American Express Company (AXP) Q2 2020 Earnings Report, Transcript and Summary

Thank you for standing by. Welcome to the American Express, Q2 2020 Earnings Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now like to turn the conference over to our host, Head of Investor Relations, Ms. Vivian Zhou. Please go ahead.

Thank you, Alan. Thank you all for joining today’s call. As a reminder, before we begin, today’s discussion contains forward-looking statements about the company’s future business and financial performance. These are based on management’s current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these statements are included in today’s presentation slides and in our reports on file with the SEC. The discussion today also contains non-GAAP financial measures. The comparable GAAP financial measures are included in this quarter’s earnings material, as well as the earnings materials for the prior periods we discussed. All of these are posted on our website at ir.americanexpress.com. We will begin today with Steve Squeri, Chairman and CEO, with some remarks about the company’s progress and results; and then Jeff Campbell, Chief Financial Officer, will provide a more detailed review of our second quarter financial performance. After that we will move to a Q&A session on the results with both Steve and Jeff. With that, let me turn it over to Steve.

Thanks, Vivian. Hello, everybody, and thanks for joining us on the call this morning. I hope everyone is safe and well and your families are the same. Let me just jump in. While our overall results for the quarter clearly show the effects of COVID-19 pandemic on our business, Jeff and I will dive into our performance on a more granular level to give you a clear picture of what’s going on. When we last got together on April 24, the global economy was basically in a free fall, and we had no way of knowing if the declines we were seeing in our billings would continue. We now realize that mid-April was when we hit the trough in terms of second quarter spending declines. As we sit here today, there is still much uncertainty about the economic environment as reopenings have stalled in a number of geographies and status of government support programs remains unclear. Nevertheless, I can give you a better sense of where we are and how the COVID-19 crisis has been affecting us to date. Spending volumes overall have been improving gradually since April, when they were down about 40% year-over-year to a decline of about 20% in mid-July. Non-T&E spending has been recovering at a faster pace than T&E categories, and our small business customers have been the most resilient through the period. We’ve not seen an increase in our total customer attrition levels from prior years. With regards to credit, we feel good about our risk management capabilities and the progress we’ve made with the financial relief programs we rolled out to support our customers as they navigate unexpected financial challenges during these unprecedented times. We remain confident in our ability to effectively manage credit risk to achieve the best outcomes for both our customers and our shareholders. All in all, I feel good about how we’re managing through this period. Despite the significant impacts of the COVID-19 pandemic had on our business, we were profitable in the quarter, and we have very strong capital and liquidity position, and we paid our dividend to our shareholders. Importantly, our customers continue to be engaged with our products and services, and I’m confident that our strategy of focusing on what we can control in the short-term while continuing to invest in areas that are key to our growth over the long-term, will put us in a position of strength when this crisis ends. Similar to the first quarter, Jeff will discuss how the current climate is affecting various elements of our financial results. And I’ll give a little more color on what we’re doing to manage the company through the present crisis while positioning ourselves to take advantage of the growth opportunities ahead. As a reminder, in Q1, we introduced four key priorities for 2020: supporting our colleagues and winning as a team, protecting our customers and our brand, structuring the company for growth in the future and staying financially strong. We’ve made good progress against this framework, and we’ll continue to use it as a guide through the rest of the year. I’ll go through each of these priorities and give you some highlights of our progress. In terms of our first priority, supporting our colleagues and winning as a team, we’ve been operating on a fully remote basis globally since mid-March. Our frontline colleagues have continued to deliver outstanding customer service and our historically strong customer satisfaction levels have improved globally on a year-over-year basis. More recently, like many other global companies, we’re taking a slow and cautious approach to returning to our offices, and we’re implementing comprehensive safety protocols as our buildings reopen. I also want to spend a minute talking about the recent incidence of deadly violence against the black community and the subsequent demands for actions to combat systematic racism. Like many others, we’re taking a hard look at our own practices across our business and developing a comprehensive plan to strengthen diversity and inclusion within the company, while also increasing our support to black-owned businesses and the black community outside of American Express. As a first step, we made $3 million in grants in 2020 to several nonprofits that support the black community. And as part of our recently launched Shop Small initiative, we pledged $10 million over the next four years to fund the coalition with the U.S. Chamber of Commerce Foundation, bringing together to U.S. Black Chambers to provide grants to black-owned small businesses. We view this as just the beginning of a multifaceted, multiyear commitment to do our part to address issues of inequality and to promote social justice. Our next priority is protecting our customers and our brand. To ensure our future success, it’s critical that we continue providing a reliable world-class experience to help our customers manage through these extraordinary times. In recognition of our customers’ evolving needs in