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American Express' Management Discusses Q1 2013 Results - Earnings Call Transcript

American Express Company (AXP)

Q1 2013 Earnings Call

April 17, 2013 5:00 pm ET

Executives

Richard Petrino – Senior Vice President, Investor Relations

Daniel T. Henry – Executive Vice President and Chief Financial Officer

Analysts

Sanjay Sakhrani – Keefe, Bruyette, & Woods, Inc.

Bill Carcache – Nomura Securities Co. Ltd.

Mark C. DeVries – Barclays Capital Inc.

Donald Fandetti – Citigroup

Kenneth Bruce – Bank of America

Bradley G. Ball – Evercore Partners Inc.

Presentation

Draft version. An edited version will be posted soon.

Operator

Ladies and gentlemen, good afternoon. Thank you for standing by and welcome to the American Express First Quarter 2013 Earnings Conference Call. At this time, all lines are in listen-only mode. Later there will be an opportunity for your questions and instructions will be given at that time. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like to turn the conference over to our host, Mr. Rick Petrino. Please go ahead.

Richard Petrino

Thank you, Tom. Welcome and we appreciate everyone joining for today’s discussion. The discussion today contains certain forward-looking statements about the Company’s future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today.

The words believe, expect, anticipate, estimate, optimistic, intend, plan, aim, will, should, could, likely and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements, including the Company’s financial and other goals are set forth within today’s earnings press release and earnings supplement, which were filed in an 8-K report and in the Company’s 2011 10-K already 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 first quarter 2013 earnings release, earnings supplement and presentation slides, as well as the earnings materials for prior period 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 Dan Henry, Executive Vice President and CFO, who will review some key points related to the quarter's earnings through the series of slides included with the earnings document distributed and provide some brief summary comments. Once Dan completes his remarks, we will move to Q&A.

With that, let me turn the discussion over to Dan.

Daniel T. Henry

Okay. Thanks, Rick. So I'll start on Slide 2, so the first quarter 2013 summary of financial performance. So total revenues came in at $7.9 billion for the first quarter of 2013, it’s 4% higher on a reported basis and 5% growth year-over-year on an FX adjusted basis. That’s the same FX adjusted revenue growth that we have had for the past two quarters.

Pre-tax income came in at $1.9 billion, up 8%. Net income came in at $1.3 billion, up 2%. So net income grew at a slower rate than pre-tax income in the first quarter, because in the first quarter of 2012, it included a tax benefit realized on certain foreign tax credits and we had no such items in the first quarter of 2013.

Diluted EPS was $1.15, up 7%. EPS grew at a faster pace than net income due to share buybacks as you can see shares outstanding on the bottom of this chart of 5% lower year-over-year.

ROE is 23% for the quarter compared to 27% in the first quarter of 2012 and this is due to the three charges that we took in the fourth quarter of 2012, which was about $600 million. So the ROE is calculated using net income for the 12 months ended March 31 2013, therefore it includes the fourth quarter of 2012 and that’s divided by average shareholder equity. Excluding those three charges in the fourth quarter, adjusted ROE would have been 26% and you can actually see that calculation in Annex 6 through the slides.

Moving to slide three, which is metric performance; we can see that billed business came in at $224 billion. It grew at 6% on a reported basis, 7% on an FX adjusted basis. So the same FX adjusted growth rate that we had in the fourth quarter of 2012, despite the negative impact of having an extra billing day in the first quarter of 2012 because it was a Leap Year.

Cards In Force grew 5%, the same as the fourth quarter. Proprietary cards grew at 2% which is comparable to the growth rate we’ve seen over the last several quarters. Growth in average basic cardmember spending reflects continued strong cardmember engagement, and cardmember loans continued minus growth growing at 4%.

Moving to slide four, this is billed business growth by segment, and as you can see on this chart total FX adjusted growth in red line, in the first quarter of 2013 was 7% consistent with fourth quarter of last year. Each of the business segment is consistent with the fourth quarter of 2012 except for GCS which is Global Corporate Services that’s the green line, and you can see here that the growth rate for that segment has moved down slightly, as T&E spending grew at a slower rate than total billings growth rate in the quarter.

The 2012 was a leap year so there was a one day of billing year-over-year which negatively impacts billed business growth rate in the first quarter of this year by about 100 basis points.

Going to slide five, this is billed business growth by region, so you can see that the U.S. which is the dark blue line with the diamonds grew at 7%, consistent with the fourth quarter of 2012. And well each of the other regions had their growth rates slowed a bit in the first quarter compared to the fourth quarter. In aggregate total FX adjusted growth rate was 7% and is consistent with last quarter.

Now we have slide six, so this is the U.S. consumer managed cardmember loans. The bars are the dollar amount of loans. The light blue line is the U.S. consumer loan growth rate, and the new line is the green line, and that is the U.S. industry revolving growth in each of the quarters. So the 4% growth in loans is driven by growth in billed business. Loans are growing at about half the rate of the growth and billings on lending products.

Our loan growth continues to outpace the industry as you can see by looking at the green line. So for example, in the fourth quarter of this year we grew at 4% and the industry growth rate was 1%. The last point I make is that well our loans grew 4% year-over-year, loans decreased sequentially on a seasonal basis from the fourth quarter. And as you see in a minute credit performance continues to be excellent.

