AMERICAN EXPRESS COMPANY EXECUTIVE OVERVIEW BUSINESS INTRODUCTION We are a globally integrated payments company with three reportable operating segments:Global Consumer Services Group (GCSG), Global Commercial Services (GCS) and Global Merchant and Network Services (GMNS). Corporate functions and certain other businesses and operations are included in Corporate & Other. Our range of products and services includes: •Credit card, charge card and other payment and financing products •Merchant acquisition and processing, servicing and settlement, and point-of-sale marketing and information products and services for merchants •Network services •Other fee services, including fraud prevention services and the design and operation of customer loyalty programs •Expense management products and services •Travel and lifestyle services Our various products and services are sold globally to diverse customer groups, including consumers, small businesses, mid-sized companies and large corporations. These products and services are sold through various channels, including mobile and online applications, affiliate marketing, customer referral programs, third-party vendors and business partners, direct mail, telephone, in-house sales teams, and direct response advertising. Business travel-related services are offered through our non-consolidated joint venture,American Express Global Business Travel (the GBT JV). The following types of revenue are generated from our various products and services: •Discount revenue, our largest revenue source, primarily represents the amount we earn on transactions occurring at merchants that have entered into a card acceptance agreement with us, or a Global Network Services (GNS) partner or other third-party merchant acquirer, for facilitating transactions between the merchants and Card Members. The amount of fees charged for accepting our cards as payment for goods or services, or merchant discount, varies with, among other factors, the industry in which the merchant does business, the merchant's overallAmerican Express -related transaction volume, the method of payment, the settlement terms with the merchant, the method of submission of transactions and, in certain instances, the geographic scope for the related card acceptance agreement between the merchant and us (e.g., domestic or global) and the transaction amount. In some instances, an additional flat transaction fee is assessed as part of the merchant discount, and additional fees may be charged such as a variable fee for "non-swiped" card transactions or for transactions using cards issued outsidethe United States at merchants located inthe United States ; •Interest on loans, principally represents interest income earned on outstanding balances; •Net card fees, represent revenue earned from annual card membership fees, which vary based on the type of card and the number of cards for each account; •Other fees and commissions, primarily represent Card Member delinquency fees, foreign currency conversion fees charged to Card Members, loyalty coalition-related fees, travel commissions and fees, service fees earned from merchants, and Membership Rewards program fees; and •Other revenue, primarily represents revenues arising from contracts with partners of our GNS business (including commissions and signing fees less issuer rate payments), cross-border Card Member spending, earnings from equity method investments (including the GBT JV), ancillary merchant-related fees, insurance premiums earned from Card Members, and prepaid card and Travelers Cheque-related revenue. 37
-------------------------------------------------------------------------------- Table of Contents FINANCIAL HIGHLIGHTS For 2019, we reported net income of$6.8 billion and diluted earnings per share of$7.99 . This compared to$6.9 billion of net income and$7.91 diluted earnings per share for 2018. 2019 results included: •a$0.21 per share impact of a litigation-related charge in the first quarter. 2018 results included: •a$0.58 per share impact of certain discrete tax benefits in the fourth quarter. NON-GAAP MEASURES We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted inthe United States of America (GAAP). However, certain information included within this report constitutes non-GAAP financial measures. Our calculations of non-GAAP financial measures may differ from the calculations of similarly titled measures by other companies. BUSINESS ENVIRONMENT Our results for 2019 continued the steady, consistent performance that we have delivered over the past two years. These results reflect our strategy of investing in share, scale and relevance and demonstrate our success in executing against our four strategic imperatives. We continued to invest in new card acquisitions, new services and Card Member benefits, refreshing and launching new products, and expanding our merchant network. During the year, we returned$5.9 billion of capital to our shareholders through our share buyback program and an increase in our dividend, while maintaining strong capital ratios. Our worldwide billed business increased 5 percent over the prior year and worldwide proprietary billings, which comprised 86% of our total billings, grew 7 percent, led by consumers. After adjusting for foreign currency exchange (FX) rates, worldwide proprietary billed business increased 8 percent over the prior year, with international proprietary billings growing 13 percent.1 This spending occurred against the backdrop of an economy that grew at a more modest pace relative to 2018.U.S. Consumer proprietary billed business grew at 7 percent reflecting continued strong acquisition performance and solid underlying spend growth from existing customers. International proprietary consumer growth remained in double digits on an FX-adjusted basis. We also saw 6 percent growth from our commercial customers, driven by steady acquisition and retention ofU.S. small and mid-sized enterprise (SME) customers and strong growth in international SME customers. GNS billed business declined 6 percent (2 percent on an FX-adjusted basis) as we exited the network business inEurope andAustralia due to certain regulatory changes; excluding the billings from those geographies, GNS billed business grew 5 percent year-over-year on an FX-adjusted basis.1 Revenues net of interest expense increased 8 percent (9 percent on an FX-adjusted basis), driven by a well-balanced mix of growth in card fees, Card Member spending and net interest income.1 The fourth quarter of 2019 was the tenth consecutive quarter with FX-adjusted revenue growth of 8 percent or better.1 Card fees continue to be our fastest growing revenue line, with an increase of 17 percent year-over-year reflecting our approach of enhancing the value of our premium products to drive higher customer engagement. Discount revenue increased 6 percent year-over-year primarily driven by the previously mentioned billings growth. Net interest income grew at 12 percent year-over-year, driven by growth in loans and net yield, reflecting continued positive impacts from mix and pricing initiatives. Card Member loans grew 7 percent year-over-year, as we continued to expand our lending relationships with existing customers and acquired new Card Members. Provisions for losses increased 7 percent, driven by a modest increase in net write-offs, which reflects the impact of our lending strategy, as well as the relatively stable economy and low unemployment rate. Spending on customer engagement (the aggregate of rewards, Card Member services, and marketing and business development expenses) increased 10 percent year-over-year with growth across all categories. Increases in rewards and Card Member services reflected the growth in proprietary billings and continued investment and usage across many of our premium travel-related benefits. Card Member services costs continue to be our fastest growing expense category, as it includes the costs of many components of our differentiated value propositions that support strong Card Member acquisition and engagement. Marketing and business development expense grew due to continued investments in our partnerships, including the impact of the renewal of our relationship with Delta Air Lines earlier in 2019, and higher corporate client incentives. Operating expenses increased 8 percent year-over-year, reflecting investments we are making across our business and the litigation-related charge in the first quarter of 2019. 1 The foreign currency adjusted information assumes a constant exchange rate between the periods being compared for purposes of currency translation intoU.S. dollars (i.e., assumes the foreign exchange rates used to determine results for the current period apply to the corresponding prior year period against which such results are being compared). FX-adjusted revenues and expenses constitute non-GAAP measures. We believe the presentation of information on a foreign currency adjusted basis is helpful to investors by making it easier to compare our performance in one period to that of another period without the variability caused by fluctuations in currency exchange rates. 38 -------------------------------------------------------------------------------- Table of Contents We continue to see attractive growth opportunities across our businesses and plan to invest to take advantage of them in order to generate and sustain a strong level of revenue growth, which we believe is the foundation for steady and consistent double-digit EPS growth. While we continue to see some headwinds in the environment, including from economic and geopolitical uncertainty, regulation in countries around the world and intense competition, we remain focused on delivering differentiated value to our merchants, Card Members and business partners and delivering appropriate returns to our shareholders. See "Supervision and Regulation" in "Business" for information on legislative and regulatory changes that could have a material adverse effect on our results of operations and financial condition and "Risk Factors" for information on the potential impacts of economic, geopolitical and competitive conditions and certain litigation and regulatory matters on our business. CONSOLIDATED RESULTS OF OPERATIONS The discussions in the "Financial Highlights", "Consolidated Results of Operations" and "Business Segment Results" provide commentary on the variances for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , as presented in the accompanying tables. For a discussion of the financial condition and results of operations for 2018 compared to 2017, please refer to Part II, Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the year endedDecember 31, 2018 , filed with theSEC onFebruary 13, 2019 . TABLE 1: SUMMARY OF FINANCIAL PERFORMANCE Years EndedDecember 31 , Change
Change
(Millions, except percentages and per share amounts) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Total revenues net of interest expense$ 43,556 $ 40,338 $ 36,878 $ 3,218 8 %$ 3,460 9 % Provisions for losses 3,573 3,352 2,760 221 7 592 21 Expenses 31,554 28,864 26,693 2,690 9 2,171 8 Pretax income 8,429 8,122 7,425 307 4 697 9 Income tax provision 1,670 1,201 4,677 469 39 (3,476) (74) Net income 6,759 6,921 2,748 (162) (2) 4,173 # Earnings per common share - diluted(a)$ 7.99 $ 7.91 $ 2.99 $ 0.08 1 %$ 4.92 # % Return on average equity(b) 29.6 % 33.5 % 13.2 % Effective tax rate (ETR) 19.8 % 14.8 % 63.0 % Adjustments to ETR(c) 6.1 % (34.7) % Adjusted ETR(c) 20.9 % 28.3 % # Denotes a variance greater than 100 percent (a)Represents net income, less (i) earnings allocated to participating share awards of$47 million ,$54 million and$21 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively, and (ii) dividends on preferred shares of$81 million ,$80 million and$81 million for the years endedDecember 31, 2019 , 2018 and 2017, respectively. (b)Return on average equity (ROE) is computed by dividing (i) one-year period net income ($6.8 billion ,$6.9 billion and$2.7 billion for 2019, 2018 and 2017, respectively) by (ii) one-year average total shareholders' equity ($22.8 billion ,$20.7 billion and$20.9 billion for 2019, 2018 and 2017, respectively). (c)The adjusted ETRs for 2018 and 2017 are non-GAAP measures. The 2018 adjusted ETR excludes a benefit of$496 million relating to changes in the tax method of accounting for certain expenses, the resolution of certain prior years' tax audits, and a final adjustment to our 2017 provisional tax charge related to the Tax Cuts and Jobs Act enacted onDecember 22, 2017 (Tax Act). The 2017 adjusted ETR excludes the$2.6 billion charge related to the Tax Act. Management believes the adjusted ETRs are useful in evaluating our tax rates in comparison with the other presented periods. Refer to Note 20 of the "Consolidated Financial Statements" for additional information. TABLE 2: TOTAL REVENUES NET OF INTEREST EXPENSE SUMMARY Years Ended December 31, Change
Change
(Millions, except percentages) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Discount revenue$ 26,167 $ 24,721 $ 22,890 $ 1,446 6 %$ 1,831 8 % Net card fees 4,042 3,441 3,090 601 17 351 11 Other fees and commissions 3,297 3,153 2,990 144 5 163 5 Other 1,430 1,360 1,457 70 5 (97) (7) Total non-interest revenues 34,936 32,675 30,427 2,261 7 2,248 7 Total interest income 12,084 10,606 8,563 1,478 14 2,043 24 Total interest expense 3,464 2,943 2,112 521 18 831 39 Net interest income 8,620 7,663 6,451 957 12 1,212 19 Total revenues net of interest expense$ 43,556 $ 40,338 $ 36,878 $ 3,218 8 %$ 3,460 9 % 39
-------------------------------------------------------------------------------- Table of Contents TOTAL REVENUES NET OF INTEREST EXPENSE Discount revenue increased, primarily due to growth in billed business.U.S. billed business increased 6 percent and non-U.S. billed business increased 2 percent. See Tables 5 and 6 for more details on billed business performance. The average discount rate remained flat at 2.37 percent for both 2019 and 2018. Net card fees increased, primarily driven by growth in the Platinum, Delta and Gold portfolios, as well as growth in certain key international countries. Other fees and commissions increased, primarily driven by growth in foreign exchange conversion revenue and delinquency fees. Other revenues increased, primarily due to higher revenues related to the GBT JV and a modification of one of our GNS arrangements, partially offset by lower revenue earned on cross-border Card Member spending. Interest income increased, primarily reflecting higher average Card Member loans and higher yields. Interest expense increased, driven by higher cost of funds, average long-term debt and average deposits. TABLE 3: PROVISIONS FOR LOSSES SUMMARY Years EndedDecember 31 , Change
Change
(Millions, except percentages) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Charge card$ 963 $ 937 $ 795 $ 26 3 %$ 142 18 % Card Member loans 2,462 2,266 1,868 196 9 398 21 Other 148 149 97 (1) (1) 52 54 Total provisions for losses$ 3,573 $ 3,352 $ 2,760 $ 221 7 %$ 592 21 % PROVISIONS FOR LOSSES Charge card provision for losses increased, primarily due to growth in receivables and higher net write-offs in the consumer and small business portfolios, partially offset by lower net write-offs in the corporate portfolio. Card Member loans provision for losses increased, driven by higher net write-offs, partially offset by a lower reserve build due to slower loan growth. See Note 1 to our "Consolidated Financial Statements" for information about the implementation and expected impact of new accounting guidance for the recognition of credit losses on financial instruments, effectiveJanuary 1, 2020 , and the new credit reserving methodology known as the Current Expected Credit Loss (CECL) methodology. Following the adoption, the future effects of CECL on our provisions for losses will ultimately be dependent on a number of internal and external factors. Assuming no change in the growth in Card Member loans, current macroeconomic conditions, and portfolio quality, we estimate our provisions for losses will likely be higher under CECL and may result in more quarter-to-quarter fluctuations relative to the current accounting methodology. TABLE 4: EXPENSES SUMMARY Years Ended December 31, Change Change (Millions, except percentages) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Marketing and business development$ 7,114 $ 6,470 $ 5,722 $ 644 10 %$ 748 13 % Card Member rewards 10,439 9,696 8,687 743 8 1,009 12 Card Member services 2,222 1,777 1,392 445 25 385 28 Total marketing, business development, rewards and Card Member services 19,775 17,943 15,801 1,832 10 2,142
14
Salaries and employee benefits 5,911 5,250 5,258 661 13 (8) - Other, net 5,868 5,671 5,634 197 3 37 1 Total expenses$ 31,554 $ 28,864 $ 26,693 $ 2,690 9 %$ 2,171 8 % EXPENSES Marketing and business development expense increased, primarily due to continued investments in partnerships (including as a result of the recent renewal of our cobrand relationship with Delta Air Lines), increased network partner payments and 40
-------------------------------------------------------------------------------- Table of Contents increased corporate client incentives driven by higher volumes, partially offset by higher marketing costs in the prior year with the launch of our new global brand campaign. Card Member rewards expense increased, primarily driven by increases in Membership Rewards and cash back rewards expenses of$505 million and cobrand rewards expense of$238 million , both of which were primarily driven by higher spending volumes. The Membership Rewards Ultimate Redemption Rate for current program participants at bothDecember 31, 2019 and 2018 was 96 percent (rounded up). Card Member services expense increased, primarily driven by higher usage of travel-related benefits. Salaries and employee benefits expense increased, reflecting higher payroll costs, higher restructuring charges and higher incentive and deferred compensation. Other expenses increased, primarily driven by lower unrealized gains on certain equity investments, higher technology costs and litigation-related expenses, partially offset by non-income tax-related benefits and a prior-year loss on a transaction involving the operations of our prepaid reloadable and gift card business. INCOME TAXES The effective tax rate for 2019 was 19.8 percent. The effective tax rate for 2018 was 14.8 percent, and reflects a benefit of$496 million relating to changes in the tax method of accounting for certain expenses, the resolution of certain prior years' tax audits and an adjustment to the 2017 provisional tax charge related to the Tax Act. The tax rates in both periods reflect the level of pretax income in relation to recurring permanent tax benefits and the geographic mix of business. TABLE 5: SELECTED CARD-RELATED STATISTICAL INFORMATION Change Change Years Ended December 31, 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Billed business: (billions) U.S.$ 827.7 $ 777.6 $ 708.3 6 % 10 % Outside the U.S. 413.1 406.4 376.9 2 8 Total$ 1,240.8 $ 1,184.0 $ 1,085.2 5 9 Proprietary$ 1,070.5 $ 1,002.6 $ 900.6 7 11 GNS 170.3 181.4 184.6 (6) (2) Total$ 1,240.8 $ 1,184.0 $ 1,085.2 5 9 Cards-in-force: (millions) U.S. 54.7 53.7 50.0 2 7 Outside the U.S. 59.7 60.3 62.8 (1) (4) Total 114.4 114.0 112.8 - 1 Proprietary 70.3 69.1 64.6 2 7 GNS 44.1 44.9 48.2 (2) (7) Total 114.4 114.0 112.8 - 1 Basic cards-in-force: (millions) U.S. 43.0 42.3 39.4 2 7 Outside the U.S. 50.0 50.3 52.2 (1) (4) Total 93.0 92.6 91.6 - 1 Average proprietary basic Card Member spending: (dollars) U.S.$ 21,515 $ 20,840 $ 20,317 3 3 Outside the U.S.$ 16,351 $ 15,756 $ 14,277 4 10 Worldwide Average$ 19,972 $ 19,340 $ 18,519 3 4 Average discount rate 2.37 % 2.37 % 2.40 % Average fee per card (dollars)(a)$ 58 $ 51 $ 49 14 % 4 %
(a)Average fee per card is computed based on proprietary net card fees divided by average proprietary total cards-in-force.