this environment, we’ve enhanced our value proposition on many of our consumer and small business products, including adjusting our Rewards Programs and added limited time offers and statement credits in categories that are relevant for today such as wireless, grocery, streaming services, business essentials and food delivery. Early results from these enhancements are encouraging. As I mentioned, we haven’t seen an increase in total customer attrition levels over prior years. In addition, we’re seeing increased card member engagement in several of the new categories where we’ve added value, including streaming and wireless services. We’re also building on our commitment to help small businesses around the world as they struggle to recover from the COVID-19 pandemic. Last month, we announced our largest-ever global Shop Small campaign, which includes a commitment of over $200 million over the next three months to help jump-start spending at small merchants in over a dozen countries globally. Finally, we’ve had very good results in helping our customers who have required financial assistance during the pandemic. Nearly three quarters [ph] of those in our short-term pandemic relief programs have successfully exited the program and are now current and paying their bills. Many of those needing more time have chosen to enter one of our enhanced longer-term relief programs, which provide additional flexibility in paying balances over time. These longer-term programs are now operating in 20 countries around the world. Our third priority is to structure the company for growth in the future. COVID-19 has had a major impact on the way we live and work, and some of the changes may last for some time, if not permanently. As we begin to see what shape the new normal will take, our focus remains on our customers as we look to deepen our relationships and take advantage of the opportunities that will help us grow our customer base going forward. In our consumer business, we’ll continue to enhance our value propositions to offer features, benefits and experiences that are particularly relevant to our customers’ changing needs. I’m not going to go into specifics now, but you’ll see us continue to refresh our current products and launch new ones, focusing on categories that build upon and add to our traditional T&E offerings. On the commercial side, we’re seeing a significant increase in demand for our automated B2B payment solutions as more customers look for efficient, secure ways to pay suppliers and manage their businesses remotely in this environment. We continue to introduce a range of new B2B payment solutions for businesses of all sizes, such as last week’s launch of American Express One AP for middle-market companies, our first proprietary accounts payable automation offering which is built on a technology of last year’s acompay acquisition. Going forward, we expect to see the trend towards digitizing the B2B payments process to continue, and we will continue to invest in these capabilities. For our merchant partners, we’re helping to meet their growing desire along with consumers for clean payments by raising our contactless transaction thresholds in 60 countries around the world. Throughout this period, we’re continuing to look for more ways to embed American Express into our customers’ digital lives. To facilitate the increasing number of online transactions, earlier this month, we announced, along with other major payment networks, that we’ll begin technical preparations for the international expansion of Click to Pay, a simple and secure digital checkout solution. We also continue to look for opportunities to extend our mutually beneficial strategic partnerships, such as the renewal of our long-standing relationship with British Airways that was announced this morning as well as the extension of our agreement with Marriott during the second quarter. Turning to internal changes, we expect to see an increase in the number of colleagues working from home going forward, which will influence how much real estate we need over the longer term. In the second quarter, we made decisions to accelerate the exit of surplus office space in several countries, and we’re assessing our long-term real estate strategy for a post-COVID world. Finally, as I’m sure you all saw, we recently announced that American Express became the first foreign payments network to be licensed to clear local currency transactions in Mainland China. This historic milestone is many years in the making and represents an important step forward in our long-term growth strategy as well as in the overall development of the payments industry in China. Our fourth priority is to remain financially strong. During the second quarter, we substantially increased our liquidity to record levels, and we further strengthened our capital position with capital ratios that are well above our targets and regulatory requirements. These robust capital and liquidity levels will enable us to continue operating through this uncertain period from a position of strength. Looking ahead, no one can tell how the COVID-19 pandemic will evolve or what its impacts will be on the global economy. So, we will continue to focus on what we can control, backing our customers, colleagues and communities, maintaining a tight rein on expenses while seizing opportunities to invest in initiatives that will enable our long-term growth and remain very transparent with all of our key constituents about the trends we’re seeing and how they are affecting our business. That’s a quick roundup of the progress we’ve made on the four priorities I laid out last quarter. These last few months have been extremely difficult for everyone, and I anticipate we’ll continue to face great challenges and uncertainty in the days ahead. While we can’t predict the future, I feel good about how we are managing through the crisis, and I remain confident that we are positioning the company to emerge from this period even stronger. This is how we’ve weathered crises time and time again over 170-year history, focusing on what we can control in the short term while positioning our company for the long term and always believing in our customers, in the power of our brand and in the resiliency and strength of our people. I’ll now turn it over to Jeff.