Slide seven, so this is our revenue performance. Total revenues grew 4%, against 5% on an FX adjusted basis. Discount revenue came in at 4%, and this reflects 6% growth in billed business partially offset by 1 basis point decline in the discount rate in higher cash back rewards.

Net card fees increased 7%, and this is reflective of higher average fees for card primarily due to fee increases and a greater mix of premium products. Travel Commissions & Fees decreased 3% as worldwide sales decreased 3%. Business travel declined 4%, while consumer travel sales increased 2%.

Other Commissions & Fees decreased 2% and this is the impact of some modest cost of cardmember reimbursements, partially offset by higher royalty partner revenues. Other revenue is lower by 3%, and this is primarily due to a favorable revision of our liability for uncashed TCs in international markets in the first quarter of 2012, and is partially offset by higher gains on our sale of ICBC shares in the first quarter of 2013.

Net interest income increased 10% and this is the combination of 3% increase in the average cardmember loans and increase in the worldwide net interest yield to 5.9% from 9.2% a year ago. Now, a portion of this increase is due to the reversal of the reserve for cardmember reimbursements that we setup in prior periods and without it, the increase would have been slightly lower. It’s also influenced by a decline in funding cost or a Charge Card portfolio.

Moving to slide 8, which is provision for losses, you can see the total provision for losses increased 21%. Charge Card provision increased 10%, primarily driven by higher receivables, which are 5% higher than a year ago.

Cardmember loan provision increased 30% or $63 million and this reflects a 4% increase in Cardmember loans compared to last year. Our reserve release of about $100 million in the first quarter of 2013 compared to reserve release of $200 million in the first quarter of 2012 and this has the effect of increasing provision by $100 million. Partially offset by approximately less in lay-off in the first quarter of 2013 compared to the first quarter of 2012 due to improved credit performance. This all nets to $63 million increase in the lending provision.

So provision is increasing while credit metrics are stable and you will see that over the next several slides.

The slide 9 is Charge Card credit performance and if you look at the left charge, this is the U.S. charge write-off rate and this has ticked up now slightly over the past few quarters, but I view this as stable over the period.

On the right side you see the Internet consumer and global corporate services, net loss ratio and this also has remained stable. Both of these metrics are at historically low levels.

Moving to slide 10; so this is the lending credit performance. The left side is the net write-off rate and this metric continues to be stable. The right side is the 30 days past due and the same is true here this metric continues to be very stable. So these metrics are at historically low levels and represent the best credit metrics in the industry. As I say each quarter, our objective is not to have the lowest possible write-off rate, but to achieve the best economic gain when we invest.

Next is slide 11. So these are the lending reserve coverage ratios. So each of the metrics whether it’s reserves as a percentage of loans, reserves as a percentage of past dues or the principal months coverage are lower in the first quarter of 2013 compared to last year based on the improved credit metrics, and/or trending slightly lower than the fourth quarter of 2012 as we continue to sustain historically low credit metrics. Our reserves in these metrics are appropriate for the risks that are inherent in our portfolio.

Slide 12; so this is expense performance. You can see on the bottom right that total expenses grew 1% year-over-year. Marketing and promotion expense decreased 2%, reflecting lower brand advertising, partially offset by higher core acquisition spending, I’ll cover this in more detail in the slide.

Next is Cardmember Rewards expense; and this increased 4% reflecting higher spending on rewards products, partially offset by slower growth in Membership Rewards ultimate redemption rate in the first quarter of 2013 compared to the first quarter of 2012, and I’ll cover this in more detail on our following slide.

Cardmembers Services decreased slightly, total operating expense grew 1% well within our target of growing total operating expense, less than 3% for the next two years, and I have a slide on this later as well. The effective tax rate was 32.9% in the first quarter of ’13 and this compares with 29.2% in the first quarter of 2012. The lower tax rate in the prior year includes a tax benefit related to the realization of certain tax credits.

Moving to slide 13, so this is marketing and promotion expense. So marketing expense in the first quarter of this year was $621 million that compares to $631 million in the first quarter of 2012, so down slightly. As you can see from the chart, it’s also down slightly for marketing as a percentage of revenue. So all the way on the right you can see the percentage for the first quarter of this year was 7.9% and for last year in the first quarter it was 9.3%. But we remained committed to our objective of having marketing and promotion expense to approximate 9% of revenues on an annual basis. Well in the first quarter of 2012, this percentage was 8.3%. If you look at the chart on the right, you can see that we increased spending in the second through fourth quarter to achieve our annual objective. And you can see on the left hand chart that 2012 for the full year came in at 9.2%. We continue to invest in our business, despite the slow growth economy.

Slide 14, the cardmember rewards expense. So rewards expense in the first quarter of this year was a $1.520 billion that compares to a $1.467 billion in the first quarter of 2012, a 4% increase.

So cardmember rewards expense is a combination of rewards on Cp-brand products and membership rewards expense. Within membership rewards is the combination of expense on points earned in the current period, and this is included in the chart below of Co-brand expense in the dark blue section of the chart. This section of the bar basically grows with the growth of billed business.

