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American Express Company (NYSE:AXP)
Q2 2018 Earnings Conference Call
July 18, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Okay, ladies and gentlemen, thank you for standing by. Welcome to American Express Q2 '18 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you wish to ask a question, please press * then 1 on your touchstone phone. Instructions will be given at that time. If you should require assistance during the call, please press * then 0.

I'd now like to turn the conference over to our host, to Mr. Edmund Reese, Head of Investor Relations. Please go ahead.

Edmund Reese -- Senior Vice President, Head of Investor Relations 

Thank you, Laurie. Welcome. We appreciate all of you joining us for today's call. The discussion contains certain forward-looking statements about the company's future financial performance and business prospects, which 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 forward-looking statements are set forth within today's presentation slides and in the company's reports on file with the Securities and Exchange Commission.

The discussion today also contains certain non-GAAP financial measures. Information relating to comparable GAAP financial measures may be found in the second quarter 2018 earnings release and presentation slides as well as the earnings materials for prior materials that may be discussed, all of which are posted on our website at ir.americanexpress.com. We encourage you to review that information in conjunction with today's discussion.

Today's discussion will begin with Steve Squeri, Chairman and CEO, who will start the call with some remarks about the company's progress and results. Then, Jeff Campbell, Chief Financial Officer, will provide a more detailed review of Q2 financial performance. Once Jeff completes his remarks, we'll move to a Q&A session on the quarter's results with both Steve and Jeff.

With that, let me turn it over to Steve.

Stephen Squeri -- Chairman and Chief Executive Officer

Thanks, Edmund, and good afternoon, everyone. As I've been meeting with shareholders and analysts over the past several months, a number of you have said you would like to hear my views of the company more frequently. With that in mind, I plan to join our earnings calls with Jeff going forward to share my perspective on our strategic progress and quarterly results. Jeff will continue to cover our financial performance in more detail before we take your questions.

As you saw in our release earlier today, we had a strong second quarter that built on the momentum we started the year with. Revenues grew 9% and earnings per share were $1.84. We are a globally integrated payments company and the power of our differentiated business model was evident throughout the results. Our revenue growth was driven by broad-based increases in cardmember spending and fees and it also reflected higher loan volumes, which that spending growth helped to generate.

Second, we're both strengthening relationships with current customers and attracting new ones through innovative products and services. Third, our disciplined control of operating expenses combined with revenue growth gave us the flexibility to make substantial investments in our global brand campaign, additional customer benefits and digital capabilities that will help us grow our business over the long-term.

In addition to our business results, we completed this year's CCAR process with a green light to increase the quarterly dividend and we are resuming our share buybacks this quarter. All in all, I feel very good about our results to date. Looking ahead, we expect 2018 revenues to be up at least 9% and we are reaffirming our full-year EPS guidance at the high-end of the range we set for this year, which is the $6.90 to $7.30 per share.

Coming into the CEO role earlier this year, I focused the organization on four strategic imperatives. You may recall that I first shared them with you back in October of last year. At the mid-year mark, I'm pleased to report solid progress on each.

The first imperative is to expand our leadership in the premium consumer space worldwide. We once again delivered record performance on our US Platinum Card. We continue to refresh our premium product line globally, with advancements to our Platinum Card in Mexico and Hong Kong and our Gold Card in the UK. In addition, we announced new co-branded cards with Marriott and lunched a new Cash Magnet card in the US. This follows the launch earlier this year of a new suite of co-branded products with Hilton.

We are continuing to invest in differentiated value propositions that distinguished American Express from the competition. We provide our card members with global access to exclusive services and experiences. We continue to expand the global range of these offerings and have recently announced the expansion of our Centurion Lounges, with new openings scheduled in Los Angeles and Denver and a second one in New York at JFK, our official partnership with the Wimbledon Championship, and a new partnership with Saks to offer value to our joint customers.

Our second strategic imperative is to build on our strong position in commercial payments. Just last month, we announced a multi-year partnership with Amazon, which will include a new co-branded small business credit card in the US. This is an exciting opportunity and a great example of why we are the small business partner of choice because of our ability to bring value to partners and their customers by leveraging our brand, innovative technology, data analytics, and other unique assets. In addition, we also introduced new value propositions for Hilton and Marriott small business card members in the US.