Well, thank you, Steve, and good morning, everyone. Just like I did last quarter, I’m going to talk you through a very different set of slides from what we have used historically in order to help you understand how our business is performing in this unprecedented environment, which is obviously unlike any environment any of us have faced historically. Since the biggest drivers of our financial performance in today’s environment are volume and credit trends, I will spend most of my time in these two areas. Let’s get right into our summary financials on Slide 3. As you can see, our results this quarter were significantly impacted by the global pandemic and the resulting containment measures. Second quarter revenues of $7.7 billion were down 28% and on an FX-adjusted basis driven by declines in spend, lend and other travel-related revenues as a result of COVID-19. Net income was $257 million in the quarter. You will notice an unusual effective tax rate this quarter of 58.7%. This is due to the combination of our lower overall pretax income and some sizable discrete items primarily related to certain foreign deferred tax assets that were impacted by the current environment. Earnings per share was $0.29 in the second quarter, down 86% from a year ago. Turning to the details of our performance. I will note that as was the case on our last earnings call, quarterly data just isn’t that helpful given the rapidly evolving environment. So we’ll continue to show you our billed business performance and certain other metrics, with a bit more granularity on monthly and recent trends. Let’s begin with billed business, which you see several different views of on Slides 4 through 9. Slide 4, shows you that worldwide billed business declines were the most significant, down around 40% year-over-year in the month of April, when the U.S. and most of our largest international markets were effectively shut down due to COVID 19. Since then, we’ve seen steady improvement in essentially all spending trends. While certain components of spend are now showing growth, our overall billed business volumes remain down year-over-year given the significant role that T&E spending has historically played in our business. In fact, you see on Slide 5 that while T&E spending remains down 75% in the first part of July, our non-T&E billings are actually up about 5% so far in July. This difference between the T&E and non-T&E billings performance particularly shows when you look at our commercial business, where you have the tale of two very different customer types. On Slide 6, you see that spending from our small and midsized enterprises, or SME customers, has held up much better through this period than the spending from our large and global corporate card clients. The majority of the spend from our SME customers is B2B spending while the spend from our large and global corporate card clients is predominantly T&E historically. I would also remind you here that spending from our SME customers represents the majority of our commercial billed business. You also see the impact of different mixes of T&E spend when you look at our international regions, which have a higher mix of T&E spend and thus are showing larger overall declines in volume as you see on Slide 7. Now as you would expect, we have seen an increasing shift to online and card-not-present spending in the current environment. This shift is most evident in the consumer business. And you can see on the right-hand side of Slide 8 that for the non-T&E categories, consumer online and card-not-present spend is actually up about 25% thus far in July. And finally, as we all look for signs of where the most recent trends might take us, you see some impact from various markets and states going through shifts in the opening of their economies. I would say, though, that these impacts tend to be modest, as you see one example of on Slide 9, which shows you the latest trends for our four largest states in the U.S. More generally, it remains remarkable how much of the world is moving in a fairly similar pattern. We are just clearly at a point where there’s still uncertainty about where that pattern will go next and at what pace. Turning next to loans and receivables on Slide 10. You see that total loans declined 15% and charge Card Member receivables declined 36% year-over-year in the second quarter, primarily driven by our lower spending volumes. This dynamic of our balance sheet shrinking in weaker economic times is an important aspect of our business model as it fuels the extremely strong liquidity and capital metrics I will discuss later. Looking forward into the third quarter, if you assume some continued modest improvement in spending levels, I’d expect the sequential trend in our balances to be fairly stable. Moving on to Slide 11, loan and receivable write-offs, excluding GCP. These things grew just 8% in the second quarter and clearly do not yet reflect incremental stress since not enough time has passed for the impacts of the current environment to flow through our traditional write-off credit metrics. It is worth noting that our delinquency dollars are actually down year-over-year. You do see an increase in write-off and delinquency rates year-over-year, but this is primarily due to the significantly lower loan and receivable balances as opposed to there being any significant change yet in these traditional credit metrics. In contrast, our provision expense on Slide 12 reflects the likely impact on future write-offs of the current stressed environment as we took an additional credit reserve build of $628 million in the second quarter. As you know, macroeconomic forecasts are a key factor in determining the credit reserve build under CECL, particularly in a volatile environment. So turning then to Slide 13, you will see the macroeconomic assumptions that were used in our CECL reserving models for the first and second quarters. This quarter, just like last quarter, you had a worsening macro environment. However, this quarter, there was an offsetting benefit mainly from volume declines, as you can see on Slide 14. We ended the second quarter with $6.6 billion of credit reserves, roughly $2.2 billion higher than the reserve level we had on our balance sheet after we implemented CECL at the beginning of Q1. The increase is from a combination of the $1.7 billion of credit reserves we added at the end of the first quarter as a result of the worsening economic outlook due to COVID-19 as well as the $628 million reserve build we took in the second quarter. Today, our lending and charge credit reserves on the balance sheet represent 8% of our loan balances and 1% of our Card Member receivable balances, respectively. So how do we feel about this level of reserves in today’s environment? Based on what we have learned and seen over the last few months, we do feel good about our risk management practices, the way we are managing risk through the current environment and the resulting level of reserves we are holding. It all starts with the changes we have made over the last few years in our risk management practices, which gave us a solid starting position. When the pandemic hit, we quickly rolled out a new short-term customer pandemic relief program, or CPR, offering primarily one-month payment deferrals, which we believe gave us better visibility into our customer situations, and then rolled out enhanced longer-term programs for customers that need extended assistance as they exit our CPR program. The nature of our charge card products also gives us very real-time visibility into our customers’ situations. And of course, like others, we are also helped by external factors such as the impact of unprecedented levels of government stimulus and the broad availability