Membership rewards expense also includes expense related to changes in the membership rewards liability for points previously earned. This is the green section of the bar. As you can see, this portion of expense in the first quarter of 2013 is more than the first quarter of 2012. as the increase in the ultimate redemption rate in the first quarter of 2013 was less than the increase in the ultimate redemption rate in the first quarter of 2012. The ultimate redemption rate in the first quarter of 2013 is 94%, the same as it was in the fourth quarter of 2012.

Next slide is slide 15, operating expense performance, in the quarter as you can see in the lower right operating expense increased over 1% versus the prior year as we continue to focus on controlling expenses. Our expense performance is consistent with our aim to have operating expense grow at an annual rate of less than 3% over the next two years.

Salaries and employee benefits decreased 1% reflecting a decrease in employee count of 1,100 people compared to the first quarter of 2012. Professional services increased 4% reflecting increased investments in the business and higher legal fees. Occupancy and equipment increased 8% driven by higher data processing costs and software amortization.

Other net decreased 2% and this is resulting from a favorable impact related to hedging of fixed rate exposures versus an expense in the first quarter of 2012. So this is an accounting adjustment we need to record. These hedges are functioning exactly the way we intended and over the life of the hedge, it all nets to zero.

Now to slide 16, so this is expense as a percentage of revenue. Now adjusted expense means we are excluding credit position. On the left side, you can see six years of history, then on the right hand side you can see the most recent five quarters. That 2010 and 2011 reflect elevated investment levels.

In 2012, we committed to migrate this ratio overtime back towards historical levels in two ways; first through revenue growth and second, our plans to control operating expense while continuing to invest in the business. And the bars for 2012 and the fourth quarter of 2012, the dotted line in the bar excludes the restructuring charge and cardmember reimbursements in the fourth quarter of 2012. As you can see on the chart on the right, we are making substantial progress in reducing adjusted expense as a percentage of managed revenues.

Moving to slide 17; so these are capital ratios. In the first quarter of 2013, Tier 1 common and total capital ratios increased due to an increase in capital during the period, primarily driven by capital generation of $1.5 billion; is a combination of $1.3 billion in net income and $200 million raised from employee plans, offset by capital distributions of $1.1 billion and this is $800 million in share repurchases and $300 million in dividends as well as a decrease in risk weighted assets, mostly due to lower cardmember loans. Tier 1 common capital ratio of 12.6 provides the Company with a strong capital position.

Next to slide 18; this is the total payout ratio. So this is the percentage of capital generated through net income return to shareholders through dividends or share repurchases. On the left hand side, we see the past five years. On the right side, we see the most recent five quarters.

In 2012, we returned $4 billion or 98% to shareholders. Now the share repurchase in the first quarter of 2013 was governed by our CCAR submission in January 2012 and so for the quarter, we returned 70% of net income. We plan to increase our dividend to $0.23 per share from $0.20 per share next quarter or 15% increase for shareholders.

We’re also moving ahead with plans to repurchase common shares that would total up to $3.2 billion to shareholders, during the remainder of this year for a total of $4 billion in 2013 and up to an additional $1 billion in the first quarter of 2014.

Next slide is slide 19 of liquidity snapshot. Our objective is to hold excess cash and marketable securities to meet our next 12 months of funding maturities. As you can see, we have $20.9 billion in excess cash compared to funding maturities of $17 billion for next year thereby meeting our objectives.

Next is slide 20, so this is our U.S. retail deposit program and shows you the deposits by type. As you can see on the right, deposits increased by $1.1 billion in the quarter with direct deposits increasing by $2.5 billion and you can see that on the left side of the chart. We remain committed to increasing direct deposits overtime.

So with that, let me conclude with a few final comments. We continue to feel positive about our performance, especially given the slow growth economic environment.

In the quarter, spend growth continue to be healthy and was relatively consistent with the past several quarters, despite the negative impact of having an extra billing day in the first quarter of 2012 because of leap year. We also saw our average loans continue to grow modestly year-over-year and outpaced the industry. Borrowing at loan growth and slightly higher net yields led to a 10% increase in net interest income. At the same time, lending loss rates remain near all-time lows. Revenue growth was 5%, on an FX-adjusted basis consistent with last quarter. This reflects the sluggish economic environment and the negative impact of having one less day in the quarter versus the prior year.

In the quarter, our operating expense increased only 1% versus the prior year as we continue to focus on controlling expenses. Our expense performance is consistent with our aim to have operating expense growth at an annual rate of less than 3% over the next two years. We’re also continuing to best in the business and expect full-year marketing and promotional expense of approximately 9% of total revenues, in line with our historical average.

EPS growth of 7% outpaced revenue growth reflecting the progress we’ve made on controlling operating and our strong capital position. We continue to return significant capital to shareholders in the quarter through dividends and buybacks while maintaining strong capital ratios.

The results of the recent (inaudible) on the store are capital strength and our ability to remain profitable even under severe stress assumptions. Risk-based capital position provides the flexibility for all our planning tools to afford 15% increase in our dividend during the second quarter and allow us balance the capital needs of our business with the potential for significant share buyback. We recognized that our business is not immune to the economic environment, but we continue to believe that the flexibility of our business model enables us to deliver significant value to shareholders even in an extended slow growth environment. Thanks for listening and we're now ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) our first question today comes from the line of (inaudible), representing Goldman Sachs. Please go ahead.