Our third strategic imperative is to strengthen our global integrated network to provide unique value. We introduced a new card with Wells Fargo, one of our larger G&S partners in the US. This is an important win and another validation of our differentiated benefits and services, like access to one-of-a-kind experiences and special offers. That enables us to win in a competitive marketplace. We continued our progress toward parity coverage in the US and expanded our merchant network internationally.

Our fourth strategic imperative is to make Amex an essential part of our customers' digital lives. Technology and innovation are the engines that continue to fuel our brand and customer value propositions and we are making investments to enhance our capabilities in this space. We are developing artificial intelligence, machine learning, and blockchain capabilities to better serve our customers.

Our mobile enhancements are being recognized and we placed first in J.D. Power's 2018 mobile app competitive survey, up from sixth in 2017. We expanded the chat-based servicing feature on our mobile app as another way to serve our customers where, how, and when they want, and we are continuing to expand our capabilities as we integrate two specialized platforms we recently acquired, Mezi and Cake, into our digital offerings.

We are also experimenting with technology and recently announced a pilot with the online retailer, Box, using blockchain and our membership rewards program to give cardmembers more ways to earn points and merchants more ways to drive business.

Two additional and important second quarter items are worth noting. First, we launched our new global brand campaign, which underscores the powerful backing of American Express. The campaign is being used across both our consumer and business segments and it drives home what our brand is all about, building enduring customer relationships through their intertwined business and personal lives.

Finally, my list of wins for the quarter includes the favorable ruling we received in a major antitrust case at the Supreme Court. The Court found that our differentiated business model has spurred innovation in the payments industry. Their ruling was a welcome end to a long legal battle with the Department of Justice. All in all, it was a very good quarter. Six months into my tenure as CEO, I feel good about what we've accomplished, I'm excited about the opportunities that lie ahead, and I'm confident in our ability to deliver sustainable growth for our shareholders.

Let me now turn the call over to Jeff, who is going to provide more detail about our financial results.

Jeffrey Campbell -- Chief Financial Officer

Thanks, Steve, and good afternoon, everyone. Good to be here today to talk about another quarter with strong performance. To get right into our summary financials on slide three, second quarter revenues of $10 billion grew 9%. Another quarter of revenue growth at the higher levels we have seen since the financial crisis. Even more importantly, this result was driven by strong growth across all of discount revenues, B-revenues, and net interest income.

Given recent strength in the dollar, our reported revenue growth was pretty consistent with our FX-suggested revenue growth, unlike the last few quarters, where the weaker dollar caused our reported revenue growth to be above our FX-adjusted revenue growth. Net income was $1.6 billion, up 21% from a year ago, and earnings per share was $1.84 for the quarter, up 25% for the prior year.

Now, of course, our earnings growth this year reflects the passage of the Tax Act last December, but it also reflects our business model's steady and consistent earnings growth, along with the impact of our share repurchases lowering the shares outstanding by 3% despite the suspension of our share repurchase program for the first half of 2018. All in, these are results we feel really good about.

Looking at the details of our performance, our start with build business, which you see several views of on slides four through six. I'd start by pointing you to the top right of slide four, where you see that there are two different trends impacting our overall billings growth. This quarter, our proprietary billings make up 85% of overall billings and growth in these proprietary billings accelerated 12% up from 11% in the first quarter, all on an FX-adjusted basis.

This is another sign of the momentum we have in our business. You can also see on the top right of slide four that the other 15% of our overall billings, which come from our network business, GNS, is now seeing the expected impacted of regulation in the European Union in Australia, and hence, billings in GNS were down 3%. This caused our total AXP billings to come in at 9% for Q2.

As you turn to slide five, I'd remind you that our results this quarter reflect the organizational changes Steve has made since becoming CEO. So, we now have three reportable operating segments -- global consumer, global commercial, and global merchant and network services.

Although we are reporting financial results on a global consumer basis, we do want to continue to provide you transparency into both the US and international consumer metrics. So, here on slide five, you can see all of the diverse parts of our business maintaining or accelerating good growth rates aside from GNS.

Turning to slide six, we have a more detailed view of billings by customer segment. This slide also serves as a helpful reminder of the relative size of each customer segment. Global commercial and global consumer are roughly the same size, representing 41% and 44% of Q2 billings, respectively. Global network services banks up the remaining 15% of billings.

Starting on the left with our small and midsize enterprise card members or SMEs, US SME was up 10% and has been relatively stable for several quarters. International SME, which has consistently been one of our strongest growing customer segments, accelerates to 25% on an FX adjusted basis in the second quarter, reflecting our increasing investment in this particularly attractive component of our global opportunities.