of forbearance programs. Internally, one way we track what is actually happening in our portfolio is through looking at the balances that are in delinquent status or in one of our financial relief programs, including the temporary CPR program. As you can see in the bar on the right-hand side of Slide 15, the total of these balances was $5 billion at the end of Q2, around $2.2 billion higher than the BAU level we had at the end of last year pre-COVID. Around the time, we reported earnings last quarter, this metric was up to a peak of $11.5 billion as we saw balances enrolled in the customer pandemic relief program peak in mid-April. Since then, the majority of customers exiting the CPR program have become current and the remainder either enrolled in one of our longer-term financial relief programs or are in the delinquent bucket. Today, we have stopped enrolling new customers in CPR, and only a relatively small balance remains in the program. You will find the details of our CPR [ph] program balances in mid-April and at the end of Q2 in the appendix on Slide 13. The increase in the longer-term financial relief program’s balance over the past quarter reflects the effectiveness of the enhancements we rolled out in April as we continue to work hard alongside our Card Members to help them identify the right program for them so that they can retain their membership and get to a good financial outcome for both our customers and our shareholders. Historically, we’ve seen that the credit outcomes of card members that enroll in our financial relief programs are better than those that do not, with around 80% of enrolled balances successfully completing these payment plans. And when you look at the delinquent and FRP balances on our books today, coupled with our historical experience with Card Member payment behavior, we believe that the reserves we have on our balance sheet are appropriate based on what’s happened so far. Now, only time will tell where the ultimate level of write-offs will be given the completely unprecedented nature of the global environment, but we feel good about our risk management capabilities and the work we’ve done so far to manage our exposure. Moving on to revenues on Slide 16. Revenues declined 28% on an FX-adjusted basis in the second quarter. As you would expect, given the spend-centric nature of our business model, revenue declines hit a trough for Q2 in the month of April and showed steady improvement throughout the quarter. Looking at the details of our revenue performance on Slide 17, you see the impact of the continued strong Card Member engagement that Steve discussed in the 15% growth in net card fees despite declines in all of the revenue lines due to the current environment. We expect this solid growth to continue with some modest deceleration since we have slowed proactive new card acquisition. Other fees and commissions and other revenues were down almost 50% year-over-year due to declines in travel-related revenue streams such as FX conversion fees, our business travel JV income share and commissions and fees from our consumer travel business. These revenue streams are a modest part of our total revenue and typically don’t change much quarter-to-quarter on a BAU environment, but continued to be down significantly year-over-year in the second quarter due to the COVID second quarter due to the COVID impact on travel. Turning to the details of net interest income and yield, I would move you ahead to Slide 18. On the left-hand side, you see that net interest yield on our Card Member loans increased 70 basis points year-over-year in the second quarter, driven primarily by mix benefits due to a faster decline in transactor loans relative to revolving loans as well as our ongoing efforts to effectively price for risk. Moving to the right, net interest income declined 8% on an FX-adjusted basis, which was less than the loan declines we saw in the second quarter due to the yield benefits I just spoke about. Our largest component of revenue, discount revenue, declined 38% in the second quarter, as you can see on Slide 19. As expected, the contraction in discount revenue was larger than the decline in billed business due to the much larger declines we saw in higher discount rate T&E spend versus lower discount rate non-T&E spend in the second quarter. The divergence in T&E and non-T&E billing trends drove a 14 basis point decline in the average discount rate in the second quarter relative to the prior year. Looking forward, if T&E spending remains suppressed, we would expect a similar level of discount rate erosion in the third quarter. Moving on to expenses on Slide 20. We are continuing to break out our expenses between variable customer engagement expenses, which come down naturally as spend declines and benefits usage changes, and marketing and OpEx, which are driven by management decisions. Variable customer engagement expenses were down 47% year-over-year driven by lower spend and lower usage of travel-related benefits. The year-over-year decline in variable customer engagement expenses provided roughly a 60% offset to the revenue decline in the second quarter, a bit more than I would expect to see going forward. Moving on to marketing and OpEx. As we mentioned in our Q1 earnings call, we made the decision back in March to aggressively reduce costs across the enterprise for the balance of the year but also to reinvest a portion of those savings in our existing customer base. As a result, we dramatically reduced our proactive marketing efforts for new card acquisition and reinvested in value proposition enhancements, resulting in a 16% decline in marketing expenses in the second quarter. This outcome is a good example of what we’ve long said about the flexibility we have around our marketing investment levels, which can be pulled back as well as redeployed quickly if market conditions and the universe of attractive opportunities change. Operating expenses were down 7% year-over-year in the second quarter, and we are on track to achieve our target of $1 billion OpEx reduction year-over-year cumulatively across Q2 through Q4. Moving last to capital and liquidity on Slide 21. Our capital and liquidity positions remain tremendously strong and strengthened even further in the second quarter. We also saw healthy deposit growth of 16% during the second quarter even as we adjusted pricing given the current rate environment, as you can see on Slide 31, the Appendix. Due to the countercyclical nature of our balance sheet, our CET1 ratio increased to 13.6%, and our cash and investment balance grew to a record $61.4 billion in the second quarter. We continue to have significant flexibility to maintain a solid balance sheet in periods of uncertainty or stress. And with our strong capital position, we have the capacity and intend to continue to pay our dividend in the third quarter. We continue to have significant flexibility to maintain a strong balance sheet in periods of uncertainty or stress. And our strong capital position provides the capacity, and we will pay our dividend in the third quarter and intend to pay it beyond, subject to our Board approval and so long as financial conditions support it. In summary, no one can know how the future will play out, but we feel good about how we are managing the company for the long term. This morning, we have been clear about how the current unprecedented times are impacting us financially. Looking forward, we have tremendous capital and liquidity strength, the continued engagement of our customers with our brand, and we’re confident that we are focused on the right things to position American Express to grow as the current challenges inevitably recede. With that, I’ll turn the call back over to Vivian.