41
--------------------------------------------------------------------------------
Table of Contents
TABLE 6: BILLED BUSINESS GROWTH
2019 2018
Percentage Percentage
Increase Increase
(Decrease) (Decrease)
Percentage Assuming No Percentage Assuming No
Increase Changes in FX Increase Changes in FX
(Decrease) Rates(a) (Decrease) Rates(a)
Worldwide
Proprietary
Proprietary consumer 8 % 9 % 12 % 12 %
Proprietary commercial 6 6 11 11
Total Proprietary 7 8 11 11
GNS (6) (2) (2) (1)
Worldwide Total 5 6 9 9
Airline-related volume (8% of Worldwide Total 1 3 8 7
for both 2019 and 2018)
U.S.
Proprietary
Proprietary consumer 7 10
Proprietary commercial 5 10
Total Proprietary 6 10
U.S. Total 6 10
T&E-related volume (25% of U.S. Total for both 6 8
2019 and 2018)
Non-T&E-related volume (75% of U.S. Total for 6 10
both 2019 and 2018)
Airline-related volume (7% of U.S. Total for 4 8
both 2019 and 2018)
Outside the U.S.
Proprietary
Proprietary consumer 10 14 17 17
Proprietary commercial 7 11 16 16
Total Proprietary 9 13 17 17
Outside the U.S. Total 2 6 8 8
Japan, Asia Pacific & Australia 1 5 8 7
Latin America & Canada 4 10 4 11
Europe, the Middle East & Africa 1 % 5 % 10 % 8 %
(a)The foreign currency adjusted information assumes a constant exchange rate
between the periods being compared for purposes of currency translation into
U.S. dollars (i.e., assumes the foreign exchange rates used to determine results
for the current year apply to the corresponding prior-year period against which
such results are being compared).
42--------------------------------------------------------------------------------
Table of Contents TABLE 7: SELECTED CREDIT-RELATED STATISTICAL INFORMATION As of or for the Years Ended
Change Change
December 31 ,
(Millions, except percentages and 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
where indicated)
Worldwide Card Member loans
Card Member loans: (billions)
U.S. $ 76.0 $ 72.0 $ 64.5 6 % 12 %
Outside the U.S. 11.4 9.9 8.9 15 11
Total $ 87.4 $ 81.9 $ 73.4 7 12
Loss reserves:
Beginning balance $ 2,134 $ 1,706 $ 1,223 25 39
Provisions - principal, interest and
fees 2,462 2,266 1,868 9 21
Net write-offs - principal less
recoveries (1,860) (1,539) (1,181) 21 30
Net write-offs - interest and fees
less recoveries (375) (304) (227) 23 34
Other (a) 22 5 23 # (78)
Ending balance $ 2,383 $ 2,134 $ 1,706 12 25
Ending reserves - principal $ 2,252 $ 2,028 $ 1,622 11 25
Ending reserves - interest and fees
$ 84 24 26 % of loans 2.7 % 2.6 % 2.3 % % of past due 177 % 182 % 177 % Average loans (billions)$ 82.8 $ 75.8 $ 66.7 9 14 Net write-off rate - principal only (b) 2.2 % 2.0 % 1.8 % Net write-off rate - principal, interest and fees (b) 2.7 % 2.4 % 2.1 % 30+ days past due as a % of total (b) 1.5 % 1.4 %
1.3 %
Worldwide Card Member receivables Card Member receivables: (billions) U.S.$ 39.0 $ 39.0 $ 37.6 - 4 Outside the U.S. 18.4 16.9 16.4 9 3 Total$ 57.4 $ 55.9 $ 54.0 3 4 Loss reserves: Beginning balance$ 573 $ 521 $ 467 10 12 Provisions - principal and fees 963 937 795 3 18 Net write-offs - principal and fees less recoveries (900) (859) (736) 5 17 Other (a) (17) (26) (5) (35) # Ending balance$ 619 $ 573 $ 521 8 % 10 % % of receivables 1.1 % 1.0 % 1.0 % Net write-off rate - principal only (b) 1.8 % 1.7 % 1.6 % Net write-off rate - principal and fees (b) 2.0 % 1.8 % 1.7 % 30+ days past due as a % of total (b) 1.4 % 1.4 % 1.4 % Net loss ratio as a % of charge volume - GCP (c) 0.08 % 0.11 % 0.10 % 90+ days past billing as a % of total - GCP (c) 0.8 % 0.7 %
0.9 %
# Denotes a variance greater than 100 percent
(a)Other includes foreign currency translation adjustments.
(b)We present a net write-off rate based on principal losses only (i.e.,
excluding interest and/or fees) to be consistent with industry convention. In
addition, as our practice is to include uncollectible interest and/or fees as
part of our total provision for losses, a net write-off rate including
principal, interest and/or fees is also presented. The net write-off rates and
30+ days past due as a percentage of total for Card Member receivables relate to
GCSG and Global Small Business Services (GSBS) Card Member receivables.
(c)Global Corporate Payments (GCP) reflects global, large and middle market
corporate accounts. For GCP Card Member receivables, delinquency data is tracked
based on days past billing status rather than days past due. A Card Member
account is considered 90 days past billing if payment has not been received
within 90 days of the Card Member's billing statement date. In addition, if we
initiate collection procedures on an account prior to the account becoming 90
days past billing, the associated Card Member receivable balance is classified
as 90 days past billing. These amounts are shown above as 90+ Days Past Due for
presentation purposes. GCP delinquency data for periods other than 90+ days past
billing is not available due to system constraints. The net loss ratio for GCP
represents the ratio of GCP charge card write-offs, consisting of principal
(resulting from authorized transactions) and fee components, less recoveries, on
Card Member receivables expressed as a percentage of gross amounts billed to
corporate Card Members.
43-------------------------------------------------------------------------------- Table of Contents TABLE 8: NET INTEREST YIELD ON AVERAGE CARD MEMBER LOANS Years EndedDecember 31 , (Millions, except percentages and where indicated) 2019 2018 2017 Net interest income$ 8,620 $ 7,663 $ 6,451 Exclude: Interest expense not attributable to our Card Member loan portfolio (a) 1,732 1,456 1,149
Interest income not attributable to our Card Member loan portfolio (b)
(1,226) (1,010) (637)
Adjusted net interest income (c) $ 9,126 $ 8,109 $ 6,963
Average Card Member loans (billions) $ 82.8
10.4 % 10.1 % 9.7 %
Net interest yield on average Card Member loans (c) 11.0 % 10.7 % 10.4 %
(a)Primarily represents interest expense attributable to maintaining our
corporate liquidity pool and funding Card Member receivables.
(b)Primarily represents interest income attributable to Other loans,
interest-bearing deposits and the fixed income investment portfolios.
(c)Adjusted net interest income and net interest yield on average Card Member
loans are non-GAAP measures. Refer to "Glossary of Selected Terminology" for the
definitions of these terms. We believe adjusted net interest income is useful to
investors because it represents the interest expense and interest income
attributable to our Card Member loan portfolio and is a component of net
interest yield on average Card Member loans, which provides a measure of
profitability of our Card Member loan portfolio. Net interest yield on average
Card Member loans reflects adjusted net interest income divided by average Card
Member loans, computed on an annualized basis. Net interest income divided by
average Card Member loans, computed on an annualized basis, a GAAP measure,
includes elements of total interest income and total interest expense that are
not attributable to the Card Member loan portfolio, and thus is not
representative of net interest yield on average Card Member loans.
44
--------------------------------------------------------------------------------
Table of Contents
BUSINESS SEGMENT RESULTS OF OPERATIONS
We consider a combination of factors when evaluating the composition of our
reportable operating segments, including the results reviewed by the chief
operating decision maker, economic characteristics, products and services
offered, classes of customers, product distribution channels, geographic
considerations (primarily United States versus outside the United States ) and
regulatory considerations. Refer to Note 24 to the "Consolidated Financial
Statements" and Part I, Item 1. "Business" for additional discussion of products
and services that comprise each segment.
Effective for the first quarter of 2019, we moved intercompany assets and
liabilities, previously recorded in the operating segments, to Corporate &
Other. Prior period amounts have been revised to conform to the current period
presentation.
Results of the reportable operating segments generally treat each segment as a
stand-alone business. The management reporting process that derives these
results allocates revenue and expense using various methodologies as described
below.
TOTAL REVENUES NET OF INTEREST EXPENSE
We allocate discount revenue and certain other revenues among segments using a
transfer pricing methodology. Within the GCSG and GCS segments, discount revenue
generally reflects the issuer component of the overall discount revenue
generated by each segment's Card Members; within the GMNS segment, discount
revenue generally reflects the network and acquirer component of the overall
discount revenue.
Net card fees and Other fees and commissions are directly attributable to the
segment in which they are reported.
Interest and fees on loans and certain investment income is directly
attributable to the segment in which it is reported. Interest expense represents
an allocated funding cost based on a combination of segment funding requirements
and internal funding rates.
PROVISIONS FOR LOSSES
The provisions for losses are directly attributable to the segment in which they
are reported.
EXPENSES
Marketing and business development expense is included in each segment based on
the actual expenses incurred. Global brand advertising is primarily reflected in
Corporate & Other and may be allocated to the segments based on the actual
expenses incurred. Rewards and Card Member services expenses are included in
each segment based on the actual expenses incurred.
Salaries and employee benefits and other operating expenses reflect expenses
such as professional services, occupancy and equipment and communications
incurred directly within each segment. In addition, expenses related to support
services, such as technology costs, are allocated to each segment primarily
based on support service activities directly attributable to the segment.
Certain other overhead expenses are allocated from Corporate & Other to the
segments based on the relative levels of revenue and Card Member loans and
receivables.
INCOME TAXES
An income tax provision (benefit) is allocated to each reportable operating
segment based on the effective tax rates applicable to the various businesses
that comprise the segment.