Unidentified Analyst

Hi thanks, hi Dan. When you think about your outlook for revenue that came in about 5% on FX adjusted basis quarter below when you factor in the FX. So if you guys (inaudible) remain consistent over the next few quarters, how should we think about OpEx growth for the remainder of the year. I know you’re saying less that 3%, but assuming revenues we’re to stay at the 5% level. Do you think we should end up on the low end of that range?

Daniel T. Henry

So, as we talked about staying, having growth of less than 3%, we really haven’t factored in exactly where the revenue growth is going to come in, so I don’t think that’s the factor in terms of our commitment to keep OpEx growth less than 3%.

Unidentified Analyst

Got it, and…

Daniel T. Henry

So at the FCA we try to give a variety of scenarios in there in terms of what the potential outcomes could be, when you vary those revenue growth and operating expense growth, and share repurchases to give you a sense of how those issue those items could affect EPS and assemble different scenarios.

Unidentified Analyst

Okay and just in terms of the spend volumes can you give a sense of how they progress during the quarter end, at this point have you seen anything that points a pull back on the part of consumers from higher tax rates?

Daniel T. Henry

So our spending levels our FX adjusted basis have been pretty consistent over two quarters, and we didn’t see any stark trends within the quarter, so whether the change in the tax rate just having any impact that were something that we could concern within our numbers.

Unidentified Analyst

Great, thanks.

Operator

Question today comes from the line of Sanjay Sakhrani with KBW. Please go ahead.

Sanjay Sakhrani – Keefe, Bruyette, & Woods, Inc.

Yeah thank you. I was hoping if I can get like some specifics around the gain that you guys had from the sale of the ICB shares as well as kind of those benefit from the reversal of the reserve for card member reimbursements, and then secondly I was just wondering how far we were into the restructuring that you guys have undertaken, and at what point during the year will we hit a level of operating expense [ex] marketing without that overhead? Thank you.

Daniel T. Henry

Okay. So we, as we (inaudible) the ICB shares we put a hedge on that in the past and have effectively locked in a gain. As you have seen over the last several quarters we are taking that over time and what we’re doing there is to enable higher levels of investment spending to help generate business momentum. So it’s (inaudible) gain we have in sort of time, our plan to take it over time.

With respect to your second question about the reversal of our reserve we put off previously, we laid it to cardmember reimbursements. We have come up with a mess in the fourth quarter. Upon further refinements we realize that the (inaudible) reimburse is actually lower than our rest. It’s a relatively small amount, but it did have an effect on the increase in spreads. So I think I want people to think that that was a permanent increase. It’s only the only reason I spike that out, but it’s not really a large number at all as relates to our income.

In terms of restructuring, we announced restructuring in January. The impact of employees leaving American Express is actually going to take place over all of 2013. Some have left in March, but others will not leave until later in the year. So we’re only get a portion of the benefit from that action in 2013 and we’ll get an additional benefit in 2014 as some people would have been here for a portion 2013 so till it come to us very gradually over 2013 and 2014 and I would say most employes, the first employes (inaudible) were probably in the March timeframe so there is a limited amount of benefit from that in the first quarter. So we really see it come to us over the next several quarters, I would say. The very good control of operating expense is just our continued focus on operating expense which we really started last year it is rolling over into this year as we see the proper control of expense as a way of creating resources so that we can invest in the business, some of which takes place on (inaudible) other portions of that actually take place on the operating expense line.

So I don’t even know it was only one question I hope I got to four parts correct.

Daniel T. Henry

You there?

Operator

Next question comes from the line of Bill Carcache, with Nomura. Please go ahead.

Bill Carcache – Nomura Securities Co. Ltd.

Thanks, good evening. Dan I had a follow up question on slide 16 on the detail that you gave on the expenses. So you are clearly making progress on reducing expenses but I wanted to kind of make sure that I was the key about the commentary that you guys have made correctly, you refer to how in the past that you intended to get that expense ratio down to historical levels and I thought that you guys said in the past that 2007 was kind of a good benchmark. So that kind of 67% level and you’re 69% now in first quarter 2013. And you know, we see the progress we’ve made there, but should we’d be thinking is that in fact of fairway to be thinking about it that 69% overtime is going to move towards 67%. And then you guys don’t want to get locked into a timeframe, but is call it the next 12 months to 18 months or so kind of the reasonable timeframe to be thinking about

Daniel T. Henry

Yeah, so we, I think we said as we want move back towards historical levels. And 2008 and 2009 are low because of during the prices and 2010 to 2011 are higher, because we had all these levels of investments. As soon as lock in exactly on the 67, something want to hit back in that direction. How much we actually think this ratio down to depend on lot of things including where our revenue growth is place of provision and what we are aiming for in terms of what we were free off for investment capacity. So all those things work together in terms of, pace and the level that we take this ratio too

Bill Carcache – Nomura Securities Co. Ltd.