Thank you, Jeff. Before we open the line for Q&A, I will ask those in the queue to please limit yourself to just one question. Thank you for your co-operation. And with that, the operator will open up the line for questions. Operator?

[Operator Instructions] Our first question comes from the line of Sanjay Sakhrani with KBW. Go ahead, please.

Thanks, good morning. I’m glad you guys are doing all right, and thank you for the added disclosures in the deck. Those were great. I guess, Steve, you pointed out that conditions are a little bit clearer now versus last quarter. So, I’m curious what your views are on T&E and the size of the market and if your views have changed in terms of there being any structural impact to the market. And then how can we think about American Express responding to that long term? Is B2B a realistic solution over the intermediate term? Thanks.

Good to hear from you, Sanjay. Let me provide a little context first and then sort of answer the question. So when you look at our overall spending, 70% of our spending before this crisis was non-T&E and growing faster than our T&E business. And 30% was T&E. To drill down a little bit, our corporate card business was 9% of our overall business with about 55% to 60% of that being T&E, and then – and not growing all that quickly. And then you look at our SME business, which has been the most resilient at this particular point in time, and that business makes up 75% of our commercial business overall and is doing quite well, and probably close to 80% of that spend is non-T&E. So, when we look at what’s going on right now, and we made – we gave you, obviously, disclosure up to almost mid – sort of mid-July, we see growth in non-T&E, but we see T&E as still being slow. We’re seeing restaurants come back obviously faster than you see airlines or hotels coming back, but I also think what you’re seeing is there is an unbelievable demand for people to travel. They may not be the same types of travel, but you are seeing people driving to different locations, and albeit when they come back quarantining, but they are driving to different locations. And so we’re seeing a little bit up – we’re seeing a little bit – obviously a little bit of uptick in some of our lodging, which would include Airbnb as well and other entities like that. But I think as we think about this longer-term, and you only have to look at what the airline executives said over the last week or so, I think my view has not changed on corporate travel. I think corporate travel will take a while to come back. But eventually, we’ll get back to 2019 levels. You just won’t have all that growth that was happening in between. I think the demand for consumer travel, once consumers feel safe again, you will have this unbelievable pent-up demand for people to want to get out and travel. In fact, our co-brand cards in our consumer business are actually performing better than some of our proprietary cards. Now that may seem counterintuitive, but when you look at our partnership with Delta, Hilton, BA and so forth, these cards are performing better. Why are they performing better? Well, they’re performing better because 90% of the spending is not on the co-brand partner, 90% of the spending. These are not store cards. These are all-purpose cards. And a lot of people, their psychology is they save points for the big trip. The other part of the psychology is I want status, and I can get status through spending. And I think when this is over, status is going to be even more important as we move forward. So I don’t think, from a timing perspective, my view has changed. I think that will be driven by therapeutics. It will be driven by vaccine. It will be driven by the distribution and production of vaccines. But I think that as we look at our spending, we anticipate a slow climb back. And we’re seeing our consumers – by definition, consumers consume, and there is a pent-up demand to consume. And they will find other ways to consume, as we are seeing. From a value proposition perspective, because I’m sure that’s where people will go next, from a value proposition perspective, part of our DNA has always been to constantly refresh our value propositions. And as we’ve talked about, we’ve been talking about refreshing those value propositions from a lifestyle perspective. And so while not getting into specific details on value propositions for competitive reasons, what we’ve done in the short-term is some stopgap measures in terms of various credits and extension of benefits and things like that, which are support – doing two things: number one, showing our customers we’re thinking about them; but number two is actually getting more engagements in categories that we didn’t have as much engagement in. We’re – increased our engagement in wireless, and we increased our engagement in streaming. But you will see us continue to morph our value propositions into next year by adding on to our premium-value propositions with more lifestyle, non-T&E aspects and developing other value propositions for other products and services. So I hope I gave you sort of a general view of how we’re thinking about things.

We’ll go next to the line of Betsy Graseck with Morgan Stanley. Go ahead, please.

Hi, good morning. My question is…

Hi, Betsy.

Hi.

Hi.

I just wanted to understand a little bit on the credit side and the reserving that you did. I know you indicated that you feel like you’re in a good place. And so when I think about the reserving levels, I’m looking at the $6.6 billion versus roughly the $5 billion in the delinquency and financial relief programs that you’ve got. So is that how I should be thinking about the forward look? As these financial relief programs either increase or decrease, the reserve will flex around that? And maybe you can give us a sense as to how you’re seeing those reserve buckets between consumer and small business because there’s been a lot of questions around the small business exposure and risk that you’ve got. Thank you.

Yes. Two good questions, Betsy. I guess the numbers I would actually encourage people to think about are since the beginning of the crisis between last quarter and this quarter, we’ve added $2.2 billion, $2.3 billion of reserves. And of course, that is based upon CECL accounting, which is really about a forecast of the future, and that forecast of the future, I would tell you, while we don’t do our own economic forecasts, the external provider that we use does incorporate into their forecasts such things as government aid running out, such things as perhaps more small business failures and/or layoffs. So that all goes into that $2.2 billion to $2.3 billion CECL reserve build as a forecast. The reason we added Slide 15, which is something we really closely monitor internally, Betsy, is because it’s fact. It’s not a forecast. It shows you the actual experience that we have had through the end of June. And the number I would actually encourage you to look at on Slide 15 is the difference between the total dollars we had that were delinquent or in a financial relief program before COVID-19. The difference between that number and the end of July was $2.2 billion. And very importantly, I pointed out in my script our historical experience is that with people we get into one of our longer financial relief programs, we generally, over time, are able to manage to get about 80% of those balances. So when you look at these numbers and say, boy, we feel good about our credit reserves, we think they’re certainly appropriate, I would point out, depending on what your future view is of the economy, Betsy, if you think there’s going to be several more shocks, government aid running out, then we will need all those reserves. On the other hand, I think what Slide 15 would say if those shocks don’t occur, we may not need all those reserves. We’ll have to see. The last thing I’d say is if you go back 90 days, this is to your second part of your question, Betsy, initially there were a higher percentage of the dollars that were in the small business receivable and loan receivable balances that signed up for CPR than there were consumer. 90 days on now, we actually feel really good about the small business portfolio. And in fact, those numbers have come way down. And I think it’s important to remember – and Steve, you might want to talk for a second about this. I think people sometimes forget when they look at our small business segment and they think, oh my gosh, that’s restaurants and some of the harder hit sectors, that’s not actually who our small business Card Members are.