45-------------------------------------------------------------------------------- Table of Contents GLOBAL CONSUMER SERVICES GROUP TABLE 9: GCSG SELECTED INCOME STATEMENT DATA Years EndedDecember 31 , Change
Change
(Millions, except percentages) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Revenues Non-interest revenues$ 15,972 $ 14,675 $ 13,378 $ 1,297 9 %$ 1,297 10 % Interest income 9,413 8,323 6,789 1,090 13 1,534 23 Interest expense 1,806 1,542 1,047 264 17 495 47 Net interest income 7,607 6,781 5,742 826 12 1,039 18 Total revenues net of interest expense 23,579 21,456 19,120 2,123 10 2,336 12 Provisions for losses 2,636 2,430 1,996 206 8 434 22 Total revenues net of interest expense after provisions for losses 20,943 19,026 17,124 1,917 10 1,902
11
Expenses
Marketing, business development, rewards and Card Member services 12,023 10,774 9,233 1,249 12 1,541
17
Salaries and employee benefits and other operating expenses 4,896 4,538 4,246 358 8 292 7 Total expenses 16,919 15,312 13,479 1,607 10 1,833 14 Pretax segment income 4,024 3,714 3,645 310 8 69 2 Income tax provision 762 637 1,053 125 20 (416) (40) Segment income$ 3,262 $ 3,077 $ 2,592 $ 185 6 %$ 485 19 % Effective tax rate 18.9 % 17.2 % 28.9 % GCSG primarily issues a wide range of proprietary consumer cards globally. GCSG also provides services to consumers, including travel and lifestyle services and non-card financing products, and manages certain international joint ventures and our partnership agreements inChina . TOTAL REVENUES NET OF INTEREST EXPENSE Non-interest revenues increased, primarily driven by discount revenue and net card fees. Discount revenue increased 8 percent reflecting a corresponding increase in proprietary consumer billed business. See Tables 5, 6 and 10 for more details on billed business performance. The increase in proprietary consumer billed business reflected higher average spend per card and higher cards-in-force. Net card fees increased 19 percent, driven primarily by growth in the Delta, Platinum and Gold portfolios, as well as growth in certain key international countries. Net interest income increased, primarily driven by growth in average Card Member loans and higher yields, partially offset by higher cost of funds. PROVISIONS FOR LOSSES Provisions for losses increased, primarily driven by higher net write-offs, partially offset by a lower reserve build in Card Member loans due to slower loan growth. Refer to Table 10 for the Card Member loan and receivable write-off rates for 2019 and 2018. EXPENSES Marketing, business development, rewards and Card Member services expenses increased across all expense categories. The increase in Card Member rewards expense was primarily driven by higher proprietary and cobrand spending volumes. The increase in Card Member services expense was primarily driven by higher usage of travel-related benefits. The increase in marketing and business development expenses was primarily due to higher cobrand partner payments. Salaries and employee benefits and other operating expenses increased, primarily driven by higher technology and other servicing-related costs, and increased payroll costs, partially offset by non-income tax-related benefits. 46 -------------------------------------------------------------------------------- Table of Contents TABLE 10: GCSG SELECTED STATISTICAL INFORMATION As of or for the Years Ended December Change Change
31,
(Millions, except percentages and where 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
indicated)
Proprietary billed business: (billions) U.S.$ 398.8 $ 371.1 $ 336.9 7 % 10 % Outside the U.S. 154.0 140.3 119.8 10 17 Total$ 552.8 $ 511.4 $ 456.7 8 12 Proprietary cards-in-force: U.S. 37.9 37.7 34.9 1 8 Outside the U.S. 17.5 16.8 15.8 4 6 Total 55.4 54.5 50.7 2 7 Proprietary basic cards-in-force: U.S. 26.9 27.0 25.0 - 8 Outside the U.S. 12.1 11.6 10.9 4 6 Total 39.0 38.6 35.9 1 8 Average proprietary basic Card Member spending: (dollars) U.S.$ 14,801 $ 14,161 $ 13,950 5 2 Outside the U.S.$ 12,884 $ 12,348 $ 11,225 4 10 Average$ 14,212 $ 13,613 $ 13,115 4 4 Total segment assets (billions)(a)$ 106.3 $ 102.4 $ 94.9 4 8 Card Member loans: Total loans (billions) U.S.$ 62.4 $ 59.9 $ 53.7 4 12 Outside the U.S. 10.9 9.6 8.6 14 12 Total$ 73.3 $ 69.5 $ 62.3 5 12 Average loans (billions) U.S.$ 59.4 $ 55.1 $ 49.0 8 12 Outside the U.S. 10.0 8.9 7.4 12 20 Total$ 69.4 $ 64.0 $ 56.4 8 % 13 % U.S. Net write-off rate - principal only (b) 2.3 % 2.1 % 1.8 % Net write-off rate - principal, interest and fees (b) 2.8 % 2.5 % 2.1 % 30+ days past due as a % of total 1.6 % 1.4 % 1.3 % Outside the U.S. Net write-off rate - principal only (b) 2.4 % 2.1 % 2.1 % Net write-off rate - principal, interest and fees (b) 2.9 % 2.6 % 2.5 % 30+ days past due as a % of total 1.8 % 1.6 % 1.4 %
Total
Net write-off rate - principal only
(b) 2.3 % 2.1 % 1.8 %
Net write-off rate - principal,
interest and fees (b) 2.8 % 2.5 % 2.2 %
30+ days past due as a % of total 1.6 % 1.5 % 1.3 %
47--------------------------------------------------------------------------------
Table of Contents
Change Change
(Millions, except percentages and 2019 vs. 2018 2018 vs. 2017
where indicated) 2019 2018 2017
Card Member receivables: (billions) U.S.$ 14.2 $ 13.7 $ 13.1 4 % 5 % Outside the U.S. 8.6 7.8 7.8 10 - Total receivables$ 22.8 $ 21.5 $ 20.9 6 % 3 % U.S. Net write-off rate - principal only (b) 1.4 % 1.3 % 1.3 % Net write-off rate - principal and fees (b) 1.6 % 1.5 % 1.4 % 30+ days past due as a % of total 1.2 % 1.1 % 1.1 % Outside the U.S. Net write-off rate - principal only (b) 2.2 % 2.1 % 2.0 % Net write-off rate - principal and fees (b) 2.4 % 2.3 % 2.1 % 30+ days past due as a % of total 1.3 % 1.3 % 1.3 % Total Net write-off rate - principal only (b) 1.7 % 1.6 % 1.5 % Net write-off rate - principal and fees (b) 1.9 % 1.8 % 1.7 % 30+ days past due as a % of total 1.2 % 1.2 %
1.2 %
(a) During 2019, we moved intercompany assets and liabilities, previously recorded in the operating segments, to Corporate & Other. Prior period amounts have been revised to conform to the current period presentation. (b) Refer to Table 7 footnote (b).
48-------------------------------------------------------------------------------- Table of Contents TABLE 11: GCSG NET INTEREST YIELD ON AVERAGE CARD MEMBER LOANS As of or for the Years EndedDecember 31 , (Millions, except percentages and where indicated) 2019 2018 2017U.S. Net interest income
257 202 164
Interest income not attributable to our Card Member loan portfolio(b)
(219) (178) (101)
Adjusted net interest income(c)
11.0 % 10.7 % 10.1 %
Net interest yield on average Card Member loans(c) 11.1 % 10.7 % 10.3 %
Outside the U.S.
Net interest income
85 70 54
Interest income not attributable to our Card Member loan portfolio(b)
(15) (8) (8)
Adjusted net interest income(c)
10.5 % 10.0 % 10.6 %
Net interest yield on average Card Member loans(c) 11.2 % 10.6 % 11.1 %
Total
Net interest income
342 272 218
Interest income not attributable to our Card Member loan portfolio(b)
(234) (186) (110)
Adjusted net interest income(c)
11.0 % 10.6 % 10.2 %
Net interest yield on average Card Member loans(c) 11.1 % 10.7 % 10.4 %
(a)Refer to Table 8 footnote (a).
(b)Refer to Table 8 footnote (b).
(c)Refer to Table 8 footnote (c).
49
--------------------------------------------------------------------------------
Table of Contents
GLOBAL COMMERCIAL SERVICES
TABLE 12: GCS SELECTED INCOME STATEMENT DATA
Years Ended December 31, Change Change
(Millions, except percentages) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Revenues Non-interest revenues$ 12,623 $ 11,882 $ 10,942 $ 741 6 %$ 940 9 % Interest income 1,900 1,621 1,361 279 17 260 19 Interest expense 995 827 595 168 20 232 39 Net interest income 905 794 766 111 14 28 4 Total revenues net of interest expense 13,528 12,676 11,708 852 7 968 8 Provisions for losses 917 899 743 18 2 156 21 Total revenues net of interest expense after provisions for losses 12,611 11,777 10,965 834 7 812
7
Expenses
Marketing, business development, rewards and Card Member services 6,241 5,853 5,311 388 7 542
10
Salaries and employee benefits and other operating expenses 3,304 3,029 2,811 275 9 218 8 Total expenses 9,545 8,882 8,122 663 7 760 9 Pretax segment income 3,066 2,895 2,843 171 6 52 2 Income tax provision 590 555 914 35 6 (359) (39) Segment income$ 2,476 $ 2,340 $ 1,929 $ 136 6 %$ 411 21 % Effective tax rate 19.2 % 19.2 % 32.1 % GCS primarily issues a wide range of proprietary corporate and small business cards and provides payment and expense management services globally. In addition, GCS provides commercial financing products. TOTAL REVENUES NET OF INTEREST EXPENSE Non-interest revenues increased, primarily driven by higher discount revenue, which increased 6 percent, reflecting growth in billed business from small and medium sized businesses, and higher net card fees, primarily due to growth in theU.S. small business Platinum portfolio. See Tables 5, 6 and 13 for more details on billed business performance. Net interest income increased, primarily driven by growth in average Card Member loans, partially offset by higher cost of funds. PROVISIONS FOR LOSSES Provisions for losses increased, driven by higher net write-offs in the small business portfolio due to continued portfolio growth, partially offset by lower net write-offs in the corporate portfolio. EXPENSES Marketing, business development, rewards and Card Member services expenses increased, primarily driven by increases in Card Member rewards expense and marketing and business development expense, which primarily reflected higher spending volumes and increased corporate client incentives. Salaries and employee benefits and other operating expenses increased, primarily driven by higher technology and other servicing-related costs, and higher payroll costs. 50
-------------------------------------------------------------------------------- Table of Contents TABLE 13: GCS SELECTED STATISTICAL INFORMATION As of or for the Years Ended December 31, Change Change (Millions, except percentages and where 2019 2018 2017 2019 vs. 2018 2018 vs. 2017
indicated)
Proprietary billed business (billions)$ 513.3 $ 486.2 $ 438.1 6 % 11 % Proprietary cards-in-force 14.9 14.5 14.0 3 4 Average Card Member spending (dollars)$ 34,905 $ 34,058 $ 31,729 2 7 Total segment assets (billions)(a)$ 52.8 $ 51.3 $ 48.5 3 6 Card Member loans (billions)$ 14.1 $ 12.4 $ 11.1 14 12 Card Member receivables (billions)$ 34.6 $ 34.4 $ 33.1 1 4 GSBS Card Member loans:(b) Total loans (billions)$ 14.1 $ 12.4 $ 11.0 14 13 Average loans (billions)$ 13.3 $ 11.7 $ 10.3 14 % 14 % Net write-off rate - principal only(c) 1.9 % 1.7 % 1.6 % Net write-off rate - principal, interest and fees(c) 2.2 % 2.0 % 1.9 % 30+ days past due as a % of total 1.3 % 1.3 % 1.2 % Calculation of Net Interest Yield on Average Card Member Loans: Net interest income$ 905 $ 794 $ 766 Exclude: Interest expense not attributable to our Card Member loan portfolio(d) 727 609 461 Interest income not attributable to our Card Member loan portfolio(e) (221) (161) (114) Adjusted net interest income(f)$ 1,411 $ 1,242 $ 1,113 Average Card Member loans (billions)$ 13.4 $ 11.8 $ 10.3 Net interest income divided by average Card Member loans(f) 6.8 % 6.7 % 7.4 % Net interest yield on average Card Member loans(f) 10.5 % 10.5 % 10.8 % GCP Card Member receivables: Total receivables (billions)$ 17.2 $ 17.7 $ 17.0 (3) % 4 % 90+ days past billing as a % of total(g) 0.8 % 0.7 % 0.9 % Net loss ratio (as a % of charge volume)(g) 0.08 % 0.11 % 0.10 % GSBS Card Member receivables: Total receivables (billions)$ 17.4 $ 16.7 $ 16.1 4 % 4 % Net write-off rate - principal only(c) 1.9 % 1.7 % 1.6 % Net write-off rate - principal and fees(c) 2.1 % 2.0 % 1.8 % 30+ days past due as a % of total 1.7 % 1.6 % 1.6 % (a)During 2019, we moved intercompany assets and liabilities, previously recorded in the operating segments, to Corporate & Other. Prior period amounts have been revised to conform to the current period presentation. (b)EffectiveJuly 1, 2017 , GSBS loans and associated metrics reflect worldwide small business services loans. Prior toJuly 1, 2017 , due to certain system limitations, small business services loans outside theU.S. and associated credit metrics are reflected within GCSG, and were not significant to either GCSG or GCS. (c)Refer to Table 7 footnote (b). (d)Refer to Table 8 footnote (a). (e)Refer to Table 8 footnote (b). (f)Refer to Table 8 footnote (c). (g)Refer to Table 7 footnote (c).