Okay, thanks and finally is a follow-up can you give a little bit more color what drove some of the weakness in GCS build business and then should we expect reserve builds for the rest of the year or should we’d be looking more releases. And then I guess last part of that is on the travel commissions and fees were little bit lower than what we are expecting. So I wondered if there is any kind of, maybe you could, if there is anything behind that and any kind of impact from the restructuring that we should expect to impact this line item. Thanks

Daniel T. Henry

Okay, so let me talk to GCS, so corporate services, so really across the broad we've seen lower spending in T&E categories, right and we are seeing better strength outside of the T&E category. Corporate services is primarily T&E type of spending and so that’s where do you see the income down and that’s relatively broad geographically, so if it is lower T&E type of spending, it was closing them to be lower and that actually ties into travel commissions and fees, right so if T&E spending is lower, then that way it is going to be impacted. Worldwide sales without 3%, that’s the main driver. Now as this travel is down 4%, consumer was actually up 2%, but business travel is much larger than consumer travel and so that’s yielding the lower sales, so it’s the activity in this particular category.

In terms of reserve, (inaudible) so we have seen them come down over the last couple of years. Actually in the fourth quarter, we had a slight reserve billed, but a return this year to release for the release this much lower. The way our models work, they use the last 12 months worth of information to do the model to the extend we get to a point where the core of it is flowing out, this is about the same level as the metrics we have in store.

Then you are going to have relatively stable provision, so it’s a relationship of what’s kind of pulling out the model and what the new quarter going into the model is. So I think most people are anticipating that reserve releases are not going to be in 2013 what they were in prior periods.

Bill Carcache – Nomura Securities Co. Ltd.

Thank you.

Operator

The next question comes from the line of Mark DeVries of Barclays. Please go ahead.

Mark C. DeVries – Barclays Capital Inc.

Yeah, thanks. Dan, could you walk us through your thoughts behind your revised buyback for (inaudible) process. You only missed the FED’s Tier 1 common buffer by 3 basis points, but then with subsequent request lowered the buy back request by $1.5 billion, was it communicated to you that would not be allowed to return in excess of 100% of earnings or alternative did you just want to make sure that you had a really conservative request around 100% that you were confident that they would approve?

Daniel T. Henry

Right. So they never said to us you can’t be above a 100%, I think (inaudible) it’s above 100%. And it turns out before submission and subsequently. So that was not hit. Our initial plan we asked for an increase of dividend to $0.23. We asked for share repurchase of $4.7 billion, all the reminder of ’13 and $1 billion in the first quarter of next year.

Our revised submission, we were asking for the same $0.23 dividend. We dropped our request from $4.7 billion to $3.2 billion this year in cap. The request for the first quarter of next year is the same. So when we prepared our initial submission to the FED under the stressed scenario it was based on our own internal announces and that internal announces yielded a minimum Tier 1 common ratio of 9.2% which was above the 5% minimum threshold that the FED reserve has set. However when the Federal Reserve did it’s own modeling, it generated a (inaudible) that dropped us below that 5% minimum amount.

Now the good thing is both scenarios and their scenarios even in the stress situation, we have [acquirer] to process over the [nine quarter] period. However the fence projection of the lower most provision was $3.1 billion higher that was. And, with actually $4.6 billion higher in the analyst day during the prior year. So, in 2012, their estimates in [ours] were relatively close.

Automated estimates for 2013, was similar assumptions ’13 and ’12 were similar. Okay, with the finance [come out] in the report that they progress they said some other reserve miles that they said was using this year here change substantially. Over newly implemented so it was that change the causes to 4% below the 5% minimum. Now, as we [proved] about our revise submission, [we don’t] we didn’t want to put in the submission (inaudible) the healthy over the 5% and we said where we go back to request that we have made in ’12 reflect that was substantial in terms of what we are returning to shareholders and that’s what really [drovers] at the end of the day.

In base format, we need to do that and reduce the share buyback request under the [fence] stress scenario are [two in] common ratio comes in at 6.42%. They are real healthy [valid] above the 5% that was really hard thinking and have we said of the simply the request.

Mark C. DeVries – Barclays Capital Inc.

Okay, I got it. In an- on a separate [track], when I am look it years or so back, the delta between your build business growth and loan growth was 10% plus and I understand you are telling us then you would eventually lend to follow spend and those would converge but now it’s relatively tied I guess there is only about a 240 basis point difference between your proprietary build business growth and your loan growth which is actually a little bit tighter than I would expected giver your more spend based model, is that relationship in line what you would have expected or is it a sign that you are getting more growth from your revolvers that you are from your transactors here?

Daniel T. Henry

So given that pre crises our loans grew at about the same phase as the growth in billings (inaudible) okay that separated while adoring the crises as consumers started to de-leverage. What we have said I think is that what the growth of loans will be in relation to the business is totally depended on our customers, as they are one who decides what amount of leverage that they want to have, although repetitively, at least in the near term can see that we back to where we were pre crises.

In the fourth quarter loan growth came closer to (inaudible) growth but in the first quarter the growth in loans was about half the rate of the growth in build businesses kind of been about that level for several quarters. Now whether it goes up or down from there as I said depending on the customers, we give products to customers, we give them the opportunity to revolve if they choose, as you know probably the number of customers that we have that have lending products that are actually transactions they are very much in the high 20s, right. But if those customers choose to revolve the products they are going to have, so it will be driven not by us but by the choice of the customer and we will rely on the credit capabilities we have to properly monitor that and you can see that while we are having loan growth even though really no one in the industry is at the moment are credit mix metrics were actual. So it’s a, it will be driven by the behavior of the customer.

Mark C. DeVries – Barclays Capital Inc.

Okay, thanks.

Operator

Next question comes from the line of Don Fandetti with the City group. Please go ahead.

