Steve became CEO last February, which is we're generating industry's leading levels of revenue growth. We think that's the best way to create value for our shareholders long-term. Customer engagement costs have been and I expect will continue to grow a little faster than our revenues and so that creates a little bit of margin compression. That's mitigated by the fact that we expect operating expenses to grow less than revenue. They have for a decade, we're highly confident that they will continue to and then you add a little bit of share repurchase to all of that and you get the double-digit EPS growth. Now that does mean that PPI in any given period may grow a little faster or little slower than revenue, but we think this is the right strategy focused on share, scale and relevance for creating the most value for our shareholders in the long-term.

Operator?

Operator

For our next question, we'll go to the line of Mark DeVries with Barclays. Go ahead.

Mark DeVries -- Barclays -- Analyst

Yeah, thank you. It seemed like the US consumer might have been the biggest source of strength in the quarter. I think you guys -- you had proprietary billed business actually declined modestly Q-over-Q, but your discount revenue growth accelerated. Was that due to the acceleration in the US consumer or presumably you have higher discount rate revenue. And then also just high level, what are you seeing from the US consumer? Are they being more resilient through some of the uncertainties we're seeing around things like the China trade issues that maybe having maybe bigger impact on the corporate side?

Jeffrey C. Campbell -- Chief Financial Officer

Well, maybe I'll start Mark on the math and Steve, you might add a little bit of color. Look, I think when you look sequentially sure [Phonetic] as you've heard from many people the consumer is strong and you did see in the US consumer business a little bit of a modest uptick in billings sequentially. All that said, I think we see overall stability, but at more modest levels than last year. Commercial spending is still at a good level, but I noted a little bit of caution. We just have our eye on that a little bit more than the consumer. So Steve, maybe you want to add a little bit of color?

Stephen J. Squeri -- Chairman and Chief Executive Officer

Yeah. I mean, look, I think that International still strong as well. I mean you had 17% international SME growth, you had 15% international consumer growth. But just to comment on US SME, I think when we dig into the numbers in US SME, what I always look at is how are we bringing on new booked business, so that's from new signings and that's been stable for a long time. How are we looking at attrition and that's also been very stable. What you see and I think this is to Jeff's point, what you see is maybe a little less confidence than the consumer from an SME perspective where there has been an organic decline from what we would say pretty much all-time highs from what we're growing over, but it's still positive, so that's US SME and I think large corporate. Pretty [Phonetic] comfortable with large corporate is especially when we had such a breakout year I think last year from large and global corporate account, so I think the commercial side of the business is being slightly more cautious than the consumer side and I think you heard that as you listened to other earnings calls this week as well, but still strong, I mean still strong growth.

Operator

Our next question will be from the line of Jason Kupferberg with Bank of America. Go ahead please.

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

Hey, good morning guys. Maybe just to pick-up on those comments with international SME, I know it's been a little bit of a decelerating trend here, 17% is still a very strong number but it was that we 25% recently a year ago, so we've got some tough comps you're working through. I guess as [Indecipherable] easier for the next few quarters is potentially an opportunity to see some reacceleration in international SMA and then if you can just separately make a quick comment on the sustainability of the card fee growth, which continues to be very impressive. That would be great. Thank you.

Jeffrey C. Campbell -- Chief Financial Officer

Yeah. So I think I got the question with little bit of background noise, but look, I mean if you look at what was going on for international SME for pretty much like six quarters prior to this, you had sort of a long run of 20% growth, but often relatively smaller base. I'm pretty happy where we are with 17% international SME growth. We continue to invest not only in the value propositions, but in the sales organizations and our absolute numbers are actually getting bigger and bigger. So I'm not really worried at all about 17% international SME growth. Our performance there has been I think really outstanding and we're going to continue invest, I mean and that's one of the reasons why you saw a little bit of an uptick sort of in operating expenses as we are investing in sales organizations not only international SME, but we're investing in some sales resources as well as it relates to international coverage. So you have some extra OpEx as it relates to that.