51-------------------------------------------------------------------------------- Table of Contents GLOBAL MERCHANT AND NETWORK SERVICES TABLE 14: GMNS SELECTED INCOME STATEMENT AND OTHER DATA Years EndedDecember 31 , Change
Change
(Millions, except percentages and where indicated) 2019 2018 2017 2019 vs. 2018 2018 vs. 2017 Revenues Non-interest revenues$ 6,252 $ 6,069 $ 6,025 $ 183 3 %$ 44 1 % Interest income 28 30 42 (2) (7) (12) (29) Interest expense (365) (294) (188) (71) 24 (106) 56 Net interest income 393 324 230 69 21 94 41 Total revenues net of interest expense 6,645 6,393 6,255 252 4 138 2 Provisions for losses 20 22 16 (2) (9) 6 38 Total revenues net of interest expense after provisions for losses 6,625 6,371 6,239 254 4 132
2
Expenses
Marketing, business development, rewards and Card Member services 1,427 1,250 1,227 177 14 23
2
Salaries and employee benefits and other operating expenses 2,050 2,277 2,367 (227) (10) (90) (4) Total expenses 3,477 3,527 3,594 (50) (1) (67) (2) Pretax segment income 3,148 2,844 2,645 304 11 199 8 Income tax provision 736 704 857 32 5 (153) (18) Segment income$ 2,412 $ 2,140 $ 1,788 $ 272 13$ 352 20 Effective tax rate 23.4 % 24.8 % 32.4 %
Total segment assets (billions)(a)
$ 19.7 $ 2.0 13 %$ (4)
(21) %
(a)During 2019, we moved intercompany assets and liabilities, previously recorded in the operating segments, to Corporate & Other. Prior period amounts have been revised to conform to the current period presentation. GMNS operates a global payments network that processes and settles card transactions, acquires merchants and provides multi-channel marketing programs and capabilities, services and data analytics, leveraging our global integrated network. GMNS manages our partnership relationships with third-party card issuers, merchant acquirers and a prepaid reloadable and gift card program manager, licensing the American Express brand and extending the reach of the global network. GMNS also manages loyalty coalition businesses in certain countries. TOTAL REVENUES NET OF INTEREST EXPENSE Non-interest revenues increased, primarily driven by worldwide billed business growth. Net interest income increased, reflecting a higher interest expense credit relating to internal transfer pricing, which results in a net benefit for GMNS due to its merchant payables. EXPENSES Marketing, business development, rewards and Card Member services expenses increased, primarily driven by marketing and business development expense reflecting increased network issuer expense due to higherU.S. volumes and payments related to the partnership agreement with our prepaid reloadable and gift card program manager, partially offset by lower levels of spending on growth initiatives. Salaries and employee benefits and other operating expenses decreased, reflecting, in part, lower technology and other service-related costs, and the prior-year loss on a transaction involving the operations of our prepaid reloadable and gift card business. CORPORATE & OTHER Corporate functions and certain other businesses are included in Corporate & Other. Corporate & Other net loss was$1.4 billion and$0.6 billion in 2019 and 2018, respectively. The increase in the net loss in 2019 compared to 2018 was primarily driven by lower discrete tax benefits, lower unrealized gains on certain equity investments and higher restructuring charges. 52 -------------------------------------------------------------------------------- Table of Contents CONSOLIDATED CAPITAL RESOURCES AND LIQUIDITY Our balance sheet management objectives are to maintain: •A solid and flexible equity capital profile; •A broad, deep and diverse set of funding sources to finance our assets and meet operating requirements; and •Liquidity programs that enable us to continuously meet expected future financing obligations and business requirements for at least a twelve-month period in the event we are unable to continue to raise new funds under our traditional funding programs during a substantial weakening in economic conditions. CAPITAL STRATEGY Our objective is to retain sufficient levels of capital generated through earnings and other sources to maintain a solid equity capital base and to provide flexibility to support future business growth. We believe capital allocated to growing businesses with a return on risk-adjusted equity in excess of our costs will generate shareholder value. The level and composition of our consolidated capital position are determined through our Internal Capital Adequacy Assessment Process, which takes into account our business activities, as well as marketplace conditions and requirements or expectations of credit rating agencies, regulators and shareholders, among others. Our consolidated capital position is also influenced by subsidiary capital requirements. As a bank holding company, we are also subject to regulatory requirements administered by theU.S. federal banking agencies. TheFederal Reserve has established specific capital adequacy guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items. We report our capital ratios using the Basel III capital definitions and the Basel III standardized approach for calculating risk-weighted assets. TheBasel III minimum requirements and the capital conservation buffers have been fully phased in as ofJanuary 1, 2019 . As a Category IV firm, we are no longer subject to the Basel III advanced approaches capital requirements. Refer to "Financial Regulatory Reform" under Part I, Item I. "Business - Supervision and Regulation" for additional details. The following table presents our regulatory risk-based capital ratios and leverage ratios and those of our significant bank subsidiary,American Express National Bank (AENB) as ofDecember 31, 2019 . TABLE 15: REGULATORY RISK-BASED CAPITAL AND LEVERAGE RATIOS Basel III Minimum Ratios as ofDecember 31, 2019 Risk-Based Capital Common Equity Tier 1 7.0 %American Express Company 10.7 %American Express National Bank
13.4
Tier 1 8.5American Express Company
11.6
American Express National Bank
13.4
Total 10.5American Express Company
13.2
American Express National Bank
15.4
Tier 1 Leverage 4.0American Express Company
10.2
American Express National Bank
11.1
Supplementary Leverage Ratio 3.0 %American Express Company
8.8
American Express National Bank 9.3 % 53
-------------------------------------------------------------------------------- Table of Contents TABLE 16:REGULATORY RISK-BASED CAPITAL COMPONENTS AND RISK-WEIGHTED ASSETS American Express Company ($ in Billions) December 31, 2019Risk-Based Capital Common Equity Tier 1 $ 18.1 Tier 1 Capital 19.6 Tier 2 Capital 2.6 Total Capital 22.2 Risk-Weighted Assets 168.5 Average Total Assets to calculate the Tier 1 Leverage Ratio 192.3
Total Leverage Exposure to calculate supplementary leverage ratio
$ 224.0
We seek to maintain capital levels and ratios in excess of the minimum regulatory requirements, specifically within a 10 to 11 percent target range forAmerican Express' Common Equity Tier 1 risk-based capital ratio, and finance such capital in a cost efficient manner. Failure to maintain minimum capital levels atAmerican Express or AENB could affect our status as a financial holding company and cause the regulatory agencies with oversight ofAmerican Express or AENB to take actions that could limit our business operations. Our primary source of equity capital has been the generation of net income. Capital generated through net income and other sources, such as the exercise of stock options by employees, is used to maintain a strong balance sheet, support asset growth and engage in acquisitions, with excess available for distribution to shareholders through dividends and share repurchases. We maintain certain flexibility to shift capital across our businesses as appropriate. For example, we may infuse additional capital into subsidiaries to maintain capital at targeted levels in consideration of debt ratings and regulatory requirements. These infused amounts can affect the capital profile and liquidity levels at theAmerican Express parent company level. The following are definitions for our regulatory risk-based capital ratios and leverage ratio, which are calculated as per standard regulatory guidance: Risk-Weighted Assets - Assets are weighted for risk according to a formula used by theFederal Reserve to conform to capital adequacy guidelines. On- and off-balance sheet items are weighted for risk, with off-balance sheet items converted to balance sheet equivalents, using risk conversion factors, before being allocated a risk-adjusted weight. Off-balance sheet exposures comprise a minimal part of the total risk-weighted assets. Common Equity Tier 1 Risk-Based Capital Ratio - Calculated as Common Equity Tier 1 capital (CET1), divided by risk-weighted assets. CET1 is the sum of common shareholders' equity, adjusted for ineligible goodwill and intangible assets, certain deferred tax assets, as well as certain other comprehensive income items as follows: net unrealized gains/losses on securities, foreign currency translation adjustments and net unrealized pension and other postretirement benefit/losses, all net of tax. Tier 1 Risk-Based Capital Ratio - Calculated as Tier 1 capital divided by risk-weighted assets. Tier 1 capital is the sum of CET1, our perpetual preferred stock and third-party non-controlling interests in consolidated subsidiaries, adjusted for capital held by insurance subsidiaries. The minimum requirement for the Tier 1 risk-based capital ratio is 1.5 percent higher than the minimum for the CET1 risk-based capital ratio. We have$1.6 billion of preferred shares outstanding to help address a portion of the Tier 1 capital requirements in excess of common equity requirements. Total Risk-Based Capital Ratio - Calculated as the sum of Tier 1 capital and Tier 2 capital, divided by risk-weighted assets. Tier 2 capital is the sum of the allowance for loan and receivable losses (limited to 1.25 percent of risk-weighted assets), minority interest that is not included in Tier 1 capital and$480 million of eligible subordinated notes, adjusted for capital held by insurance subsidiaries. The$480 million of eligible subordinated notes reflect a 20 percent, or$120 million , reduction of Tier 2 capital credit for the$600 million subordinated debt issued inDecember 2014 . Tier 1 Leverage Ratio - Calculated by dividing Tier 1 capital by our average total consolidated assets for the most recent quarter. Supplementary Leverage Ratio - Calculated by dividing Tier 1 capital by total leverage exposure under Basel III. Total leverage exposure reflects average total consolidated assets with adjustments for Tier 1 capital deductions, average off-balance sheet derivative exposures, average securities purchased under agreements to resell, and average credit equivalents of conditionally and unconditionally cancellable undrawn commitments. 54 -------------------------------------------------------------------------------- Table of Contents InDecember 2018 , federal banking regulators issued a final rule that provides an optional three-year phase-in period for the adverse regulatory capital effects upon adopting the CECL model pursuant to new accounting guidance for the recognition of credit losses on financial instruments, effectiveJanuary 1, 2020 . We plan to elect to phase-in the regulatory capital impact of adopting CECL, at 25 percent per year throughJanuary 1, 2023 . TheFederal Reserve also released a statement indicating that it plans to maintain the current framework for calculating credit loss allowances on loans in supervisory stress tests through the 2021 stress test cycle. Refer to Note 1 to the "Consolidated Financial Statements" for further information about CECL. SHARE REPURCHASES AND DIVIDENDS We return capital to common shareholders through dividends and share repurchases. The share repurchases reduce common shares outstanding and more than offset the issuance of new shares as part of employee compensation plans. During the year endedDecember 31, 2019 , we returned$5.9 billion to our shareholders in the form of common stock dividends of$1.4 billion and share repurchases of$4.6 billion . We repurchased 40 million common shares at an average price of$115.50 in 2019. These dividend and share repurchase amounts collectively represent approximately 87 percent of total capital generated during the year. In addition, during the year endedDecember 31, 2019 , we paid$81 million in dividends on non-cumulative perpetual preferred shares outstanding. For additional information on our preferred shares, refer to Note 16 to the "Consolidated Financial Statements." FUNDING STRATEGY Our principal funding objective is to maintain broad and well-diversified funding sources to allow us to meet our maturing obligations, cost-effectively finance current and future asset growth in our global businesses, as well as to maintain a strong liquidity profile. The diversity of funding sources by type of instrument, by maturity and by investor base, among other factors, provides additional insulation from the impact of disruptions in any one type of instrument, maturity or investor. The mix of our funding in any period will seek to achieve cost efficiency consistent with both maintaining diversified sources and achieving our liquidity objectives. While we seek to diversify our funding sources by maintaining scale and relevance in unsecured debt, asset securitizations and deposits, we currently expect that direct deposits, such as the Personal Savings program, will become a larger proportion of our funding over time. Our funding strategy and activities are integrated into our asset-liability management activities. We have in place a funding policy coveringAmerican Express Company and all of our subsidiaries. Our global proprietary card-issuing businesses generate significant assets in both domestic and international Card Member lending and receivable activities. Our financing needs are in large part a consequence of our proprietary card-issuing businesses, and the maintenance of a liquidity position to meet regulatory requirements and support all of our business activities, such as merchant payments. We generally pay merchants for card transactions prior to reimbursement by Card Members and therefore fund the merchant payments during the period Card Member loans and receivables are outstanding. We also have additional financing needs associated with general corporate purposes. Our funding plan to meet these financing needs is in turn driven by, among other factors, our liquidity position, size and mix of business asset growth, choice of funding sources, and our maturing obligations. FUNDING PROGRAMS AND ACTIVITIES We meet our funding needs through a variety of sources, including direct and third-party distributed deposits and debt instruments, such as senior unsecured debt, asset securitizations, borrowings through secured borrowing facilities and a committed bank credit facility. We had the following consolidated debt and customer deposits outstanding as ofDecember 31 : TABLE 17: SUMMARY OF CONSOLIDATED DEBT AND CUSTOMER DEPOSITS (Billions) 2019 2018 Short-term borrowings$ 6.4 $ 3.1 Long-term debt 57.8 58.4 Total debt 64.2 61.5 Customer deposits 73.3 70.0
Total debt and customer deposits
We may redeem from time to time certain debt securities within 31 days prior to the original contractual maturity dates in accordance with the optional redemption provisions of those debt securities.
55
--------------------------------------------------------------------------------
Table of Contents
Our funding plan for the full year 2020 includes, among other sources,
approximately zero to $3 billion of unsecured term debt issuance and
approximately $7 billion to $10 billion of secured term debt issuance. Our
annual funding plans can vary due to various risks and uncertainties, such as
future business growth, the impact of global economic, political and other
events on market capacity, demand for securities offered by us, regulatory
changes, ability to securitize and sell receivables, and the performance of
receivables previously sold in securitization transactions. Many of these risks
and uncertainties are beyond our control.
Our equity capital and funding strategies are designed, among other things, to
maintain appropriate and stable unsecured debt ratings from the major credit
rating agencies: Moody's Investor Services (Moody's), Standard & Poor's (S&P)
and Fitch Ratings (Fitch). Such ratings help support our access to
cost-effective unsecured funding as part of our overall funding strategy. Our
asset securitization activities are rated separately.
TABLE 18: UNSECURED DEBT RATINGS
Credit Agency American Express Entity Short-Term Ratings Long-Term Ratings Outlook
Fitch All rated entities F1 A Stable
Moody's American Express Travel Related Services N/A A2 Stable
Company, Inc.
Moody's American Express Credit Corporation Prime-1 A2 Stable
Moody's American Express National Bank Prime-1 A3 Stable
Moody's American Express Company N/A A3 Stable
S&P American Express Travel Related Services N/A A- Stable
Company, Inc.
S&P American Express Credit Corporation and A-2 A- Stable
American Express National Bank
S&P American Express Company A-2 BBB+ Stable
Downgrades in the ratings of our unsecured debt or asset securitization program
securities could result in higher funding costs, as well as higher fees related
to borrowings under our unused lines of credit. Declines in credit ratings could
also reduce our borrowing capacity in the unsecured debt and asset
securitization capital markets. We believe our funding mix, including the
proportion of U.S. retail deposits insured by the Federal Deposit Insurance
Corporation (FDIC) to total funding, should reduce the impact that credit rating
downgrades would have on our funding capacity and costs.
SHORT-TERM FUNDING PROGRAMS
Short-term borrowings, such as commercial paper, are defined as any debt with an
original maturity of twelve months or less, as well as interest-bearing
overdrafts with banks. Our short-term funding programs are used primarily to
fund working capital needs, such as managing seasonal variations in receivables
balances. The amount of short-term borrowings issued in the future will depend
on our funding strategy, our needs and market conditions. As of December 31,
2019 , we had $3.0 billion in commercial paper outstanding and we had an average
of $0.3 billion in commercial paper outstanding during 2019. Refer to Note 8 to
the "Consolidated Financial Statements" for a further description of these
borrowings.
DEPOSIT PROGRAMS
We offer deposits within our U.S. bank subsidiary, AENB. These funds are
currently insured up to $250,000 per account holder through the FDIC . Our
ability to obtain deposit funding and offer competitive interest rates is
dependent on the capital level of AENB. We, through AENB, have a Personal
Savings program, which is our primary deposit product channel. The direct retail
program makes FDIC -insured certificates of deposit (CDs) and high-yield savings
account products available directly to consumers. We also source deposits
through third-party distribution channels as needed to meet our overall funding
objectives. As of December 31, 2019 we had $73.3 billion in customer deposits.
Refer to Note 7 to the "Consolidated Financial Statements" for a further
description of these deposits.
56-------------------------------------------------------------------------------- Table of Contents LONG-TERM DEBT AND ASSET SECURITIZATION PROGRAMS As ofDecember 31, 2019 , we had$57.8 billion in long-term debt outstanding. During 2019, we and our subsidiaries issued$11.7 billion of unsecured debt and asset-backed securities with maturities ranging from 2 to 7 years. Refer to Note 8 to the "Consolidated Financial Statements" for a further description of these borrowings. We periodically securitize Card Member loans and receivables arising from our card business, as the securitization market provides us with cost-effective funding. Securitization of Card Member loans and receivables is accomplished through the transfer of those assets to a trust, which in turn issues securities collateralized by the transferred assets to third-party investors. The proceeds from issuance are distributed to us, through our wholly-owned subsidiaries, as consideration for the transferred assets. Refer to Note 5 to the "Consolidated Financial Statements" for a further description of our asset securitizations. OnFebruary 1, 2020 , we removedU.S. consumer and small business Card Member receivables from the American Express Issuance Trust II (theCharge Trust ) and substantially replaced them withU.S. corporate Card Member receivables. Our 2019 long-term debt and asset securitization issuances were as follows: TABLE 19: DEBT ISSUANCES (Billions)
2019
American Express Company : Fixed Rate Senior Notes (weighted-average coupon of 2.92%)$ 5.6 Floating Rate Senior Notes (3-month LIBOR plus 62 basis points)
0.9
American Express Credit Account Master Trust : Fixed Rate Class A Certificates (weighted-average coupon of 2.55%)
4.2
Fixed Rate Class
0.2
Floating Rate Class A Certificates (1-month LIBOR plus 24 basis points)
0.8
Total $ 11.7
LIQUIDITY MANAGEMENT
Our liquidity objective is to maintain access to a diverse set of on- and
off-balance sheet liquidity sources. We seek to maintain liquidity sources in
amounts sufficient to meet our expected future financial obligations and
business requirements for liquidity for a period of at least twelve months in
the event we are unable to raise new funds under our regular funding programs
during a substantial weakening in economic conditions.