Donald Fandetti – Citigroup

Sort of looking at bill business in the U.S I mean effectively your growth rates you could argue accelerated a bit and you’ve got the banks and JP Morgan sort of coming at the Apple inside I mean I guess my question is do you still think you are gaining share how was growth so stable and good I mean is there anything specific in terms of sort of a income breakdown where the super affluent is maybe stronger I mean are you choosing across the board decent numbers.

Daniel T. Henry

Moving on customer basis is primarily (inaudible) customer base and as I said before royalty any (inaudible) impact on of taxes all our basis. As you said in the U.S we had some pretty consistent performance over the last several quarters, we are pleased with, given where GDP is and the fact that is a solvers economy. We believe the fact that (inaudible) compares one of Euro space as we mean to continue to innovate and provide to as a service to customers to maintain the kind of (inaudible) that we have, but we haven’t done analysis to distinguish by income level within our customer base, but it’s pretty good performance over of who are based of our products that’s giving us this segment growth.

Donald Fandetti – Citigroup

Thank you. And then, in terms of the Chase-Visa deal, I guess, some have suggested there maybe that could be a competitive (inaudible) to AmEx because of the closed loop. I mean is there anything specific that they could do that’s incremental, is there any sort of incremental competitive threat from that you see today?

Daniel T. Henry

Well, they’re trying to replicate our closed loop. I think people realize that that has value. But the number of customers that actually within that space is limited, right, has to be a Chase number at a merchant that uses their merchant-acquiring process. (inaudible) I don’t think that’s a very piece of the total universe. So it is something that will enable them to achieve growth. I think it likely is, but I don’t see it as a large threat as our flows which covers all our merchants and all of our customers.

Donald Fandetti – Citigroup

Thank you.

Operator

Now we’ll go to line of Ken Bruce representing Bank of America. Please go ahead.

Kenneth Bruce – Bank of America

Thank you. Good evening. Firstly appreciate the commentary in your prepared remarks as it relates to the marketing and promotion expense and expense levels in general. I do want to make sure I understand some of your comments there and my question will tie in with some of the others. But firstly, you’d mention that marketing and promotion expense, running at 7.9% likely going to go higher just in terms of where you expect to run at on a more stable state basis, and I want to make sure that that’s your outlook as for marketing promotion as a percentage of managed revenue to rise and then within the context of your marketing and promotion expenses, you had pointed out that brand advertising was down and acquisition costs or acquisition spending was up. And I want to understand, maybe you can [nationalize] if there is been any changes in terms of what is the discretionary side of the expense versus what is more cardmember behavior, if you have seen any change in the outlook for where you want to invest, whether that would be geographically or within products and get a sense as to how you are looking at the investment horizon, if you could provide some color on those areas, please?

Daniel T. Henry

So what we have said is, our objective is for marketing and promotion on an annual basis to be about 9%. It’s not a forecast, but that’s our objective. I was just putting out that last year, we had brought marketing as a percentage of revenue down in the first quarter, we have done that again. But again we aren’t changing our objective of being at that 9% level.

The (inaudible) down a little bit and acquisition up a little bit was going to say we had a strategy change in terms of the expense, which is say, during this quarter, when we had lower expense, it was coming more from the brand side or acquisition engine to bringing customers was actually at a revolver we have had in the past. So it’s really just to give you a sense of how we allocate within the quarter.

Every year, we look at all of the opportunities we have in terms of where we spend our marketing dollars, whether it’s on brand, or charge in the U.S. or charge internationally our lending products and co-branded products. And we have pretty refined models in terms of what the expected economic gain of each of those investments are and that’s what really drives where we put the dollars. Obviously, it’s a lot easier to measure when you do an acquisition, because you can see the actual cost to come in and we have a pretty good idea how they going to perform, when I guess things like brand advertising, if you don’t have that nice mathematical calculation. We know this is certain amount to that you want to do. And if you do, if you have good products and good brand advertising that’s what you want to be. Because really driven by which investments give us the greatest economic gain it will drive what geography and what products we put the investments [behind].

Kenneth Bruce – Bank of America

And as follow-up are you, when you look at brand versus acquisition expenditures, it feels that the brand is very discretionary, but ultimately as a longer payback window versus you know the acquisition (inaudible) could you maybe making which are harder to pullback and trying to get a sense with how much this maybe in reaction to, meeting some shorter term financial objectives versus any change in the overall outlook for investment in your business?

Daniel T. Henry

But I think we need some (inaudible) marketing and promotion just about maybe on a 100% on a very, very large it's completely discretionary. Right that we can decide to either do or not do so [started off] like a fixed cost of having employees within the company. So, it is just a matter of, I think we recognized that we can take working promotion down in any quarter or for couple of quarters in fact as we did back in 2008 and 2009. And as really not a negative impact to the franchise, we can do that longer-term. So this is just in recognizing the first quarter. It was taken downtown, we’ve committed to hit the objective (inaudible) and we chose in this particular quarter to have our income down and acquisition, that can change from quarter-to-quarter depending on what we are endeavoring the achieve.

Kenneth Bruce – Bank of America

Great thank you very much.

