American Express 2002 Annual Report Download - page 53

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AEB had worldwide loans outstanding at December 31, 2002 of approximately $5.6 billion, up from $5.3 billion at December
31, 2001. Activity during 2002 included a $400 million net decrease in corporate and other banking loans, which was more
than offset by a $500 million increase in consumer and private banking loans and a $200 million increase in financial institu-
tion loans. As of December 31, 2002, consumer and private banking loans comprised 66 percent of total loans versus 60 per-
cent at December 31, 2001. Corporate Banking and other loans comprised 9 percent of total loans at December 31, 2002 versus
18 percent at December 31, 2001. In addition to the loan portfolio, other banking activities, such as securities, unrealized gains
on foreign exchange and derivatives contracts, various contingencies and market placements added approximately $8.0 billion
and $7.3 billion to AEB’s credit exposures at December 31, 2002 and 2001, respectively. Included in these additional exposures
are relatively lower risk cash and securities related balances totaling $5.8 billion at December 31, 2002.
Risk Management
AEB employs a variety of financial instruments in managing its exposure to fluctuations in interest and currency rates.
Derivative instruments consist principally of foreign exchange spot and forward contracts, foreign currency options,
interest rate swaps, futures and forward rate agreements. Generally, they are used to manage specific interest rate and
foreign exchange exposures related to deposits, long-term debt, equity, loans and securities holdings. At December 31, 2002,
interest rate products with notional amounts totaling approximately $7.7 billion and $0.6 billion for trading and nontrading
purposes, respectively, were outstanding. Notional amounts outstanding at December 31, 2002 for foreign currency products
were approximately $18.1 billion and $5.3 billion for trading and nontrading purposes, respectively. Additionally, equity
products with notional amounts of $120 million were outstanding at December 31, 2002.
The negative effect of a 100 basis point increase in interest rates on AEB’s pretax earnings would be $18 million at both
December 31, 2002 and 2001. The effect on earnings of a 10 percent strengthening of the U.S. dollar would be negligible and,
with respect to translation exposure of foreign operations, would result in a $16 million and $11 million charge against equity
as of December 31, 2002 and 2001, respectively.
AEB utilizes foreign exchange and interest rate products to meet the needs of its customers. Customer positions are usually,
but not always, offset. They are evaluated in terms of AEB’s overall interest rate or foreign exchange exposure. AEB also takes
limited proprietary positions. Potential daily exposure from trading activities is calculated using a Value at Risk methodology.
This model employs a parametric technique using a correlation matrix based on historical data. The Value at Risk measure
uses a 99 percent confidence interval to estimate potential trading losses over a one-day period. At December 31, 2002 and
2001, the Value at Risk for AEB was less than $2 million.
Asset/liability and market risk management at AEB are supervised by the Asset and Liability Committee, which comprises
senior business managers of AEB. It meets monthly and monitors: (i) liquidity, (ii) capital exposure, (iii) capital adequacy,
(iv) market risk and (v) investment portfolios. The committee evaluates current market conditions and determines AEB’s tactics
within risk limits approved by AEB’s Board of Directors. AEB’s treasury and risk management operations issue policies and
control procedures and delegate risk limits throughout AEB’s regional trading centers.
CORPORATE AND OTHER
Corporate and Other reported net expenses of $176 million, $187 million and $180 million in 2002, 2001 and 2000, respectively.
2001 results include $14 million ($9 million after-tax) of the restructuring charges noted earlier.
Included in 2002 results were the final preferred stock dividends from Lehman Brothers totaling $69 million ($59 million after-
tax) compared with $46 million ($39 million after-tax) in both 2001 and 2000. The dividends were offset by business building
initiatives in each year.
I51 AXP IFINANCIAL REVIEW