Our liquidity management strategy includes a number of elements, including, but
not limited to:
•Maintaining diversified funding sources (refer to the "Funding Strategy"
section for more details);
•Maintaining unencumbered liquid assets and off-balance sheet liquidity sources;
•Projecting cash inflows and outflows under a variety of economic and market
scenarios;
•Establishing clear objectives for liquidity risk management, including
compliance with regulatory requirements; and
•Incorporating liquidity risk management as appropriate into our capital
adequacy framework.
We seek to maintain access to a diverse set of on-balance sheet and off-balance
sheet liquidity sources, including cash and other liquid assets, committed bank
credit facilities and secured borrowing facilities. Through our U.S. bank
subsidiary, AENB, we also hold collateral eligible for use at the Federal
Reserve's discount window.
The amount and type of liquidity resources we maintain can vary over time, based
upon the results of stress scenarios required under the Dodd-Frank Wall Street
Reform and Consumer Protection Act, as well as additional stress scenarios
required under our liquidity risk policy. These stress scenarios possess
distinct characteristics, varying by cash flow assumptions, time horizon and
qualifying liquidity sources, among other factors. Scenarios under our liquidity
risk policy include market-wide, firm-specific and combined liquidity stresses.
We consider other factors in determining the amount and type of liquidity we
maintain, such as economic and financial market conditions, seasonality in
business operations, growth in our businesses, potential acquisitions or
dispositions, the cost and availability of alternative liquidity sources and
credit rating agency guidelines and requirements.
The investment income we receive on liquidity resources is less than the
interest expense on the sources of funding for these balances. The level of
future net interest costs to maintain these resources can be substantial, as it
depends on the amount of liquidity resources we maintain and the difference
between our cost of funding these amounts and their investment yields.
57
--------------------------------------------------------------------------------
Table of Contents
Securitized Borrowing Capacity
As of December 31, 2019 , we maintained our committed, revolving, secured
borrowing facility, with a maturity date of July 15, 2022 , which gives us the
right to sell up to $3.0 billion face amount of eligible AAA notes from the
Charge Trust . We also maintained our committed, revolving, secured borrowing
facility, with a maturity date of September 15, 2022 , which gives us the right
to sell up to $2.0 billion face amount of eligible AAA certificates from the
American Express Credit Account Master Trust (the Lending Trust ). Both
facilities are used in the ordinary course of business to fund working capital
needs, as well as to further enhance our contingent funding resources. As of
December 31, 2019 , no amounts were drawn on the Charge Trust facility or the
Lending Trust facility.
Federal Reserve Discount Window
As an insured depository institution, AENB may borrow from the Federal Reserve
Bank of San Francisco , subject to the amount of qualifying collateral that it
may pledge. The Federal Reserve has indicated that both credit and charge card
receivables are a form of qualifying collateral for secured borrowings made
through the discount window. Whether specific assets will be considered
qualifying collateral and the amount that may be borrowed against the
collateral, remain at the discretion of the Federal Reserve .
We had approximately $76.6 billion as of December 31, 2019 in U.S. credit card
loans and charge card receivables that could be sold over time through our
securitization trusts or pledged in return for secured borrowings to provide
further liquidity, subject in each case to applicable market conditions and
eligibility criteria.
Committed Bank Credit Facility
In addition to the secured borrowing facilities described above, we maintained a
committed syndicated bank credit facility as of December 31, 2019 of $3.5
billion , with a maturity date of October 15, 2022 . The availability of this
credit line is subject to our compliance with certain financial covenants,
principally the maintenance by American Express Credit Corporation (Credco) of a
certain ratio of combined earnings and fixed charges to fixed charges. As of
December 31, 2019 and 2018, we were in compliance with each of our covenants. As
of December 31, 2019 , no amounts were drawn on the committed credit facility. We
may, from time to time, use this facility in the ordinary course of business to
fund working capital needs. Any undrawn portion of this facility could serve as
backstop for the amount of commercial paper outstanding.
Our committed bank credit facility does not contain a material adverse change
clause, which might otherwise preclude borrowing under the credit facility, nor
is it dependent on our credit rating.
CASH FLOWS
The following table summarizes our cash flow activity, followed by a discussion
of the major drivers impacting operating, investing and financing cash flows.
TABLE 20: CASH FLOWS
(Billions) 2019 2018 2017
Total cash provided by (used in):
Operating activities $ 13.6 $ 8.9 $ 13.5
Investing activities (16.7) (19.6) (18.2)
Financing activities (0.5) 5.1 12.2Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash
0.2 0.1 0.3
Net (decrease) increase in cash, cash equivalents and restricted cash
$ (3.4)
Cash Flows from Operating Activities
Our cash flows from operating activities primarily include net income adjusted
for (i) non-cash items included in net income, such as provisions for losses,
depreciation and amortization, deferred taxes and stock-based compensation and
(ii) changes in the balances of operating assets and liabilities, which can vary
significantly in the normal course of business due to the amount and timing of
payments.
The increase in net cash provided by operating activities was primarily driven
by the amount and timing of payments of accounts payable and other liabilities.
58
--------------------------------------------------------------------------------
Table of Contents
Cash Flows from Investing Activities
Our cash flows from investing activities primarily include changes in Card
Member receivables and loans, as well as changes in our available-for-sale
investment securities portfolio.
The decrease in net cash used in investing activities was primarily driven by
lower growth in Card Member receivables and loans, partially offset by a larger
net increase in the investment securities portfolio.
Cash Flows from Financing Activities
Our cash flows from financing activities primarily include changes in customer
deposits, long-term debt and short-term borrowings, as well as dividend payments
and share repurchases.
The increase in net cash used in financing activities was primarily driven by a
higher level of share repurchases and lower growth in customer deposits.
OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS
We have identified both on- and off-balance sheet transactions, arrangements,
obligations and other relationships that may have a material current or future
effect on our financial condition, changes in financial condition, results of
operations, or liquidity and capital resources.
CONTRACTUAL OBLIGATIONS
The table below identifies transactions that represent our contractually
committed future obligations. Purchase obligations include our agreements to
purchase goods and services that are enforceable and legally binding and that
specify significant terms, including: fixed or minimum quantities to be
purchased; fixed, minimum or variable price provisions; and the approximate
timing of the transaction.
TABLE 21: COMMITTED FUTURE OBLIGATIONS BY YEAR
Payments due by year(a)
2025 and
(Millions) 2020 2021-2022 2023-2024 thereafter Total
Long-term debt $ 15,615 $ 25,898 $ 12,050 $ 4,883 $ 58,446
Certificates of deposit 4,632 4,687 625 - 9,944
Interest payments on long-term
debt(b) 1,426 1,844 743 1,246 5,259
Lease obligations 134 214 166 842 1,356
Deemed repatriation tax(c) - - 263 749 1,012
Purchase obligations(d) 269 188 33 - 490
Other long-term liabilities(e) (f) 217 101 3 20 341
Total 22,293 32,932 13,883 7,740 76,848
(a)The table above excludes approximately $0.7 billion of tax reserves related
to the uncertainty in income taxes as inherent complexities and the number of
tax years currently open for examination in multiple jurisdictions do not permit
reasonable estimates of payments, if any, to be made over a range of years.
Refer to Note 20 to the "Consolidated Financial Statements" for additional
information.
(b)Estimated interest payments were calculated using the effective interest
rates as of December 31, 2019 , and includes the effect of existing interest rate
swaps. Actual cash flows may differ from estimated payments.
(c)Represents the remaining obligation under the Tax Act to pay a one-time
transition tax on unrepatriated earnings and profits of certain foreign
subsidiaries. In 2019, the Internal Revenue Service applied our prior year U.S.
federal income tax return over-payment against a portion of the remaining
obligation.
(d)The purchase obligation amounts represent either the early termination fees
or non-cancelable minimum contractual obligations, as applicable, by period
under contracts that were in effect as of December 31, 2019 .
(e)As of December 31, 2019 , there were no minimum required contributions, and no
contributions are currently planned, for the U.S. American Express Retirement
Plan. For the U.S. American Express Retirement Restoration Plan and non-U.S.
defined benefit pension and postretirement benefit plans, contributions in 2020
are anticipated to be approximately $45 million , and this amount has been
included within other long-term liabilities. Remaining obligations under defined
benefit pension and postretirement benefit plans aggregating $595 million have
not been included in the table above as the timing of such obligations is not
determinable. Additionally, other long-term liabilities do not include $8.9
billion of Membership Rewards liabilities, which are not considered long-term
liabilities as Card Members in good standing can redeem points immediately,
without restrictions, and because the timing of point redemption is not
determinable.
(f)As of December 31, 2019 , we had committed to provide funding related to
certain tax credit investments resulting in a $211 million unfunded commitment
included in other long-term liabilities. In addition to this amount, there was a
further $78 million of contractual off-balance sheet obligations that have not
been included in the table above as the timing of such obligations is not
determinable. Refer to Note 6 to the "Consolidated Financial Statements" for
additional information.
59-------------------------------------------------------------------------------- Table of Contents In addition to the contractual obligations noted in Table 21, we have financial commitments related to agreements with certain cobrand partners under which we are required to make a certain level of minimum payments over the life of the agreement, generally ranging from five to ten years. Such commitments are designed to be satisfied by the payments we make to such cobrand partners primarily based on Card Members' spending and earning rewards on their cobrand cards and as we acquire new Card Members. In the event these payments do not fully satisfy the commitment, we will pay the cobrand partner up to the amount of the commitment in exchange for an equivalent value of reward points. As ofDecember 31, 2019 , we had$5 billion in such commitments outstanding and also had certain cobrand arrangements that include commitments based on variables, the values of which are not yet determinable and thus the amount is not quantifiable. We also have off-balance sheet arrangements that include guarantees, indemnifications and certain other off-balance sheet arrangements. GUARANTEES As ofDecember 31, 2019 , we had guarantees and indemnifications totaling approximately$1 billion related primarily to real estate and business dispositions in the ordinary course of business. Refer to Note 15 to the "Consolidated Financial Statements" for further discussion regarding our guarantees. CERTAIN OTHER OFF-BALANCE SHEET ARRANGEMENTS As ofDecember 31, 2019 , we had approximately$306 billion of unused credit available to Card Members as part of established lending product agreements. Total unused credit available to Card Members does not represent potential future cash requirements, as a significant portion of this unused credit will likely not be drawn. Our charge card products generally have no pre-set spending limit, and therefore are not reflected in unused credit available to Card Members. We provide Card Member protection plans that cover losses associated with purchased products. The maximum potential liability related to these plans is the portion of annual billed business for which timely and valid disputes may be raised under applicable law and relevant customer agreements. However, based on historical experience, we believe that this total amount is not representative of our actual potential loss exposure. The actual amount of the potential exposure cannot be quantified as the billed business volumes which may include or result in claims under these plans are not sufficiently estimable. Losses related to these protection plans were immaterial for the years endedDecember 31, 2019 , 2018 and 2017. Refer to Notes 6 and 12 to the "Consolidated Financial Statements" for discussion regarding our other off-balance sheet arrangements. RISK MANAGEMENT GOVERNANCE We use our comprehensive Enterprise-wide Risk Management (ERM) program to identify, aggregate, monitor, and manage risks. The program also defines our risk appetite, governance, culture and capabilities. The implementation and execution of the ERM program is headed by ourChief Risk Officer . Risk management is overseen by our Board of Directors through three Board committees: the Risk Committee, theAudit and Compliance Committee , and theCompensation and Benefits Committee . Each committee consists entirely of independent directors and provides regular reports to the full Board regarding matters reviewed at their committee. The committees meet regularly in private sessions with ourChief Risk Officer , the Chief Compliance & Ethics Officer, the Chief Audit Executive and other senior management with regard to our risk management processes, controls, talent and capabilities. The Board monitors the "tone at the top," our risk culture, and oversees emerging and strategic risks. The Risk Committee of our Board of Directors provides oversight of our enterprise-wide risk management framework, processes and methodologies. The Risk Committee approves our ERM policy. The ERM policy governs risk governance, risk oversight and risk appetite for risks, including individual credit risk, institutional credit risk, market risk, liquidity risk, operational risk, reputational risk, compliance risk, model risk, asset/liability risk, strategic and business risk, and foreign country risk. Risk appetite defines the authorized risk limits to control exposures within our risk capacity and risk tolerance, including stressed forward-looking scenarios. In addition, it establishes principles for risk taking in the aggregate and for each risk type, and is supported by a comprehensive system for monitoring limits, escalation triggers and assessing control programs. The Risk Committee reviews and concurs in the appointment, replacement, performance and compensation of ourChief Risk Officer and receives regular updates from the Chief Risk Officer on key risks, transactions and exposures. 60
-------------------------------------------------------------------------------- Table of Contents The Risk Committee reviews our risk profile against the tolerances specified in the Risk Appetite Framework, including significant risk exposures, risk trends in our portfolios and major risk concentrations. The Risk Committee also provides oversight of our compliance withBasel capital and liquidity standards, our Internal Capital Adequacy Assessment Process, including its Comprehensive Capital Analysis and Review (CCAR) submissions, and resolution planning.The Audit and Compliance Committee of our Board of Directors reviews and approves compliance policies, which include our Compliance Risk Tolerance Statement. In addition, theAudit and Compliance Committee reviews the effectiveness of our Corporate-wide Compliance Risk Management Program. More broadly, this committee is responsible for assisting the Board in its oversight responsibilities relating to the integrity of our financial statements and financial reporting process, internal and external auditing, including the qualifications and independence of the independent registered public accounting firm and the performance of our internal audit services function, and the integrity of our systems of internal controls.The Audit and Compliance Committee provides oversight of ourInternal Audit Group .The Audit and Compliance Committee reviews and concurs in the appointment, replacement, performance and compensation of our Chief Audit Executive and approves Internal Audit's annual audit plan, charter, policies and budget.The Audit and Compliance Committee also receives regular updates on the audit plan's status and results including significant reports issued by Internal Audit and the status of our corrective actions.The Compensation and Benefits Committee of our Board of Directors works with the Chief Risk Officer to ensure our overall compensation programs, as well as those covering our risk-taking employees, appropriately balance risk with business incentives and how business performance is achieved without taking imprudent or excessive risk. OurChief Risk Officer is actively involved in setting goals. OurChief Risk Officer also reviews the current and forward-looking risk profiles of each business unit and provides input into performance evaluation. The Chief Risk Officer meets with theCompensation and Benefits Committee and attests whether performance goals and results have been achieved without taking imprudent risks.The Compensation and Benefits Committee uses a risk-balanced incentive compensation framework to decide on our bonus pools and the compensation of senior executives. There are several internal management committees, including the Enterprise-wide Risk Management Committee (ERMC), chaired by ourChief Risk Officer . The ERMC is the highest-level management committee to oversee all firm-wide risks and is responsible for risk governance, risk oversight and risk appetite. It maintains the enterprise-wide risk appetite framework and monitors compliance with limits and escalations defined in it. The ERMC oversees implementation of risk policies company-wide. The ERMC reviews key risk exposures, trends and concentrations, significant compliance matters, and provides guidance on the steps to monitor, control and report major risks. As defined in the ERM policy, we follow the "three lines of defense" approach to risk management. The first line of defense comprises functions and management committees directly initiating risk taking. Business unit presidents, ourChief Credit Officer ,Chief Market Risk Officer and Functional Risk Officer are part of the first line of defense. The second line comprises independent functions overseeing risk-taking activities of the first line. The Chief Risk Officer, the Chief Compliance & Ethics Officer, the Chief Operational Risk Officer and certain control groups, both at the enterprise level and within regulated entities, are part of the second line of defense. The global risk oversight team oversees the policies, strategies, frameworks, models, processes and capabilities deployed by the first line teams and provides challenges and independent assessments on how the first line of defense is managing risks. In addition, the Asset Liability Committee, chaired by our Chief Financial Officer, is responsible for managing market, liquidity and asset/liability risk, capital and resolution planning. OurInternal Audit Group constitutes the third line of defense, and provides independent assessments and effective challenge of the first and second lines of defense. CREDIT RISK MANAGEMENT PROCESS Credit risk is defined as loss due to obligor or counterparty default or changes in the credit quality of a counterparty or security. Our credit risks are divided into two broad categories: individual and institutional. Each has distinct risk management capabilities, strategies, and tools. Business units that create individual or institutional credit risk exposures of significant importance are supported by dedicated risk management teams, each led by aChief Credit Officer . INDIVIDUAL CREDIT RISK Individual credit risk arises from consumer and small business charge cards, credit cards, and term loans. These portfolios consist of millions of customers across multiple geographies, industries and levels of net worth. We benefit from the high- 61