As far as card fees go, card fees is all about adding value to the products and we will continue on our quest to continue to add differentiated value on an ongoing basis to all of our products around the globe. We have taken a very deliberate step to make sure that we are constantly looking at and refreshing these products on a very proactive basis. And by doing that, that enables us to continue that tremendous pace that we've been on in terms of card fee acceleration, I mean you saw 17% card fee growth year-over-year and even sort of sequential uptick in 70% of the cards that we acquired are fee-based cards and people are paying for those cards, because they are getting value out of those cards and so it is how our model has been for decades and we will continue to invest in those value propositions, so that we can continue to generate card fees.

Operator

We'll go next to the line of James Friedman with Susquehanna. Go ahead.

James Friedman -- Susquehanna Financial Group -- Analyst

Hi, thank you. It's Jamie. Steve, I wanted to ask you about the M&A strategy. You had some activity year-to-date. How would you describe the themes in M&A because some of it seems consumer-oriented, but some of it seems merchant-oriented like your last couple, I mean if you could provide some structure about how you're thinking about M&A will be helpful.

Stephen J. Squeri -- Chairman and Chief Executive Officer

Yeah. So look for every business, we have an opportunity to grow sort of three different ways, right; you grow from organic growth, you grow through partnerships and you grow through acquisitions. I think if you look at the last sort of five acquisitions or so and I think you picked up on a really important point with Resy, but I'll get to that in a minute, but if you really look at the last five acquisitions while you could say their consumer rated, consumer-driven, what they really are is all about embedding ourselves more in our customers' digital lives. And those customers are not only consumers, but they're small businesses and they are corporate card customers. So maybe from a business process perspective, we're not, we haven't done any M&A in that area, but when you think about what we've done it first started out and we started out with some building blocks. We started out with Mezi which is digital-based AI-assist and that we've rolled that out in the UK and we're testing that in the US with some of our Platinum Card holders. And then [Indecipherable] take which is really sort of middleware to help us sort of manage our restaurant reservations, we want with pocket Concierge which Japan is a really important market for us and that gave us access to some of the best restaurants in Japan and then we went with LoungeBuddy because our focus has been on providing a great experience end-to-end for the travelers and while I'm not going to be able to build hundreds of lounges I've got 12 right now and we'll continue to add them selectively as we go along. LoungeBuddy from a mobile perspective will show our customers exactly where other lounges are and we get access to lots of other lounges. And then the last one, Resy, which is really sort of two-pronged and I think we've probably not done a good enough job talking about the merchant side of this, but it will give us access to some of the what we believe is some of the finest restaurants and actually more requested restaurants from our card members and be able to not only provide special card member offers, but to also be able to acquire new card members when they actually use the Resy app and seeing what our existing card members were getting. And for restaurants the thing that we love about Resy is they look at the fact that they have two customers, they have the cart, they have the diner as a customer and they have the restaurant customers and restaurants are really important partners for us. And so what you're seeing is a constant and continued build-out whether it'd be organically partnership of the acquisition and remember, we had a partnership with LoungeBuddy before this to constantly and consistently move more upstream or in-stream into our customers' digital lives. So we'll opportunistic. We'll continue to look for those companies either from a partnership perspective or an acquisition perspective that will continue to build-out our digital capabilities and we'll continue to look on the commercial side, but I don't want you to think it's all consumer because small businesses can use this and our corporate card customers can use this as well.

Operator

Will now turn to the line of David Togut with Evercore ISI. Go ahead please.

David Togut -- Evercore ISI -- Analyst

Thank you and good morning. You've been repositioning American Express in Europe over the last year, principally winding down GNS. With the next wave of payment regulation coming PSD2 on September 14th along with strong customer authentication requirements, is there more to do? You signaled on the last call you might introduce a debit card for example. I'd be curious for your updated thoughts?

Stephen J. Squeri -- Chairman and Chief Executive Officer

No, I don't know that we -- yeah, well, actually yes. Not necessarily a debit card, but access for sort of more real-time payments with PSIP, but I think that we will wind-down Europe by the end of this year and so you won't have that grow-over. Our value propositions are very strong in Europe. We're still -- the reason we -- just to refresh everybody's memory, the reason we wind these down is we wanted to stay as a three-party scheme versus a four-party scheme which aspects of our business in Europe were four-party, which enables us to have a better, not only a better value proposition but in fact a higher discount rate as it relates to our transactions there, but I don't see us introducing a debit card per se. And I think we'll just continue on our path of increasing our value to our customers both from a small business perspective and from a consumer perspective.