Yes. So just the other point of that question is there’s – in that FRP program, as Jeff said, historically, 80% wind up paying us. And when they do that now, they’ll get their membership back and what have you. But there was a – out of that, there’s more consumer in FRP right now than there is small business. But I think what’s really important about small business, you’ve got to look at the merchant business and you’ve got to look at the small business card business. They’re two completely different businesses. And while we have a huge preponderance of the restaurants across the world and particularly in the United States, from a merchant perspective – from a merchant acceptance perspective, only 3% of our small business customers are actually restaurants. The concentration of our small business portfolio is professional services, legal, finance, insurance, real estate, about 14%; construction, about 10%; and health care, about 5%. So when you think about small businesses, there’s a wide variety of small businesses. And I think we tend to think about small businesses as the restaurant and the local retail shop. We don’t tend to think about small businesses from a professional perspective. And there’s a lot of people getting a lot of things done in their homes because they’re not going anywhere at this particular point in time. So we’re seeing good activity in those segments. So I think that’s an important distinction between what our merchant base looks like and what our small business card base looks like.

Our next question will come from the line of Mihir Bhatia with Bank of America. Go ahead, please.

Hi, good morning. Thanks for taking my question. I wanted to just I appreciate your comments on the discount fees remaining strong this year and the near-term. But your proprietary cards in force did decline for the first time in quite a while. So I was curious. Is that just driven by slower acquisitions? And if you could really just provide some more color on just what you’re seeing in terms of attrition trends and what you’ve been doing to drive retention in this current effort. Thank you.

Well, so maybe a couple of points. First, I’d just remind everyone the context here is that for a couple years, the fastest-growing part of our revenue line by far has been net card fees. We feel really good about the level of Card Member engagement that, that represents. And even this quarter, in the face of all the challenges, that line grew 15%, point one. Point two, as Steve pointed out, when you look at our overall attrition levels, they have not gone up at all and are flat to down to where they were a year ago, which we think is a really strong statement about the continued engagement of our card members. What we did do is that we slowed our proactive acquisition because there’s just not enough visibility into the actual credit quality of applicants. So you saw our new cards acquired, which was also disclosed in parts of the press tables, were down significantly year-over-year. The other thing you would expect us to be doing from a risk management perspective is we have been very diligent about looking at people who are inactive card members and canceling those cards. You don’t want to have inactive cards sitting out there in the middle of an economic downturn. So really, that combination of slower new card number acquisition along with some of the inactive cancellations that we’re doing are why, when you look at that total card number, you see the numbers you do. But we feel really good about our attrition levels, we feel really good about our Card Member, and I’d expect to see net card fees continue to grow in the double digits.

Yes. I mean the most important thing – so if you look at exactly the number you looked at, that’s what you see. The most important thing for me in looking at the business is voluntary attrition, and voluntary attrition levels are down year-over-year. And from an acquisition perspective, you don’t want to be the spender or borrower here of last resort. And so we have been very, very circumspect about how we keep the channels going and what have you and who we take in and who we don’t take in. But what we’ve done is we’ve kept our channels open because – you’ve got to keep those channels open because you want to be able to turn them on at the appropriate time. There will be a pent-up demand, and I don’t want to have to sort of regen all the channels that we have. But the thing that I look at on a weekly basis – and we look at this by card level and card type, but I’m not going to get into it with you. But the reality is, in managing the business, I look at voluntary attrition, and that is down. And of course, in a situation like we’re in now, where over time we’ve been feeding the card acquisition machine, you don’t feed it to the same extent that we’ve been feeding it. And so it is down significantly, which is why you’ve seen the marketing expense go down, which is why you’ve seen us pivot our marketing investment from card acquisition to Card Member value and Card Member engagement. So I’m not concerned at all about the proprietary card numbers. Those numbers will come back up as we turn acquisition back on. But I do – what I do watch very carefully is the voluntary attrition numbers. And Jeff’s point is right. I mean we will cancel people because you do not want contingent liability out there in the environment. If they hadn’t been using you before, more than likely you don’t want them to be using you now.

We’ll go next to Chris Donat with Piper Sandler. Go ahead, please.

Hi, good morning. Thanks for taking my question. I wanted to ask about the impact of bankruptcies on your financial statements. Some of the – now we’ve seen some corporate issuers, and they’ll identify American Express as a creditor. And we did see in the variance analysis in the presentation that you had a $53 million write-off for receivables for a corporate client. So Jeff, can you just remind us sort of how those flow like in terms of recoveries? Do they show up in different places in the income statement? And how do they typically play out?