-------------------------------------------------------------------------------- Table of Contents quality profile of our customers, which is driven by our brand, premium customer servicing, product features and risk management capabilities, which span underwriting, customer management and collections. The risk in these portfolios is generally correlated to broad economic trends, such as unemployment rates and gross domestic product (GDP) growth. The business unit leaders and their Chief Credit Officers take the lead in managing the credit risk process. These Chief Credit Officers are guided by the Individual Credit Risk Committee (ICRC), which is responsible for implementation and enforcement of the Individual Credit Risk Management Policy. The ICRC ensures compliance with ERMC guidelines and procedures and escalates to the ERMC as appropriate. The Individual Credit Risk Management Policy is further supported by subordinate policies and operating manuals covering decision logic and processes of credit extension, including prospecting, new account approvals, point-of-sale authorizations, credit line management and collections. The subordinate risk policies and operating manuals are designed to ensure consistent application of risk management principles and standardized reporting of asset quality and loss recognition. Credit risk management is supported by sophisticated proprietary scoring and decision-making models that use up-to-date information on prospects and customers, such as spending and payment history and data feeds from credit bureaus. We have developed data-driven economic decision logic for customer interactions to better serve our customers. INSTITUTIONAL CREDIT RISK Institutional credit risk arises principally within our GCS, GMS and GNS businesses, as well as investment and liquidity management activities. Unlike individual credit risk, institutional credit risk is characterized by a lower loss frequency but higher severity. It is affected both by general economic conditions and by client-specific events. The absence of large losses in any given year or over several years is not necessarily representative of the level of risk of institutional portfolios, given the infrequency of loss events in such portfolios. Similar to individual credit risk, business units taking institutional credit risks are supported by Chief Credit Officers. These officers are guided by the Institutional Risk Management Committee (IRMC), which is responsible for implementation and enforcement of the Institutional Credit Risk Management Policy and for providing guidance to the credit officers of each business unit with substantial institutional credit risk exposures. The committee, along with the business unit Chief Credit Officers, makes investment decisions in core risk capabilities, ensures proper implementation of the underwriting standards and contractual rights for risk mitigation, monitors risk exposures, and determines risk mitigation actions. The IRMC formally reviews large institutional risk exposures to ensure compliance with ERMC guidelines and procedures and escalates them to the ERMC as appropriate. At the same time, the IRMC provides guidance to the business unit risk management teams to optimize risk-adjusted returns on capital. A centralized risk rating unit provides risk assessment of our institutional obligors. Exposure to the Airline and Travel Industry We have multiple important cobrand, rewards, merchant acceptance and corporate payments arrangements with airlines. The ERM program evaluates the risks posed by our airline partners and the overall airline strategy companywide through comprehensive business analysis of global airlines, and the travel industry more broadly, including cruise lines, travel agencies and tour operators. Our largest airline partner is Delta, and this relationship includes an exclusive cobrand credit card partnership and other arrangements including Membership Rewards redemption, merchant acceptance, travel and corporate payments. See "We face intense competition for partner relationships, which could result in a loss or renegotiation of these arrangements that could have a material adverse impact on our business and results of operations" and "Arrangements with our business partners represent a significant portion of our business. We are exposed to risks associated with our business partners, including reputational issues, business slowdowns, bankruptcies, liquidations, restructurings and consolidations, and the possible obligation to make payments to our partners" under "Risk Factors" for additional information. Debt Exposure As part of our ongoing risk management process, we monitor our financial exposure to both sovereign and non-sovereign customers and counterparties, and measure and manage concentrations of risk by geographic regions, as well as by economic sectors and industries. A primary focus area for monitoring is credit deterioration due to weaknesses in economic and fiscal profiles. We evaluate countries based on the market assessment of the riskiness of their sovereign debt and our assessment of the economic and financial outlook and closely monitor those deemed high risk. As ofDecember 31, 2019 , we considered our gross credit exposures to government entities, financial institutions and corporations in those countries deemed high risk to be individually and collectively not material. 62
-------------------------------------------------------------------------------- Table of Contents OPERATIONAL RISK MANAGEMENT PROCESS We define operational risk as the risk of not achieving business objectives due to inadequate or failed processes, people, or information systems, or the external environment, including failures to comply with laws and regulations as well as impacts from relationships with third parties. Operational risk is inherent in all business activities and can impact an organization through direct or indirect financial loss, brand damage, customer dissatisfaction, or legal and regulatory penalties. To appropriately measure and manage operational risk, we have implemented a comprehensive operational risk framework that is defined in the Operational Risk Management Policy approved by the Risk Committee. The Operational Risk Management Committee (ORMC), chaired by the Chief Operational Risk Officer, coordinates with all control groups on effective risk assessments and controls and oversees the preventive, responsive and mitigation efforts by Operational Excellence teams in the business units and staff groups. We use the operational risk framework to identify, measure, monitor and report inherent and emerging operational risks. This framework, supervised by the ORMC, consists of (a) operational risk event capture, (b) a project office to coordinate issue management and control enhancements, (c) key risk indicators, and (d) process and entity-level risk assessments. The framework requires the assessment of operational risk events to determine root causes, impact to customers and/or us, and resolution plan accountability to correct any defect, remediate customers, and enhance controls and testing to mitigate future issues. The impact is assessed from an operational, financial, brand, regulatory compliance and legal perspective. INFORMATION AND CYBER SECURITY We have implemented an Information Security Program and Operating Model that is designed to protect the confidentiality, integrity and availability of information and information systems from unauthorized access, use, disclosure, disruption, modification or destruction. Our Information Security Program and Operating Model are based on theNational Institute of Standards andTechnology Cybersecurity Common Standards Framework , which consist of controls designed to identify, protect, detect, respond and recover from information and cyber security incidents. The framework defines risks and associated controls which are embedded in our processes and technology. Those controls are measured and monitored by a combination of subject matter experts and a security operations center with our integrated cyber detection, response and recovery capabilities. Chaired by the Chief Information Security Officer, our Information Security Risk Management Committee, a sub-committee of the ORMC, provides governance for our information security risk management program. The Information Security and Technology Oversight team provides independent challenge and assessment of the information, cyber security and technology risk management programs. See "A major information or cyber security incident or an increase in fraudulent activity could lead to reputational damage to our brand and material legal, regulatory and financial exposure, and could reduce the use and acceptance of our charge and credit cards" under "Risk Factors" for additional information. PRIVACY AND DATA GOVERNANCE Our Privacy Framework and Operating Model follow a similar structure. Chaired by the Chief Privacy Officer, our Privacy Risk Management Committee, a sub-committee of the ORMC, provides oversight and governance for our privacy program. The committee is responsible for the governance over the collection, notice, use, sharing, transfer, confidentiality and retention of personal data. Our Enterprise Data Governance Framework and Policy defines governance requirements for data used in critical processes. COMPLIANCE RISK MANAGEMENT PROCESS We define compliance risk as the risk of legal or reputational harm, fines, monetary penalties and payment of damages or other forms of sanction as a result of non-compliance with applicable laws, regulations, rules or standards of conduct. We view our ability to effectively mitigate compliance risk as an important aspect of our business model. Our Global Compliance and Ethics organization is responsible for establishing and maintaining our corporate-wide Compliance Risk Management Program. Pursuant to this program, we seek to manage and mitigate compliance risk by assessing, controlling, monitoring, measuring and reporting the legal and regulatory risks to which we are exposed. The Compliance Risk Management Committee (CRMC), chaired by the Chief Compliance and Ethics Officer, is responsible for identifying, evaluating, managing, and escalating compliance risks. The CRMC has a dual reporting relationship directly to both the ERMC and theAudit and Compliance Committee . 63 -------------------------------------------------------------------------------- Table of Contents We have a comprehensive Anti-Money Laundering program that monitors and reports suspicious activity to the appropriate government authorities. As part of that program, the Global Risk Oversight team provides independent risk assessment of the rules used by the Anti-Money Laundering team. In addition, theInternal Audit Group reviews the processes for practices consistent with regulatory guidance. REPUTATIONAL RISK MANAGEMENT PROCESS We define reputational risk as the risk that negative stakeholder reaction to our products, services, client and partner relationships, business activities and policies, management and workplace culture, or our response to unexpected events, could cause sustained, critical media coverage, a decline in revenue or investment, talent attrition, litigation, or government or regulatory scrutiny. We view protecting our reputation for excellent customer service, trust, security and high integrity as core to our vision of providing the world's best customer experience and fundamental to our long-term success. Our business leaders are responsible for considering the reputational risk implications of business activities and strategies and ensuring the relevant subject matter experts are engaged as needed. The ERMC is responsible for ensuring reputational risk considerations are included in the scope of appropriate subordinate risk policies and committees and properly reflected in all decisions escalated to the ERMC. MARKET RISK MANAGEMENT PROCESS Market risk is the risk to earnings or asset and liability values resulting from movements in market prices. Our market risk exposures include interest rate risk and foreign exchange risk. Interest rate risk is driven by the relationship between interest rates on assets (such as loans, receivables and investment securities) and interest rates on liabilities (such as debt and deposits). Foreign exchange risk arises from transactions, funding, investments and earnings in currencies other than theU.S. dollar. Our Asset-Liability Management (ALM) and Market Risk policies establish the framework that guides and governs market risk management, including quantitative limits and escalation triggers. These policies are approved by the Asset Liability Committee or Market Risk Management Committee. Market risk is managed by the Market Risk Management Committee. The Market Risk Oversight Officer provides an independent risk assessment and oversight over the policies and exposure management for market risk and ALM activities, as well as overseeing compliance with the Volcker Rule and other regulatory requirements. Market risk management is also guided and governed by policies covering the use of derivative financial instruments, funding, liquidity and investments. Interest Rate Risk We analyze a variety of interest rate scenarios to inform us of the potential impacts from interest rate changes on earnings and the value of assets, liabilities and the economic value of equity. Our interest rate exposure can vary over time as a result of, among other things, the proportion of our total funding provided by variable-and fixed-rate debt and deposits compared to our Card Member loans and receivables. Interest rate swaps are used from time to time to effectively convert debt issuances to (or from) variable-rate, from (or to) fixed-rate. We do not engage in derivative financial instruments for trading purposes other than with respect to our Foreign Exchange International Payments business activities. Refer to Note 13 to the "Consolidated Financial Statements" for further discussion of our derivative financial instruments. As ofDecember 31, 2019 , a hypothetical, immediate 100 basis point increase in market interest rates would have a detrimental effect on our annual net interest income of approximately$141 million . This measure first projects net interest income over the following twelve-month time horizon considering forecasted business growth and anticipated future market interest rates. The detrimental impact from a rate increase is then measured by instantaneously increasing the anticipated future interest rates by 100 basis points. It is further assumed that our interest-rate sensitive assets and the majority of our liabilities that reprice within the twelve-month horizon generally reprice by 100 basis points. Our estimated repricing risk assumes that certain deposit liabilities reprice at a lower magnitude than benchmark rate movements consistent with historical deposit repricing experience in the industry and within our own portfolio. Actual changes in our net interest income will depend on many factors, and therefore may differ from our estimated risk to changes in market interest rates. In addition to parallel rate changes, our net interest income is subject to changes in the relationship between market benchmark rates. For example, movements in Prime rate change the yield on a large portion of our variable-rateU.S. lending receivables and loans, while LIBOR rates determine the effective interest rate on a significant portion of our outstanding funding. Differences in the rate of change of these two benchmark indices, commonly referred to as basis risk, would thus impact our net interest income. The detrimental effect on our net interest income of a hypothetical 10 basis point decrease in the spread 64
-------------------------------------------------------------------------------- Table of Contents between Prime and LIBOR over the next twelve months is estimated to be$20 million . We currently have approximately$48 billion of Prime-based, variable-rateU.S. lending receivables and loans and$20 billion of LIBOR-indexed debt, including asset securitizations. LIBOR Transition Due to uncertainty surrounding the suitability and sustainability of LIBOR, central banks and global regulators have called for financial market participants to prepare for the discontinuance of LIBOR by the end of 2021 and the establishment of alternative reference rates. We have financial instruments and commercial agreements that will be impacted by the discontinuance of LIBOR, including floating rate debt and equity instruments, derivatives, borrowings and other contracts. We have established an enterprise-wide, cross-functional initiative to identify, assess and monitor risks associated with LIBOR, engage with the industry participants and regulators and to transition to new alternative reference rates. As part of this initiative, we are reviewing and updating our operational processes, IT systems and models for a timely transition. See "Uncertainty relating to LIBOR and other reference rates and their potential discontinuance may negatively impact our access to funding and the value of our financial instruments and commercial agreements" under "Risk Factors" for additional information. Foreign Exchange Risk Foreign exchange exposures arise in four principal ways: 1) Card Member spending in currencies that are not the billing currency, 2) cross-currency transactions and balances from our funding activities, 3) cross-currency investing activities, such as in the equity of foreign subsidiaries, and 4) revenues generated and expenses incurred in foreign currencies, which impact earnings. These foreign exchange risks are managed primarily by entering into foreign exchange spot transactions or hedged with foreign exchange forward contracts when the hedge costs are economically justified and in notional amounts designed to offset pretax impacts from currency movements in the period in which they occur. As ofDecember 31, 2019 , foreign currency derivative instruments with total notional amounts of approximately$36 billion were outstanding. With respect to Card Member spending and cross-currency transactions, including related foreign exchange forward contracts outstanding, a hypothetical 10 percent strengthening of theU.S. dollar would result in an immaterial impact to projected earnings as ofDecember 31, 2019 . With respect to translation exposure of foreign subsidiary equity balances, including related foreign exchange forward contracts outstanding, a hypothetical 10 percent strengthening of theU.S. dollar would result in an immaterial reduction in other comprehensive income and equity as ofDecember 31, 2019 . With respect to earnings denominated in foreign currencies, the adverse impact on pretax income of a hypothetical 10 percent strengthening of theU.S. dollar related to anticipated overseas operating results for the next twelve months would be approximately$146 million as ofDecember 31, 2019 . To a much lesser extent, we are also subject to market risk arising from activities conducted by our Foreign Exchange International Payments business. We aim to minimize market risk from these activities through hedging, where appropriate, and the establishment of limits to define and protect the company from excessive exposure. The actual impact of interest rate and foreign exchange rate changes will depend on, among other factors, the timing of rate changes, the extent to which different rates do not move in the same direction or in the same direction to the same degree, changes in the cost, volume and mix of our hedging activities and changes in the volume and mix of our businesses. FUNDING & LIQUIDITY RISK MANAGEMENT PROCESS Liquidity risk is defined as our inability to meet our ongoing financial and business obligations as they become due at a reasonable cost. Our Board-approved Liquidity Risk Policy establishes the framework that guides and governs liquidity risk management. Liquidity risk is managed by theFunding and Liquidity Committee . In addition, the Market Risk Oversight Officer provides independent oversight of liquidity risk management. We manage liquidity risk by maintaining access to a diverse set of cash, readily-marketable securities and contingent sources of liquidity, such that we can continuously meet our business requirements and expected future financing obligations for at least a twelve-month period in the event we are unable to raise new funds under our regular funding programs during a substantial weakening in economic conditions. We consider the trade-offs between maintaining too much liquidity, which can be costly and limit financial flexibility, and having inadequate liquidity, which may result in financial distress during a liquidity event. 65 -------------------------------------------------------------------------------- Table of Contents Liquidity risk is managed at an aggregate consolidated level as well as at certain subsidiaries in order to ensure that sufficient and accessible liquidity resources are maintained.The Funding and Liquidity Committee reviews forecasts of our aggregate and subsidiary cash positions and financing requirements, approves funding plans designed to satisfy those requirements under normal and stressed conditions, establishes guidelines to identify the amount of liquidity resources required and monitors positions and determines any actions to be taken. MODEL RISK MANAGEMENT PROCESS We define model risk as the risk of adverse consequences, such as financial loss, poor business and strategic decision making, or damage to our reputation, from decisions based on incorrect or misused model outputs and reports. We manage model risk through a comprehensive model governance framework, including policies and procedures for model development, independent model validation and change management capabilities that seek to minimize erroneous model methodology, outputs and misuse. We also assess model performance on an ongoing basis. STRATEGIC AND BUSINESS RISK MANAGEMENT PROCESS Strategic and business risk is the risk related to our inability to achieve our business objectives due to poor strategic decisions, including decisions related to mergers, acquisitions, and divestitures, poor implementation of strategic decisions or declining demand for our products and services. Strategic decisions are reviewed and approved by business leaders and various committees and must be aligned with company policies. We seek to manage strategic and business risks through risk controls embedded in these processes as well as overall risk management oversight over business goals. Existing product performance is reviewed periodically by committees and business leaders. Mergers, acquisitions and divestitures can only be approved following Deal Committee due diligence, a comprehensive risk assessment by operational, market, credit and oversight leaders provided to the Chief Risk Officer and approval by either the Chief Risk Officer or appropriate risk committees. All new products and material changes in business processes are reviewed and approved by the New Products Committee and appropriate credit or risk committees.