Operator

Next from the inner of (inaudible)

Unidentified Analyst

Hi, thanks greeting. Dan if you can touch on the lending business one more time. The margin in the (inaudible) first quarter anything going on there that is sustainable, and also just putting back the lending business also seems to be going fairly well, as you mentioned here (inaudible) better than almost anyone in the industry. The margin is healthy rather than (inaudible) industry, the margins are healthy, cut at all time lows. Any change in strategy around lending and given the weakness and other part of the business is there any desire to increase your focuses on lending? And can you just comment on (inaudible) currently? Thanks.

Daniel T. Henry

So with (inaudible) we others are using balanced transfers with zero for certain period of time. That is not a strategy that we’re following, so not going loans by putting (inaudible) three. The growth in the loan in currently by as a result of spending, the business spending on our products which is what we want them to do.

Coming on the prices, we didn’t have a shift in our lending strategy, right? So we were coming on the prices to be focused on premium one. So that was a change, so that’s the change so we put in back in 2009 and were continuing to execute against that. We’ve shred information about what percentage of lending customers actually are transactors and that has increased quite a bit over the last several years and as a result of the premium lending strategy, we are focused on cards that have higher spending on them so we have also shared the percentage of customers who have a 10 years or less than 2.5 years with us so there is a lot less than it was again five years because we are bring in fewer (inaudible) right?

Unidentified Analyst

Right

Daniel T. Henry

That’s helpful from the credit prospective as well so I think you put in a number of matrix out there show that we were talking about a premium lend mix ratio but actually executing against it, we can actually see that as average card member spending is and whole base is growing up. So that has been something of a change because [charging] some strategy change that we made a couple of years ago. Lending products for credit worthy customer or products that have good economics associated with it and so we were in a (inaudible) charge card and premium lending and as I said before which ones are actually investing again is based on the return that we think we’ll get out of each investment.

Unidentified Analyst

Any comment on the manager’s margin and then also separately can you also comment on fraud? I herd you are more and more concerned about fraud but the lack of EMB in the US and next year plan to start issuing EMB cards in the US and update there. Thanks.

Daniel T. Henry

So net yield is at 9.5% in the quarter, up about 30 basis points from last year, I made comment that apart of that increase had to do with just in our reserves I wouldn’t expect to spend exactly 9.5%. Coming out of the crises or actually coming out of the (inaudible) regulations that we had. We had said, 9% was about our yield prior to those regulations and on 10 on was for our yield to be about 9% and after those regulations with the changes we have made in the (inaudible), so we have achieved that and slightly more. So on lending products, we are getting good growth, low credit losses and good yields and that’s a pretty good combination to have, right. So we are very pleased with how our lending products are performing.

As it relates to fraud, our fraud losses are less than half of what we see across the industry and I think that’s the benefit of having very good (inaudible) growth, it’s probably one of the benefits of the closing and we have not seen any notable tick-up in fraud in our core business.

As it relates to EMV, we have started to put EMV chips on some of our premium products or products for customers who travel expensively, so that they have the best utilization possible quite frankly outside the U.S., but I think gradually within the U.S. we put EMV on to our cards over a number of years.

Unidentified Analyst

No big role out planned to this year, Dan?

Daniel T. Henry

It’s going to be a very gradual role out over several years, I would say, so no big push to do it in 2013, but it’s a gradual undertaking for us.

Unidentified Analyst

Great. Thank you so much.

Operator

Next, we will go to the line of (inaudible) of Morgan Stanley. Please go ahead.

Unidentified Analyst

Hi, good evening.

Daniel T. Henry

Hi.

Unidentified Analyst

Couple of questions; one is just on the travel segment, travel segment have been relatively weak thinking about just airline and airline seat capacity, and I’m wondering how much that may have impacted your first quarter in terms of billed business?

Daniel T. Henry

Yes, I think I mentioned before the reason that corporate services was down in terms of growth rate, the growth rate was lower was that we were seeing weakness in T&E spend compared to our (inaudible), so that in all of our products, it’s a bigger percentage of corporate services, so it had a bigger impact that, so it was impacting growth in the quarter.

Unidentified Analyst

Okay, no sense of degree of impact?

Daniel T. Henry

It’s hard to tease out exactly because I would say, that was one a little bit of role very pleased with our aggregate growth rate given the sluggish economy.

Unidentified Analyst

Sure, and then on slide five, just looking at the different billed business growth rates per region, you know it’s kind of interesting that somewhat coming together fairly tightly and I’m wondering how you guys are thinking about that as this new normal where distribution of growth rate across the globe is likely to be running, more similarly or do you have a different look than what you’ve experienced this quarter?

Daniel T. Henry

Yeah I think it feels every times we are kind of inched together like it is now and I think it is the other side where it feels once again, let’s say EMEA is stronger than the other regions, and so kind of figure out exactly all the issues and problems, it could well be the EMEA stays kind of the (inaudible) part of the chart. We think JAPA is being impacted by China, so it’s good growth rate but not the growth rates that they had in recent history that impacts countries like Australia. So it’s really very much going to be driven by the economies in those regions in large parts

Unidentified Analyst

Sure. Okay, and then lastly couple of questions Bluebird. I wanted to understand the impact of adding checking future and the Australian [fee] insurance on Bluebird. And if there has been much in a way of any effort to expand the merchant acceptance attract more Bluebird spend

Daniel T. Henry

So, Bluebird price or all reloadable products are accepted across our whole network. Right, so you can use any of those products in eight locations (inaudible) product is accepted

Unidentified Analyst

Right

Daniel T. Henry

It has to be FDIC insured. And in terms of the check driving we just want to have a full sweep options to customers so it’s a best possible product for them

Unidentified Analyst

Have you seen any uptick in growth rate beyond, you’re experiencing before the post the FDIC announcement?