Yes. So Chris, the kinds of losses you’re mostly referring to, which are when a merchant goes out of business in a situation where either the merchant owes us money or we’re going to make good on certain Card Members who didn’t get their goods or services delivered, those are generally not going to appear as part of the credit provision. They’re generally going to appear in OpEx. Historically, that number has been completely insignificant. We’ve taken some modest hits, in the tens of millions of dollars charges, in the last two quarters. We manage it very closely. The one larger number you talked about, if you – and very quick reading on your part to get to the variance explanation, you would also note that due to a little bit of a cork in accounting, yes, we had a $53 million loss with an international merchant. On the other hand, that’s actually a merchant where we had some credit insurance, so we would expect to more or less fully recover that loss. It appears on a different line item in the P&L. So that’s all carefully footnoted there in the appendix. So look, we work closely with all of our merchants. We watch this very carefully. But historically, these just aren’t big numbers for us.

We’ll go next to the line of Craig Wasserstrom with UBS. Go ahead.

Hi, thank you. It’s Eric Wasserstrom. One question, Steve. Obviously, it was interesting, of course, to see the renewal with this – that you announced today. Generally speaking, as you’re approaching these co-brand renewals, how and to what extent are the current trends influencing how these deals are being struck, if at all, differently from the past?

Yes. So look, we’ve done – in the quarter, we did two – we did a renewal and an extension. We extended our Marriott agreement early in the quarter. And today, we announced the renewal to 2028 of BA – of British Airways. So let me just give you the context on how I think about these things. If I was thinking about these renewals and – for a 12 to 24 month period, I wouldn’t do them. But I’m thinking about this business for the long term. And in the long-term, these have been terrific partners. British Airways has been a terrific partner of ours for over 20 years. Marriott has been a partner of ours as they did the Starwood acquisition. We had Starwood for a number of years, and we’re very happy about that relationship. And the reality is, is that this pandemic will end. And as I mentioned earlier, when I look at the Delta and when I look at the Hilton Card, these are cards that were actually performing even better than some of our proprietary cards, and the reason for that is you have two great brands together with great value propositions. So as we think about these renewals, we think about them over the long-term. We don’t think about them just in a short-term period. And you see that in both of these renewals, there were upfront purchases of points, and that’s a way for us to help out our partners but also to help out our shareholders as well. So these are, again, long-term partnerships that have tremendous value, and we look at them over the life of these deals. And over the life of these deals, these will be good things for our shareholders and good things for our customers. And so – and that’s why we extended both of these deals at this particular point in time.

Our next question will come from David Togut with Evercore ISI. Go ahead, please.

Thank you, good morning. Steve, you’ve highlighted the search for more kind of cardholder value in your comments. And we’ve seen, for most of the card issuing banks in the second quarter reports and even in the Visa and Mastercard intra-quarter updates, the strength in debit. And I’m wondering whether this isn’t a time for American Express to introduce a debit card. To the extent we’re in a multiyear search for value here, tough economy, doesn’t that play to the consumer value proposition that could be with us for a while?

It’s something that we look at on an ongoing basis. Economics were a little bit different in debit. And so – and the value is – the value that you’re able to put on a debit card given the economics are a little bit different. But we continue to look at ways to fully service our customers not only from a lending perspective but a transaction spending perspective as well. So it’s something that we’ll continue to look at. And if in fact we believe it will add more value, then we will look to proceed. It was part of why we did our deal with PayPal to link Venmo in. We felt that while we didn’t need our own debit product, the ability to have the transfer of – from Venmo to American Express and vice versa is – was good. And look, as we launch China, that will be both a debit and a credit market for us. So I think it’s something that we constantly look at. And as you can see, there’ll be two sort of flavors of that while not having our own issued debit card at this particular point in time.

Our next question will be from Dominick Gabriele with Oppenheimer. Go ahead.

Thanks so much for taking my questions. As you guys look at your billed business growth numbers versus the peer data, I think some of the spend growth trends reflect the prudence of your customer base to dial back perhaps some of their discretionary spending. Can you just talk about some of the green shoots, if any, as to where your customer base has been diverting their spending from travel to other categories and how that spending behavior may have changed on a temporary basis versus more permanent? Thanks so much.

Yes. Look, I think that our spending base has been traditionally with – from a consumer perspective, more high-end consumer, more discretionary spending, more luxury spending. Over the last couple of months, it’s been hard to do that. It has been hard to take those trips. It has been hard to even go shopping for luxury goods. We’ve seen more online spending. Obviously, people are eating out less and they’re buying more groceries and what have you. But we believe there is a pent-up demand within our consumer base to spend. I think what you’re also seeing is lots of spending from our perspective in sort of home improvement area with people like Lowe’s and Home Depot and things like that where our Card Members are spending. The other piece of our overall spending really is as you think about our corporate spending. Our corporate spending is down about 50%. And so – and that’s traditionally the T&E piece. The B2B piece is still relatively strong. So I think while we look at it, we haven’t really seen our consumers really break out a lot of their spending at this point, which, from my perspective, is not necessarily a bad thing because, number one, it gives us more opportunity sort of down the road, and we are more than holding our own, obviously, from a financial perspective, both credit and profitability, and from a card value perspective with what we – with they’re doing. But I think time will tell if there are permanent shifts in spending. But I think that – as I said before, our consumers like to consume, and they will find other ways to spend and they’ll find ways to get more luxury goods and things like that.