FOREIGN COUNTRY RISK MANAGEMENT PROCESS
Foreign country risk is defined as the risk that economic, social, and/or
political conditions and events in a foreign country will adversely impact us,
primarily as a result of greater credit losses, increased operational risk or
the inability to repatriate capital. We manage foreign country risk as part of
the normal course of business. Policies and procedures establish foreign country
risk escalation thresholds to control and limit exposure, driven by processes
that enable the monitoring of foreign country conditions in which we have
exposure.
CRITICAL ACCOUNTING ESTIMATES
Refer to Note 1 to the "Consolidated Financial Statements" for a summary of our
significant accounting policies. Certain of our accounting policies requiring
significant management assumptions and judgments are as follows:
RESERVES FOR CARD MEMBER LOSSES
Reserves for Card Member losses represent our best estimate of the probable
losses inherent in our outstanding portfolio of Card Member loans and
receivables, as of the balance sheet date.
In estimating these losses, we use statistical and analytical models that
analyze portfolio performance and reflect our judgment regarding the
quantitative components of the reserve. The models take into account several
factors, including delinquency-based loss migration rates, loss emergence
periods and average losses and recoveries over an appropriate historical period.
We also consider whether to adjust the quantitative reserve for certain external
and internal qualitative factors that may increase or decrease the reserves for
losses on Card Member loans and receivables. Refer to Note 3 to the
"Consolidated Financial Statements" for additional information.
The process of estimating these reserves requires a high degree of judgment. To
the extent historical credit experience, updated for any external and internal
qualitative factors such as environmental trends, is not indicative of future
performance, actual losses could differ significantly from our judgments and
expectations, resulting in either higher or lower future provisions for Card
Member losses in any quarter.
66-------------------------------------------------------------------------------- Table of Contents As ofDecember 31, 2019 , a 10 percent increase in our estimate of losses inherent in the outstanding portfolio of Card Member loans and receivables, evaluated collectively for impairment, would increase reserves for losses with a corresponding change to provisions for losses by approximately$300 million . This sensitivity analysis is provided as a hypothetical scenario to assess the sensitivity of the provisions for losses. It does not represent our expectations for losses in the future, nor does it include how other portfolio factors such as delinquency-based loss migration rates or recoveries, or the amount of outstanding balances, may impact the level of reserves for losses and the corresponding impact on the provisions for losses. Refer to Note 1 to the "Consolidated Financial Statements" for information about the implementation and impact of new accounting guidance for the recognition of credit losses on financial instruments, effectiveJanuary 1, 2020 , and the new credit reserving methodology known as the CECL methodology. LIABILITY FOR MEMBERSHIP REWARDS The Membership Rewards program is our largest card-based rewards program. Card Members can earn points for purchases charged on their enrolled card products. A significant portion of our cards, by their terms, allow Card Members to earn bonus points for purchases at merchants in particular industry categories. Membership Rewards points are redeemable for a broad variety of rewards, including travel, shopping, gift cards, and covering eligible charges. Points typically do not expire, and there is no limit on the number of points a Card Member may earn. Membership Rewards expense is driven by charge volume on enrolled cards, customer participation in the program and contractual arrangements with redemption partners. We record a Membership Rewards liability that represents the estimated cost of points earned that are expected to be redeemed by Card Members in the future. The Membership Rewards liability is impacted over time by enrollment levels, attrition, the volume of points earned and redeemed, and the associated redemption costs. We estimate the Membership Rewards liability by determining the Ultimate Redemption Rate (URR) and the weighted average cost (WAC) per point, which are applied to the points of current enrollees. Refer to Note 9 to the "Consolidated Financial Statements" for additional information. The URR assumption is used to estimate the number of points earned by current enrollees that will ultimately be redeemed in future periods. We use statistical and actuarial models to estimate the URR of points earned to date by current Card Members based on redemption trends, card product type, enrollment tenure, card spend levels and credit attributes. The WAC per point assumption is used to estimate future redemption costs and is primarily based on redemption choices made by Card Members, reward offerings by partners, and Membership Rewards program changes. The WAC per point is derived from the previous 12 months of redemptions and is adjusted as appropriate for certain changes in redemption costs that are not representative of future cost expectations. We periodically evaluate our liability estimation process and assumptions based on developments in redemption patterns, cost per point redeemed, partner contract changes and other factors. The process of estimating the Membership Rewards liability includes a high degree of judgment. Actual redemptions and associated redemption costs could differ significantly from our estimates, resulting in either higher or lower Membership Rewards expense. Changes in the Membership Rewards URR and WAC per point have the effect of either increasing or decreasing the liability through the current period Membership Rewards expense by an amount estimated to cover the cost of all points previously earned but not yet redeemed by current enrollees as of the end of the reporting period. As ofDecember 31, 2019 , an increase in the estimated URR of current enrollees of 25 basis points would increase the Membership Rewards liability and corresponding rewards expense by approximately$123 million . Similarly, an increase in the WAC per point of 1 basis point would increase the Membership Rewards liability and corresponding rewards expense by approximately$114 million . GOODWILL RECOVERABILITYGoodwill represents the excess of acquisition cost of an acquired business over the fair value of assets acquired and liabilities assumed.Goodwill is not amortized but is tested for impairment at the reporting unit level annually or when events or circumstances arise, such as adverse changes in the business climate, that would more likely than not reduce the fair value of the reporting unit below its carrying value. Our methodology for conducting this goodwill impairment testing contains both a qualitative and quantitative assessment. We have the option to initially perform an assessment of qualitative factors in order to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The qualitative factors may include, but are not limited to, economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting unit and other company and reporting unit-specific events. If we determine that it is more likely than not that the fair value of a 67 -------------------------------------------------------------------------------- Table of Contents reporting unit is less than its carrying amount, we then perform the impairment evaluation using a more detailed quantitative assessment. We could also directly perform this quantitative assessment for any reporting unit, bypassing the qualitative assessment. Our methodology for conducting the quantitative goodwill impairment testing is fundamentally based on the measurement of fair value for our reporting units, which inherently entails the use of significant management judgment. For valuation, we use a combination of the income approach (discounted cash flows) and market approach (market multiples) in estimating the fair value of our reporting units. When preparing discounted cash flow models under the income approach, we estimate future cash flows using the reporting unit's internal multi-year forecast, and a terminal value calculated using a growth rate that we believe is appropriate in light of current and expected future economic conditions. To discount these cash flows we use our expected cost of equity, determined using a capital asset pricing model. When using the market method under the market approach, we apply comparable publicly traded companies' multiples (e.g., earnings, revenues) to our reporting units' actual results. The judgment in estimating forecasted cash flows, discount rates and market comparables is significant, and imprecision could materially affect the fair value of our reporting units. We could be exposed to an increased risk of further goodwill impairment if future operating results or macroeconomic conditions differ significantly from management's current assumptions. INCOME TAXES We are subject to the income tax laws ofthe United States , its states and municipalities and those of the foreign jurisdictions in which we operate. These tax laws are complex, and the manner in which they apply to the taxpayer's facts is sometimes open to interpretation. In establishing a provision for income tax expense, we must make judgments about the application of inherently complex tax laws. In particular, the Tax Act is complex and requires interpretation of certain provisions to estimate the impact on our income tax expense. The estimates are based on our current interpretations of the Tax Act, and may change due to additional guidance or context from the Internal Revenue Service, theU.S. Treasury Department or others. Unrecognized Tax Benefits We establish a liability for unrecognized tax benefits, which are the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized in the financial statements. In establishing a liability for an unrecognized tax benefit, assumptions may be made in determining whether, and the extent to which, a tax position should be sustained. A tax position is recognized only when it is more likely than not to be sustained upon examination by the relevant taxing authority, based on its technical merits. The amount of tax benefit recognized is the largest benefit that we believe is more likely than not to be realized on ultimate settlement. As new information becomes available, we evaluate our tax positions and adjust our unrecognized tax benefits, as appropriate. Tax benefits ultimately realized can differ from amounts previously recognized due to uncertainties, with any such differences generally impacting the provision for income tax. Deferred Tax Asset Realization Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using the enacted tax rates expected to be in effect for the years in which the differences are expected to reverse. Since deferred taxes measure the future tax effects of items recognized in the Consolidated Financial Statements, certain estimates and assumptions are required to determine whether it is more likely than not that all or some portion of the benefit of a deferred tax asset will not be realized. In making this assessment, we analyze and estimate the impact of future taxable income, reversing temporary differences and available tax planning strategies. These assessments are performed quarterly, taking into account any new information. Changes in facts or circumstances can lead to changes in the ultimate realization of deferred tax assets due to uncertainties. 68 -------------------------------------------------------------------------------- Table of Contents OTHER MATTERS RECENTLY ISSUED ACCOUNTING STANDARDS Refer to the Recently Issued Accounting Standards section of Note 1 to the "Consolidated Financial Statements." GLOSSARY OF SELECTED TERMINOLOGY Adjusted net interest income - A non-GAAP measure that represents net interest income attributable to our Card Member loans (which includes, on a GAAP basis, interest that is deemed uncollectible), excluding the impact of interest expense and interest income not attributable to our Card Member loans. Asset securitizations - Asset securitization involves the transfer and sale of loans or receivables to a special-purpose entity created for the securitization activity, typically a trust. The trust, in turn, issues securities, commonly referred to as asset-backed securities that are secured by the transferred loans and receivables. The trust uses the proceeds from the sale of such securities to pay the purchase price for the transferred loans or receivables. The securitized loans and receivables of ourLending Trust andCharge Trust (collectively, the Trusts) are reported as assets and the securities issued by the Trusts are reported as liabilities on our Consolidated Balance Sheets. Average discount rate - This calculation is generally designed to reflect the average pricing at all merchants acceptingAmerican Express cards and represents the percentage of proprietary and GNS billed business retained by us from merchants we acquire, or from merchants acquired by third parties on our behalf, net of amounts retained by such third parties. The average discount rate, together with billed business, drive our discount revenue. Billed business - Represents transaction volumes (including cash advances) on cards and other payment products issued byAmerican Express (proprietary billed business) and cards issued under network partnership agreements with banks and other institutions, including joint ventures (GNS billed business). In-store spending activity within GNS retail cobrand portfolios, from which we earn no revenue, is not included in billed business. Billed business is reported as insidethe United States or outsidethe United States based on the location of the issuer. Billed business, together with the average discount rate, drive our discount revenue. Capital ratios - Represents the minimum standards established by regulatory agencies as a measure to determine whether the regulated entity has sufficient capital to absorb on- and off-balance sheet losses beyond current loss accrual estimates. Refer to the Capital Strategy section under "Consolidated Capital Resources and Liquidity" for further related definitions under Basel III. Cards-in-force - Represents the number of cards that are issued and outstanding byAmerican Express (proprietary cards-in-force) and cards issued and outstanding under network partnership agreements with banks and other institutions, including joint ventures (GNS cards-in-force), except for GNS retail cobrand cards that had no out-of-store spending activity during the prior twelve months. Basic cards-in-force excludes supplemental cards issued on consumer accounts. Cards-in-force is useful in understanding the size of our Card Member base. Card Member - The individual holder of an issuedAmerican Express -branded card. Card Member loans - Represents the outstanding amount due from Card Members for charges made on theirAmerican Express credit cards, as well as any interest charges and card-related fees. Card Member loans also include revolving balances on certainAmerican Express charge card products. Card Member receivables - Represents the outstanding amount due from Card Members for charges made on theirAmerican Express charge cards, as well as any card-related fees, other than revolving balances on certainAmerican Express charge cards with Pay Over Time features. Such revolving balances are included within Card Member loans. Charge cards - Represents cards that generally carry no pre-set spending limits and are primarily designed as a method of payment and not as a means of financing purchases. Charge Card Members generally must pay the full amount billed each month. No finance charges are assessed on charge cards. Each charge card transaction is authorized based on its likely economics reflecting a Card Member's most recent credit information and spend patterns. Some charge cards have additional Pay Over Time feature(s) that allow revolving of certain charges. Cobrand cards - Cards issued under cobrand agreements with selected commercial partners. Pursuant to the cobrand agreements, we make payments to our cobrand partners, which can be significant, based primarily on the amount of Card Member spending and corresponding rewards earned on such spending and, under certain arrangements, on the number of accounts acquired and retained. The partner is then liable for providing rewards to the Card Member under the cobrand partner's own loyalty program. 69
--------------------------------------------------------------------------------
Table of Contents
Credit cards - Represents cards that have a range of revolving payment terms,
grace periods, and rate and fee structures.