Jeffrey C. Campbell -- Chief Financial Officer

I'd add David, on the, your specific question around September 14th deadline on merchants having better authentication capabilities, we're working with all our merchants. It's not a big cost for us, it's really a merchant question. We don't expect it to cause any significant inflection point. There is some talk about banks deferring a little bit, because not all merchants were ready, but I don't see it as a big issue.

Stephen J. Squeri -- Chairman and Chief Executive Officer

No actually, just and will leverage our safety technology to do that, but in fact it's really more about conversations and visits with merchants more than just technology and we've been really ahead of the curve on that in educating merchants on how to interact. So not a cost issue for us at all.

Operator

We'll go now to the line of Moshe Orenbuch with Credit Suisse. Go ahead.

Moshe Orenbuch -- Credit Suisse AG -- Analyst

Great, thanks. You've started to kind of discuss some of the aspects of this, but could you talk a little bit about how you would expect the SME business to perform both in terms of kind of growth rate and in terms of credit kind of as the economy looks to be a little more variable. Is it more or less kind of volatile than the consumer side?

Jeffrey C. Campbell -- Chief Financial Officer

Well, we feel really good about the breadth of our small business franchise. As you know mostly we talk a lot about the fact that we are in the US, larger than our next five competitors combined. Outside the US where we have some of the highest growth rates in the company, our shares tend to be small and we think we have a very long runway to continue to grow. We are broadly speaking and I'm actually going to take your question beyond just small business, one of the things you've heard me talk about in my prepared remarks is we actually have been making some changes in all of our risk management practices steadily across the last year, that's both a consumer and a small business issue because they're both so important to us. And in fact, those changes are part along with the stable economic environment on what's driving stronger than expected credit performance for us provision actually being up less than loans. So all of those things we think help prepare us to continue to perform strongly in all economic environments. We always spend a lot of time thinking about how we manage the company through all aspects of the economic cycle. We make every economic decision around customers assuming a through the cycle view of the economics, so we feel good about where we are in our preparation.

Stephen J. Squeri -- Chairman and Chief Executive Officer

Yeah. The other point I would make is when you look at international SME, it's predominantly if not 100% charge business for us, which has a lot less obviously a lot less volatility and our small business portfolio is more heavily charge based, in fact our consumer portfolio as well.

Operator

We'll go next to the line of Bill Carcache with Nomura Instinet. Go ahead please.

Bill Carcache -- Nomura Instinet -- Analyst

Thanks. Good morning. Jeff, I wanted to follow-up on some of your comments regarding the rate environment. I understand your point that there is a natural buffer in your business model based on the interplay between a stronger or weaker economy and higher lower rates, but to the extent that the Fed is turning more competitive in an effort to extend the cycle and not because economic conditions are deteriorating, then wouldn't that be a scenario where lower rates would benefit you?

And Steve, if I may. Just wanted to ask a question on the digital investments that you guys are making specifically on cloud. You guys have talked about pursuing a hybrid cloud strategy versus a public cloud strategy that some of your competitors are pursuing. Is there any concern that you may be falling behind your competitors relative to the investments that they're making. Thanks.

Stephen J. Squeri -- Chairman and Chief Executive Officer

So let me, I'll answer the second one. No, I think, look, having been the CIO of this company and spent 10 years running technology, I'm really comfortable with where we are. From an economic perspective, the reason we had a hybrid strategy is we believe that on an ongoing basis we have better economics by running our own private clouds. Now that may not be the case with everybody else but when you go to one of the cloud providers you have a situation where there is obviously just profit built in. So as we focused on our infrastructure and if you look at our technology costs over a long period of time or run the company costs, our best-in-class and they have been decreasing over-time. So I am really comfortable with where we are from a hybrid strategy perspective and what you do is you look to put workloads out there that are variable in nature and so I think having a hybrid strategy really works well for us because it enables us not to have some of the fixed cost investment that you would just need to have on a variable basis. So I don't feel we're falling behind at all. And I think we might have been a little bit ahead with the hybrid strategy that we have deployed.

