American Express 2010 Annual Report Download - page 22

AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW
FINANCIAL REVIEW
The financial section of American Express Company’s (the
Company) Annual Report consists of this Financial Review,
the Consolidated Financial Statements and the Notes to the
Consolidated Financial Statements. The following discussion is
designed to provide perspective and understanding regarding
the Company’s consolidated financial condition and results of
operations. Certain key terms are defined in the Glossary of
Selected Terminology, which begins on page 61.
This Financial Review and the Notes to Consolidated
Financial Statements have been adjusted to exclude
discontinued operations unless otherwise noted.
EXECUTIVE OVERVIEW
American Express is a global service company that provides
customers with access to products, insights and experiences that
enrich lives and build business success.The Company’s principal
products and services are charge and credit payment card
products and travel-related services offered to consumers and
businesses around the world. The Company’s range of products
and services include:
•charge and credit card products;
•expense management products and services;
•consumer and business travel services;
•stored value products such as Travelers Cheques and other
prepaid products;
•network services;
•merchant acquisition and processing, point-of-sale, servicing
and settlement, and marketing and information products and
services for merchants; and
•fee services, including market and trend analyses and related
consulting services, fraud prevention services, and the design
of customized customer loyalty and rewards programs.
The Company’s products and services are sold globally to diverse
customer groups, including consumers, small businesses,
mid-sized companies and large corporations. These products
and services are sold through various channels, including direct
mail, on-line applications, targeted direct and third-party sales
forces, and direct response advertising.
The Company has also recently created an Enterprise Growth
Group to focus on generating alternative sources of revenue on a
global basis, both organically and through acquisitions, in areas
such as online and mobile payments and fee-based services.
The Company’s products and services generate the following
types of revenue for the Company:
•Discount revenue, which is the Company’s largest revenue
source, represents fees charged to merchants when
cardmembers use their cards to purchase goods and
services on the Company’s network;
•Net card fees, which represent revenue earned for annual
charge card memberships;
•Travel commissions and fees, which are earned by charging a
transaction or management fee for airline or other travel-
related transactions;
•Other commissions and fees, which are earned on foreign
exchange conversions and card-related fees and assessments;
•Other revenue, which represents insurance premiums earned
from cardmember travel and other insurance programs,
revenues arising from contracts with Global Network
Services’ (GNS) partners (including royalties and signing
fees), publishing revenues and other miscellaneous revenue
and fees; and
•Interest and fees on loans, which principally represents
interest income earned on outstanding balances, and card
fees related to the cardmember loans portfolio.
In addition to funding and operating costs associated with these
types of revenue, other major expense categories are related to
marketing and reward programs that add new cardmembers and
promote cardmember loyalty and spending, and provisions for
anticipated cardmember credit and fraud losses.
Historically, the Company sought to achieve three financial
targets, on average and over time:
•Revenues net of interest expense growth of at least 8 percent;
•Earnings per share (EPS) growth of 12 to 15 percent; and
•Return on average equity (ROE) of 33 to 36 percent.
In addition, assuming achievement of such financial targets, the
Company sought to return at least 65 percent of the capital it
generates to shareholders as a dividend or through the
repurchase of common stock.
The Company met or exceeded these targets for most of the
past decade. However, during 2008 and 2009, its performance
fell short of the targets due to the effects of the continuing global
economic downturn. The Company’s share repurchase program
was suspended in 2008 and, as a result, the amount of capital
generated that has been returned to shareholders has been
below the levels achieved earlier in the decade. Refer to Share
Repurchases and Dividends below for further discussion of the
Company’s share repurchase activity.
The Company is retaining its on average and over time
revenue and earnings growth targets. However, evolving
market, regulatory and debt investor expectations will likely
cause the Company, as well as other financial institutions, to
maintain in future years a higher level of capital than they have
historically maintained. These higher capital requirements
would in turn lead, all other things being equal, to lower
future ROE than the Company has historically targeted. In
addition, the Company recognizes it may need to maintain
higher capital levels to support acquisitions that can augment
its business growth. In combination, these factors have led the
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