American Express 2010 Annual Report Download - page 23

Company to revise its on average and over time ROE financial
target to 25 percent or more.
In establishing the revised ROE target, the Company has
assumed that it will target a 10 percent Tier 1 Common ratio.
The actual future capital requirements applicable to the
Company are uncertain and will not be known until further
guidance is provided in connection with certain initiatives, such
as Basel III and the implementation of regulations under the
recent United States financial reform legislation. International
and United States banking regulators could also increase the
capital ratio levels at which banks would be deemed to be “well
capitalized”. Refer to Capital Strategy below. The revised ROE
target also assumes the Company would need to maintain capital
to finance moderate-sized acquisitions, although the actual
magnitude of these transactions cannot be determined at this
time. If the Company achieves its EPS target as well as the
revised ROE target, it would seek to return, on average and over
time, at least 50 percent of the capital it generates to
shareholders as a dividend or through the repurchase of
common stock rather than the 65 percent level referred to above.
Certain of the statements in this Annual Report are forward-
looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Refer to the “Forward-Looking
Statements” section below.
BANK HOLDING COMPANY
The Company is a bank holding company under the Bank
Holding Company Act of 1956 and the Federal Reserve Board
(Federal Reserve) is the Company’s primary federal regulator.
As such, the Company is subject to the Federal Reserve’s
regulations, policies and minimum capital standards.
CURRENT ECONOMIC ENVIRONMENT/OUTLOOK
The Company’s results for 2010 reflected strong spending
growth and improved credit performance. Throughout the
year cardmember spending volumes grew both in the United
States and internationally, and across all of the Company’s
businesses. Cardmember spending levels in 2010 reached
record levels by the end of the year.
During 2010, the Company continued to see a sharp
divergence between the positive growth rates in customer
spending on credit cards and lower borrowing levels, due in
part to changing consumer behavior and the Company’s strategic
(e.g., additional focus on charge and co-brand products) and
risk-related actions. While the offsetting influences of stronger
billings growth and lower loan balances challenged overall
revenue growth, the year-over-year benefits from improving
credit trends have provided an ability to invest in the
business at significant levels and also generate strong
earnings. Some of these investments are focused on near-
term metrics, while others are initiatives focused on the
medium to long-term success of the Company. These
investments are reflected not only in marketing and other
operating expenses, but also involve using the Company’s
strong capital base for acquisitions such as Accertify and
Loyalty Partner, which were announced during the fourth
quarter of 2010. Refer to “Acquisitions” below.
The improving credit trends contributed to a significant
reduction in loan and receivable write-offs and in loss reserve
levels over the course of 2010 when compared to 2009. Despite
the reduction in loss reserve levels, reserve coverage ratios
remain strong. It is expected that the year-over-year benefits
from improving credit trends will decrease over the course of
2011. While the Company invested at historically high levels in
2010, it intends to maintain the flexibility to scale back on
investments as business conditions change and the benefits
realized from improving credit trends lessen.
Net interest yield declined over the course of 2010. The lower
yield reflects higher payment rates and lower revolving levels,
and the implementation of elements of the Credit Card
Accountability Responsibility and Disclosure Act of 2009 (the
“CARD Act”), which were partially offset by the benefit of
certain repricing initiatives effective during 2009 and 2010.
The Company expects the net interest yield in the US
Consumer business to decline, moving closer to historic
levels, but this remains subject to uncertainties such as
cardmember behavior and the requirement under the CARD
Act to periodically reevaluate annual percentage rate
(APR) increases.
Despite improvement in parts of the economic environment,
challenges clearly remain for the Company, both in the United
States and in many other key regions. These challenges include
weak job creation, volatile consumer confidence, uncertain
consumer behavior, an uncertain housing market, and the
regulatory and legislative environment, including the
uncertain impact of the CARD Act, of the recently enacted
Dodd-Frank Wall Street Reform and Consumer Protection
Act and of the proceeding against the Company recently
brought by the Department of Justice (DOJ) and certain state
attorneys general alleging a violation of the U.S. antitrust laws.
In addition, during 2011 the Company will stop receiving
quarterly Visa and MasterCard litigation settlement
payments, and year-over-year comparisons will be more
difficult in light of the strong 2010 results. Refer to “Certain
Legislative, Regulatory and Other Developments”, “Other
Information — Legal Proceedings” and “Risk Factors” below.
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AMERICAN EXPRESS COMPANY
2010 FINANCIAL REVIEW