Jeffrey C. Campbell -- Chief Financial Officer

And Bill on rates. Look, I'd just start by reminding everyone that 80% of our revenues come from spend and fee revenue. So just the math starts with the fact that relative to any other financial institution, we're just far or less sensitive in terms of our overall economics to where rates are going. Second, we do manage our funding stack in terms of our fixed floating mix to keep our exposure to changes in rates pretty modest and that's why in my prepared remarks I pointed out that when you think about a 25 basis point change it's a penny a quarter and in ensuing quarters. Third, there is this economic offset, right. I think in response to Sanjay's first question I did point out that the economy is growing, little slowly than it was last year as the rate environment for the rate outlook has come down a little bit. That's because people are worried about the economy that provides a little bit of a natural offset to even the modest impact that rates do. So look, we pay attention to rates. I'm just making the general point that when you net it all out for us, I don't see modest changes in the rate environment up and down is something that's going to move needle on our overall earnings.

Operator, let's keep going [Indecipherable] squeeze-in one or two more here.

Operator

We go next to the line of John Hecht with Jefferies. Your line is open.

John Hecht -- Jefferies -- Analyst

Morning, guys, thanks for taking my question. Your discount rate has been very stable year-over-year and I know you've taken specific guidance regarding the discount rate off the table, but I'm wondering if you can tell us is there any trends whether you're looking by channel, by region, by product or a mix shift, is there any trends underlying that that we should think about here for the next couple of quarters?

Jeffrey C. Campbell -- Chief Financial Officer

Well, I will just remind you, yes, you're correct. We're focused on driving discount revenue, which we feel great about, not average discount rate. All that said, we're also getting further from some of the things we've talked about for a few years, the impact of regulation in Australia and the European Union, the impact about Blues and big strategic deals we cut. And so those are having an impact on the average discount rate. But the thing I just want to emphasize is we feel good about the discount revenue trajectory. That's what we're focused on driving and the rate will average discount rate will kind of go where it will.

Operator?

Operator

We'll go next to the line of Craig Maurer with Autonomous. Go ahead please.

Craig Maurer -- Autonomous Research -- Analyst

Yeah, hi. Thanks. Wanted to ask a question about the Blue business cash card that you put a release out on yesterday. You talked about the invoicing product and that you were launching effectively what seems like a working capital program that will be paid over ACH. Curious, is that a new offering how are you marketing it, how big is it today if it's not a new offering? Thanks.

Jeffrey C. Campbell -- Chief Financial Officer

So actually the working capital product has been out there for a couple of years now, which maybe you've got sort of mixed up in this, in the Blue cash, but the working capital product has been out there for quite a long time a couple of years. It is relatively small and it does write-over ACH rails and what we want to do is remember what we want to do with small businesses is to help them run their business and the role at the card plays is part of the overall working capital solution and so there are suppliers and there are merchants that do not accept credit card payments of any type, just American Express with Visa and Mastercard and so to be able to provide a long with providing the card product to be able to provide working capital product as well to these customers helps them manage their business and helps them manage their cash flow and the reality is these are loans that are anywhere from 30 to 90 days.

Craig Maurer -- Autonomous Research -- Analyst

How big is it?

Jeffrey C. Campbell -- Chief Financial Officer

It's very tiny.

Rosie Perez -- Vice President and Head of Investor Relations

With that, we'll 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

Ladies and gentlemen, this conference will be made available for digitized replay beginning at 10:30 AM Eastern Time today and running until July 26th midnight Eastern Time. You can access the AT&T teleconference replay system by dialing 1800-475-6701 and entering the replay access code 469337. International participants may dial 1320-365-3844 with the access code 469337.

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Rosie Perez -- Vice President and Head of Investor Relations

Stephen J. Squeri -- Chairman and Chief Executive Officer

Jeffrey C. Campbell -- Chief Financial Officer

Sanjay Sakhrani -- Keefe, Bruyette & Woods -- Analyst

Donald Fandetti -- Wells Fargo Securities -- Analyst

Mark DeVries -- Barclays -- Analyst

Jason Kupferberg -- Bank of America Merrill Lynch -- Analyst

James Friedman -- Susquehanna Financial Group -- Analyst

David Togut -- Evercore ISI -- Analyst

Moshe Orenbuch -- Credit Suisse AG -- Analyst

Bill Carcache -- Nomura Instinet -- Analyst

John Hecht -- Jefferies -- Analyst

Craig Maurer -- Autonomous Research -- Analyst

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