Discount revenue - Primarily represents revenue earned from fees charged to
merchants who have entered into a card acceptance agreement. The discount fee is
generally deducted from our payment for Card Member purchases.
Interest expense - Includes interest incurred primarily to fund Card Member
loans and receivables, general corporate purposes and liquidity needs. Interest
expense is divided principally into two categories: (i) deposits, which
primarily relates to interest expense on deposits taken from customers and
institutions, and (ii) debt, which primarily relates to interest expense on our
long-term financing and short-term borrowings, (e.g., commercial paper, federal
funds purchased, bank overdrafts and other short-term borrowings), as well as
the realized impact of derivatives hedging interest rate risk on our long-term
debt.
Interest income - Includes (i) interest on loans, (ii) interest and dividends on
investment securities and (iii) interest income on deposits with banks and
other.
Interest on loans - Assessed using the average daily balance method for Card
Member loans. Unless the loan is classified as non-accrual, interest is
recognized based upon the principal amount outstanding in accordance with the
terms of the applicable account agreement until the outstanding balance is paid
or written off.
Interest and dividends on investment securities - Primarily relates to our
performing fixed-income securities. Interest income is recognized using the
effective interest method, which adjusts the yield for security premiums and
discounts, fees and other payments, so a constant rate of return is recognized
on the outstanding balance of the related investment security throughout its
term. Amounts are recognized until securities are in default or when it is
likely that future interest payments will not be made as scheduled.
Interest income on deposits with banks and other - Primarily relates to the
placement of cash in excess of near-term funding requirements in
interest-bearing time deposits, overnight sweep accounts, and other
interest-bearing demand and call accounts.
Loyalty Coalitions - Programs that enable consumers to earn rewards points and
use them to save on purchases from a variety of participating merchants through
multi-category rewards platforms. Merchants in these programs generally fund the
consumer offers and are responsible to us for the cost of rewards points; we
earn revenue from operating the loyalty platform and by providing marketing
support.
Net card fees - Represents the card membership fees earned during the period
recognized as revenue over the covered card membership period (typically one
year), net of the provision for projected refunds for Card Membership
cancellation and deferred acquisition costs.
Net interest yield on average Card Member loans - A non-GAAP measure that is
computed by dividing adjusted net interest income by average Card Member loans,
computed on an annualized basis. Reserves and net write-offs related to
uncollectible interest are recorded through provision for losses, and are thus
not included in the net interest yield calculation.
Net loss ratio - Represents the ratio of GCP charge card write-offs, consisting
of principal (resulting from authorized transactions) and fee components, less
recoveries, on Card Member receivables expressed as a percentage of gross
amounts billed to corporate Card Members.
Net write-off rate - principal only - Represents the amount of proprietary
consumer or small business Card Member loans or receivables written off,
consisting of principal (resulting from authorized transactions), less
recoveries, as a percentage of the average loan or receivable balance during the
period.
Net write-off rate - principal, interest and fees - Includes, in the calculation
of the net write-off rate, amounts for interest and fees in addition to
principal for Card Member loans, and fees in addition to principal for Card
Member receivables.
Operating expenses - Represents salaries and employee benefits, professional
services, occupancy and equipment, and other expenses.
Return on average equity - Calculated by dividing one-year period net income by
one-year average total shareholders' equity.
70
--------------------------------------------------------------------------------
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, which are subject to risks and
uncertainties. The forward-looking statements, which address our current
expectations regarding business and financial performance, among other matters,
contain words such as "believe," "expect," "anticipate," "intend," "plan,"
"aim," "will," "may," "should," "could," "would," "likely," "estimate,"
"predict," "potential," "continue" and similar expressions. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date on which they are made. We undertake no obligation to
update or revise any forward-looking statements. Factors that could cause actual
results to differ materially from these forward-looking statements, include, but
are not limited to, the following:
•our ability to grow earnings per share in the future, which will depend in part
on revenue growth, credit performance and the effective tax rate remaining
consistent with current expectations, the company's ability to control operating
expense growth and generate operating leverage, and the company's ability to
continue executing its share repurchase program, any of which could be impacted
by, among other things, the factors identified in the subsequent paragraphs as
well as the following: issues impacting brand perceptions and our reputation;
the impact of any future contingencies, including, but not limited to,
restructurings, impairments, changes in reserves, legal costs, the imposition of
fines or civil money penalties and increases in Card Member reimbursements; the
amount and efficacy of investments in share, scale and relevance; changes in
interest rates beyond current expectations; a greater impact from new or
renegotiated cobrand and other partner agreements than expected, which could be
affected by spending volumes and customer acquisition; and the impact of
regulation and litigation, which could affect the profitability of our business
activities, limit our ability to pursue business opportunities, require changes
to business practices or alter our relationships with Card Members, partners,
merchants, vendors and other third parties;
•our ability to grow revenues net of interest expense and the composition and
relative growth of fee, spend and lend revenues remaining consistent with
expectations, which could be impacted by, among other things, weakening economic
conditions in the United States or internationally; a decline in consumer
confidence impacting the willingness and ability of Card Members to sustain and
grow spending, pay higher card fees and revolve balances; concerns related to
the recent coronavirus outbreak and travel restrictions and bans; a slowdown in
corporate spending; growth in Card Member loans and the yield on Card Member
loans not remaining consistent with current expectations; the average discount
rate changing by a greater amount than expected; the strengthening of the U.S.
dollar beyond expectations; Card Members continuing to be attracted to our
premium card products; and our inability to address competitive pressures and
implement our strategies and business initiatives, including within the premium
consumer segment, commercial payments, the global network and digital
environment;
•changes in the substantial and increasing worldwide competition in the payments
industry, including competitive pressure that may materially impact the prices
we charge merchants that accept American Express cards, competition for new and
existing cobrand relationships, competition from new and non-traditional
competitors and the success of marketing, promotion and rewards programs;
•net interest income not growing consistent with current expectations, which
will be influenced by, among other things, changes in benchmark interest rates
and our cost of funds, changes in consumer behavior that affect loan balances
(such as paydown rates) and our ability to continue to grow loans, our Card
Member acquisition strategy, pricing changes, product mix and credit actions,
including line size and other adjustments to credit availability;
•write-off rates being higher or lower than current expectations, which will
depend in part on changes in the level of loan and receivable balances and
delinquencies, macroeconomic factors such as unemployment rates and the volume
of bankruptcies, the mix of balances and the credit performance of newer
vintages and non-card lending products;
•our ability to continue to grow loans, which may be affected by increasing
competition, brand perceptions and our reputation, our ability to manage risk,
the behavior of Card Members and their actual spending and borrowing patterns,
and our ability to issue new and enhanced card products, offer attractive
non-card lending products, capture a greater share of existing Card Members'
spending and borrowings, reduce Card Member attrition and attract new customers;
•the growth of provisions for losses being higher or lower than current
expectations, which will depend in part on changes in the level of loan and
receivable balances and delinquency and write-off rates; the impact of new
accounting guidance and the CECL methodology; collections capabilities and
recoveries of previously written-off loans and receivables; and macroeconomic
factors like unemployment rates and the volume of bankruptcies;
71
--------------------------------------------------------------------------------
Table of Contents
•the actual amount to be spent on customer engagement, which will be based in
part on management's assessment of competitive opportunities; overall business
performance and changes in macroeconomic conditions; the growth in the cost of
Card Member services, which could be impacted by, among other things, the
factors identified in the subsequent paragraph; Card Member behavior as it
relates to their spending patterns (including the level of spend in bonus
categories) and the redemption of rewards and offers; the costs related to
reward point redemptions, advertising and Card Member acquisition; our ability
to continue to shift Card Member acquisition to digital channels; and new and
renegotiated contractual obligations with business partners;
•the cost of Card Member services not growing consistently with current
expectations, which could be impacted by the degree of interest of Card Members
in the value propositions we offer; increasing competition, which could result
in pressure to further enhance card products and services to make them
attractive to Card Members, potentially in a manner that is not cost effective;
and the pace and cost of the expansion of our global lounge collection;
•our ability to control operating expense growth and grow operating expenses
more slowly than revenues, which could be impacted by increases in costs, such
as cyber, fraud or compliance expenses or consulting, legal and other
professional fees, including as a result of increased litigation or internal and
regulatory reviews; higher than expected employee levels; an inability to
innovate efficient channels of customer interactions, such as chat supported by
artificial intelligence, or customer acquisition; the impact of changes in
foreign currency exchange rates on costs; the payment of civil money penalties,
disgorgement, restitution, non-income tax assessments and litigation-related
settlements; impairments of goodwill or other assets; management's decision to
increase or decrease spending in such areas as technology, business and product
development, sales force, premium servicing and digital capabilities; and the
level of M&A activity and related expenses;
•our ability to satisfy our commitments to certain of our cobrand partners as
part of the ongoing operations of the business, which will be impacted in part
by competition, brand perceptions and our reputation, and our ability to develop
and market value propositions that appeal to current cobrand Card Members and
new customers and offer attractive services and rewards programs, which will
depend in part on ongoing investments, new product innovation and development,
Card Member acquisition efforts and enrollment processes, including through
digital channels, and infrastructure to support new products, services and
benefits;
•changes affecting our plans regarding the return of capital to shareholders
through dividends and share repurchases, which will depend on factors such as
our capital levels and regulatory capital ratios and the actual impact of CECL
on those ratios; changes in the stress testing and capital planning process and
approval of our capital plans; the amount of capital required to support asset
growth; the amount we spend on acquisitions of companies; and our results of
operations and financial condition; and the economic environment and market
conditions in any given period;
•our tax rate not remaining consistent with current expectations, which could be
impacted by, among other things, our geographic mix of income, further changes
in tax laws and regulation, unfavorable tax audits and other unanticipated tax
items;
•a failure in or breach of our operational or security systems, processes or
infrastructure, or those of third parties, including as a result of
cyberattacks, which could compromise the confidentiality, integrity, privacy
and/or security of data, disrupt our operations, reduce the use and acceptance
of American Express cards and lead to regulatory scrutiny, litigation,
remediation and response costs, and reputational harm;
•our deposit rates increasing faster or slower than current expectations and
changes affecting our ability to grow Personal Savings deposits due to market
demand, changes in benchmark interest rates, competition or regulatory
restrictions on our ability to obtain deposit funding or offer competitive
interest rates, which could affect our net interest yield and ability to fund
our businesses;
•our funding plan being implemented in a manner inconsistent with current
expectations, which will depend on various factors such as future business
growth, the impact of global economic, political and other events on market
capacity, demand for securities we offer, regulatory changes, ability to
securitize and sell receivables and the performance of receivables previously
sold in securitization transactions;
•changes in global economic and business conditions, consumer and business
spending generally, the availability and cost of capital, unemployment rates,
geopolitical conditions, travel restrictions and bans, including as a result of
the recent coronavirus outbreak, Brexit, prolonged or recurring government
shutdowns, trade policies, foreign currency rates and
72
--------------------------------------------------------------------------------
Table of Contents
interest rates, all of which may significantly affect demand for and spending on
American Express cards, delinquency rates, loan and receivable balances and
other aspects of our business and results of operations;
•changes in capital and credit market conditions, which may significantly affect
our ability to meet our liquidity needs, expectations regarding capital and
liquidity ratios, access to capital and cost of capital, including changes in
interest rates; changes in market conditions affecting the valuation of our
assets; or any reduction in our credit ratings or those of our subsidiaries,
which could materially increase the cost and other terms of our funding or
restrict our access to the capital markets;
•legal and regulatory developments, which could require us to make fundamental
changes to many of our business practices, including our ability to continue
certain cobrand and agent relationships in the EU; exert further pressure on the
average discount rate and GNS volumes; result in increased costs related to
regulatory oversight, litigation-related settlements, judgments or expenses,
restitution to Card Members or the imposition of fines or civil money penalties;
materially affect our capital or liquidity requirements, results of operations
or ability to pay dividends or repurchase stock; or result in harm to the
American Express brand;
•changes in the financial condition and creditworthiness of our business
partners, such as bankruptcies, restructurings or consolidations, including
merchants that represent a significant portion of our business, such as the
airline industry, or our partners in GNS or financial institutions that we rely
on for routine funding and liquidity, which could materially affect our
financial condition or results of operations; and
•factors beyond our control such as fire, power loss, disruptions in
telecommunications, severe weather conditions, natural and man-made disasters,
health pandemics or terrorism, any of which could significantly affect demand
for and spending on American Express cards, delinquency rates, loan and
receivable balances and other aspects of our business and results of operations
or disrupt our global network systems and ability to process transactions.
A further description of these uncertainties and other risks can be found in
"Risk Factors" above and our other reports filed with the SEC .
73--------------------------------------------------------------------------------
Table of Contents ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Refer to "Risk Management" under "MD&A" for quantitative and qualitative disclosures about market risk.
© Edgar Online, source
