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…

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%…

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…

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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