Daniel T. Henry

Well, we just went on, so it’s hard to measure, but we are seeing healthy growth in reloadable prepaid of course that products had

Unidentified Analyst

And then the question on the merchant acceptance I get it that, who were expected at any merchant who access actually the question is does that reloadable repaid card user seek a potentially different kind of merchant in addition to merchant said (inaudible) today

Daniel T. Henry

So, we access possible, but we do have an initiative to, so those are initiative to expand merchant coverage starting at small merchant is a particular initiative within 2013. We were trying to expect it. That’s very much in line, probably good for customers who use reloadable prepaid, good for customers who use our core network as well. (inaudible) to the next question if you could.

Unidentified Analyst

Thanks.

Daniel T. Henry

This will be the last question. Well, two more questions. Two more questions. Okay.

Operator

All right. Next we’ll go to line of Brad Ball with Evercore. Please go ahead.

Bradley G. Ball – Evercore Partners Inc.

Thanks Dan. A lot of my questions have been asked. Just you mentioned that you were experiencing higher cash back rewards. Is that a contra-revenue item and how many of your, what proportion of your customers are using cash back?

Daniel T. Henry

So cash back reward is a contra-revenue and cash back is a good product. I think we actually break out percentage, but it’s still a reasonably product within our suite of products.

Bradley G. Ball – Evercore Partners Inc.

And is it a product that resembles the products that are in the market, 1% type cash back on all spending that kind of product?

Daniel T. Henry

Well, this product is a little different, but it’s basically a percentage of spend you get and sometimes there is higher rewards in particular categories either on a product feature basis or on a promotion basis.

Bradley G. Ball – Evercore Partners Inc.

Okay. And then one other. You had mentioned that other revenue were helped by higher loyalty partner revenues.

Daniel T. Henry

Yeah.

Bradley G. Ball – Evercore Partners Inc.

Can you give us a sense as to the magnitude or the contribution there and just broadly how are you tracking to the $3 billion target for fee revenues?

Daniel T. Henry

So we’ll be partnered as a substantial business. However it’s one business in a very large company, but they are performing nicely, very much in line with our expectations and it’s one spot that we think is going to help us achieve our $3 billion target. Yeah, as we said, we are halfway through the timeframe of achieving that target which we still think is appropriate. It will be different key businesses like certified, royalty edge, royalty partner, moving to prepaid, that we’re looking forward to get us there. And as of 2012 we stood at $1.5 billion that was up 15% from the prior year. We recognized $3 billion an ambitious target in particularly a sluggish economy, and we had a fair amount of work to do as we go forward. Our royalty partner, we build (inaudible) are two examples of how we’re diversifying our base and we expect those to ramp up as we hit towards the end of 2014, which is when we’re shooting to be at a run rate of $3 billion.

Bradley G. Ball – Evercore Partners Inc.

That’s great. Thanks.

Daniel T. Henry

Last question.

Operator

The final question today will come from the line of (inaudible) with Credit Suisse. Please go ahead.

Unidentified Analyst

Great thanks. Just to comment about the bank stock gained, could you just tell us how much is left in that that you’re releasing kind of overtime when you said you needed the earnings for marketing purposes? And (inaudible)?

Daniel T. Henry

So we’ve taken gains, I think over the past six quarters or some every quarters, the hedged is still runs into next year sometime, probably towards the middle of next year. So I would expect we’re going to take gains pretty easily over the next six or seven quarters.

Unidentified Analyst

All right. And just on the reserving, I mean, if you kind of take the analysis that you described, what the kind of forward 12 months, what have been at the end of this quarter versus at the beginning you count a down 3% or 4% in terms of [charge-offs]. But I guess

Daniel T. Henry

(inaudible) suppose to you stop (inaudible)

Unidentified Analyst

Yeah, basically you accept that with respective reserving that you can to look at the forward kind of 12 month losses and if the quarter drops out, that had higher losses in that exact analysis. I mean taken literally year losses were down 3% or 4%. So, kind of their reserve drop we saw it’s seems reasonable how do you factor in the fact the idea growth because you [count] from 14 months of coverage at the current rate [to ’13] which kind of employes (inaudible) growth or kind of deterioration in the existing rate.

Daniel T. Henry

That actually use 12 months looking back. We are actually to use the historical information to feed our models that’s [destroying] the reserve.

Unidentified Analyst

The loan growth has not [been do] that expecting longer?

Daniel T. Henry

No, we’re looking at the behavior of our portfolio and if you have loan growth. We’re assuming I guess in handling that loan growth you have a similar loss aspects as our existing both our business.(inaudible) we’re not putting reserves our books today for loans that we put [out] in future. So, this is your [worsen] reserve you need for the loans that (inaudible) books at this moment.

Unidentified Analyst

I got it. Okay. Thanks.

Daniel T. Henry

Okay, so thanks everybody for joining the call. Take care.

Operator

Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and using the AT&T Executive Teleconference Service. You may now disconnect.



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