We’ll go to the line of Mark DeVries from Barclays. Go ahead.

Yes. Thanks. And sorry if you’ve covered this in the prepared comments, but normally, Card Member rewards kind of move with billed business, but this quarter, it was down a lot more. Was that just a product of just lower spend in T&E, which has higher rewards attached to it? Or is there something you did actively there to manage that expense? And also, if revenues remain weak for a prolonged period of time, are there other things you’re looking to do to lower expenses?

Yes. So actually, Mark, you’re sort of dead on it. Normally, people should expect rewards to move roughly in line with billings. This quarter, it went down more, and that was driven by the fact that you’re correct, the higher-cost redemptions are the redemptions that people do for travel-related awards. One of the shifts, just like spend, as Steve was just talking about, has shifted a little bit from travel into other types of spending. Well, so if rewards shifted from the higher-cost travel to other things, particularly some of the online things we do with some of our partners, and so that’s why for this quarter, you saw rewards come down a little faster than just the billings. I don’t know that I’d – I think that trend may have played itself out. We’ll have to see.

The other thing that we did about a year ago is we did a deal with PayPal to be able to burn points at every PayPal merchant in the United States. And so we were starting to see PayPal kick up, and it was all about providing our Card Members with more and more options for rewards. And so again, is that a permanent trend? No. But I think we were starting to see that. So I think we’ll have a little bit more balance in redemption going forward as well.

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

Yes, good morning.

Hey, Craig.

How are you guys?

Good, how are you, Craig?

Great. Thank you. I wanted to go back to Sanjay’s comment and ask that you retain these disclosures after the pandemic. But just a suggestion. I wanted to ask if you’re seeing any – I’m trying to think through what retailers are doing now in response to what’s going on. This seems like this might be a once-in-a-lifetime opportunity for retailers to disintermediate their highest-cost cards, meaning travel-based rewards programs, and try to permanently push the narrative away from that. How are you thinking about that? How are you reacting to that? And are you hearing any discussions of that from executives? And then just a numbers question for Jeff. Jeff, what was the reserve coverage in the SME portfolio?

Yes. So Craig, I haven’t heard any of that. I think right now, retailers, restaurants and anybody else is trying to welcome people with open arms. Now is not the time to be aggravating your customers in any way, shape or form. And I think when customers are coming into establishments, they go there with the intent to not only support the establishment but to have a good time. And I’m not so sure they really want to be badgered or suppressed or anything else. I don’t see that. I have not seen that. I haven’t heard that. I haven’t heard that from other card executives. And I certainly haven’t seen that within our own portfolios. The other thing I would say is that I’m not seeing a big push on store cards right now either, which is probably not the most creditworthy segment. So I haven’t seen it. We’re always – look, Craig, we’re always looking for that, and that’s why we’re always trying to deliver value on both sides of the equation by driving in high-spending customers. And I just think at this time, it’s foolhardy for a merchant to sort of give their customer any reason to not want to come back to the store. So I haven’t seen it at all.

And Craig, in response to your second question, as I said in my remarks, overall, you had 8% of our Card Member loan balance reserved and about a little more than 1% on the Card Member receivables side and really reflecting something else I said earlier. One of the things that has pleased us in the last 90 days is that when you look at the reserve percentage on the loans side, which is where most of the exposure is, it’s actually lower for SMEs at 7% than it is for consumer, which is a little bit above 8%. 90 days ago, to be honest, it was not clear to us that’s where the trend was going to go, but that makes us feel pretty good. On the receivable side, on both the SME and consumer side, it’s around 1%.

Yes. Just one other point on that. There was a – early on coming out of the pandemic, you saw a group of merchants that we’re adding on sort of – regardless of how you pay, they were from a 3% to 5% COVID surcharge. They were actually calling it a COVID surcharge. They got ripped in the press, and they got ripped by their customers. If your costs are going up, raise your costs. But don’t surprise somebody at the end. So I think people right now are just happy with people coming into the store, albeit what that means, coming into a store, these days, whether you’re eating out in the street or you’re sort of dropping – drive by or pick up or shopping. So I just don’t see that happening in the short to medium-term.

Our final question will come from Don Fandetti with Wells Fargo. Go ahead.

Thanks. So Jeff, in terms of the state disclosure, and you think about consumer T&E, how impactful is sort of your top one or two markets, New York or California, if we see one of those open up or slow down, just to get a sensitivity, what that could do to T&E?

Well, so you’re correct, the states we chose to show in the slides are our four largest states: Texas, Florida, New York and California. I don’t think we’ve given the exact numbers, Don, in a while by state. What – although I’d kind of step way back. Remember, we’re a global company. The U.S. is only two-thirds of the business to begin with. And of course, we are spread across all 50 states. So no one state opening or closing at various levels is going to have a material impact on our trends. The other point I will come back to, Don, that I do think is not completely intuitive to people is when you look at the varying rate states have opened up, there’s a little bit of difference between states. If you look at that chart is New York – New York is still down a little bit more than in Texas or Florida, but it’s a pretty modest difference. So the most important thing is more where is the overall global economy going, at what rate we make some real medical strides here. And our business will respond.

With that, we will bring the call to an end. Thank you, Steve. Thank you, Jeff. Thank you again for joining today’s call, and thank you for your continued interest in American Express. The IR team will be available for any follow-up questions. Operator, back to you.

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