American Express 2013 Annual Report Download - page 19

AMERICAN EXPRESS COMPANY
2013 FINANCIAL REVIEW
2012 results included:
폷$461 million ($328 million after-tax) of net charges for costs related
to reengineering initiatives, including a $400 million ($287 million
after-tax) restructuring charge in the fourth quarter;
폷$342 million ($212 million after-tax) in expense resulting from
enhancements to the process that estimates future redemptions of
Membership Rewards points by U.S. Card Members;
폷$153 million ($95 million after-tax) in charges related to Card
Member reimbursements in the fourth quarter, in addition to
amounts incurred in prior quarters during the year; and
폷A tax benefit of $146 million related to the realization of certain
foreign tax credits.
2011 results from continuing operations included:
폷$300 million and $280 million ($186 million and $172 million after-
tax) of benefits related to the MasterCard and Visa litigation
settlements, respectively;
폷$188 million ($117 million after-tax) in expense reflecting
enhancements to the process that estimates future redemptions of
Membership Rewards points by U.S. Card Members;
폷$153 million ($106 million after-tax) of net charges for costs related
to reengineering initiatives; and
폷Tax benefits of $102 million and $77 million related to the favorable
resolution of certain prior years’ tax items and the realization of
certain foreign tax credits, respectively.
FINANCIAL TARGETS
The Company seeks to achieve three financial targets, on average and
over time:
폷Revenues net of interest expense growth of at least 8 percent;
폷Earnings per share (EPS) growth of 12 to 15 percent; and
폷Return on average equity (ROE) of 25 percent or more.
If the Company achieves its EPS and ROE targets, it will seek to return
on average and over time approximately 50 percent of the capital it
generates to shareholders as dividends or through the repurchases of
common stock, which may be subject to certain regulatory restrictions
as described herein.
FORWARD-LOOKING STATEMENTS AND NON-GAAP MEASURES
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 “Cautionary Note Regarding
Forward-Looking Statements” section.
The Company prepares its Consolidated Financial Statements in
accordance with accounting principles generally accepted in the
United States (GAAP). However, certain information included within
this Annual Report constitute non-GAAP financial measures. The
Company’s calculations of non-GAAP financial measures may differ
from the calculations of similarly titled measures by other companies.
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 2013 reflect healthy spending growth,
continuing strong credit quality, effective control of operating
expenses and a strong capital position. Despite a challenging economic
environment, billed business grew 7 percent over the prior year. Card
Member billed business volumes grew both in the U.S. and
internationally, and across all of the Company’s businesses.
The Company’s average loans also continued to grow year over
year, which, along with a higher net yield and a lower cost of funds,
led to a 9 percent increase in net interest income. At the same time,
lending write-off rates remained at historically low levels. While the
Company expects lending write-off rates will increase from such
levels, the Company has not experienced overall credit deterioration,
as total delinquency rates remained consistently low during the year.
The Company effectively controlled its expenses, with total
expenses decreasing 1 percent over the prior year. The Company
continued to invest in growth opportunities in the U.S. and
internationally as marketing and promotion expense grew by 5
percent as compared to the prior year. Operating expenses decreased 4
percent as compared to the prior year. Excluding the impact of the
restructuring charge taken in the fourth quarter of 2012, adjusted
operating expenses were flat year over year.1The Company’s aim is to
have operating expenses grow at an annual rate of less than 3 percent
in 2014.
As discussed below within Certain Legislative, Regulatory and
Other Developments, the regulatory environment continues to evolve
and has heightened the focus that all financial services firms, including
the Company, must have on their controls and processes. The review
of products and practices will be a continuing focus of the Company,
as well as by regulators. In addition, regulation of the payments
industry has increased significantly in recent years and governments
in several countries have established or are proposing to establish
payment system regulatory regimes.
1Adjusted operating expenses, a non-GAAP measure, is calculated by
excluding from 2012 operating expenses of $13.2 billion the $400
million restructuring charge taken in the fourth quarter of 2012.
The year over year growth rate is calculated by comparing 2012
adjusted operating expenses of $12.8 billion with 2013 operating
expenses of $12.7 billion. Management believes adjusted operating
expenses is a useful metric to evaluate the Company’s performance
against its operating expense goal for 2013.
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