The large and global customer segment continued to perform nicely, with 9% growth on an FX-adjusted basis. And on a related note, you can see in the earnings tables that the company's overall global airline billings continue to accelerate 7% on an FX-adjusted basis and US GNE billings growth remains strong at 8%.

Moving to US consumer, which made up about 32% of the company's billings in the second quarter, we are pleased to report our second consecutive quarter of double-digit growth. We feel particularly good about our US consumer platinum performance, where growth did not slow as we expected this quarter as we fully lapped the changes that we made to the product early in 2017.

Around half of our acquisition on US consumer platinum continued to come from millennials. I would also point out that similar to last quarter, our strong billings growth reflects both our continued focus on customer engagement as well as general strength we are seeing in consumer spending and confidence within our premium US consumer base.

Moving to the right, we continue to see strong growth for international consumer, which is up 18% on an FX-adjusted basis, up from 16% in Q1. Although it is only 12% of overall billings, we feel really good about the widespread strong growth in key markets with FX-adjusted growth of 13% in Japan and over 20% in both Australia and the UK.

Last, on the right, as I mentioned earlier, global network services was down 3%, driven by the impacts of regulation in the European Union and Australia. Although network billings are down in these regions, we are seeing strong growth on the proprietary side, as I just mentioned.

Additionally, if you were to exclude the European Union and Australia markets, the remaining portion of GNS was up 8%. Overall, we feel good about the diverse sources of growth. We have been sustaining double-digit billings growth in US consumer and US SME while also accelerating billings growth across both international consumer and SME as well as with large and global corporate clients.

Turning next to loan performance on slide seven, our total loan growth was 16% in the second quarter and in line with the prior quarter. Once again, over 60% of our growth came from existing customers. I'd remind you that we completed the Hilton portfolio acquisition earlier this year, which contributed about 140 basis points and 130 basis points to the growth rates in the first and second quarters, respectively.

On the right, net interest yield was 10.6%, up 30 basis points versus the prior year. For some time now, we have been saying that we expect year over year growth and net interest yield to moderate. You can clearly see that playing out. While net yield is still growing over the prior year, the increase has moderated over the last few quarters as we lapped some of our pricing initiatives and experienced higher funding costs.

Lastly, I would add that we typically see a seasonal decline in net yield from the first to second quarter, which you do see this year with net yield down 20 basis points sequentially in the second quarter.

To spend a minute now on funding, I'd remind you that our funding strategy is to be active in three markets -- deposits, asset-backed securities, and unsecured debt. Focusing on deposits, we have about 67 billion in total to June 30th, with about 31 billion coming from sweep accounts and CDs, which tend to move in line with market rates.

The remaining 36 billion in deposits is coming from our online personal savings program, which in a rising rate environment, is generally our least expensive source of funding. We expect to continue to grow our online savings program steadily over the next few years, facilitated by the recent consolidation of our two US banks.

In terms of rate sensitivity, since the Fed started raising rates back in mid-2016, our beta has been about 0.45 but is trending up. More recently, our beta is closer to 0.7, which is also what we use for internal planning purposes. Stepping back, while we view a rising rate environment as a modest headwind, it is usually mitigated in part by a stronger economic environment, which is certainly what we see currently.

Turning next to credit metrics, which you see on slide eight -- starting on the left with the lending portfolio, the lost rate for the quarter was 2.1%, up about 30 basis points from last year and 10 basis points for the prior quarter. As a reminder of what we've been saying for quite some time, we expect these rates to drift up. They have. In fact, lending write-off rates in the second quarter were slightly better than we originally expected in our plan for the year.

On the right side, you can see net write-off rates in our charge portfolio as well as the global corporate payments loss ratio. There's often some quarterly volatility in these rates due to seasonality, and this quarter's write-off rate included some write-offs related to the hurricanes last fall, for which we had previously taken a reserve.

Looking forward, we don't see anything in the performance of our tenured customers to suggest any change in the broader environment. Given these credit metrics and moving to slide eight, provision was $806 million, up 38% in the second quarter, right in line with our full-year expectation of mid-30% growth, despite loan growth running a bit higher than we had originally planned.

Turning now to revenues on slide 10. FX-adjusted revenue growth was 9% in the second quarter. This represents our fifth-straight quarter of having adjusted revenue growth of at least 8%, driven by steady growth from all of spending, fees, and lending.

On slide 11, you see the component of our total revenue. Discount revenue, which makes up over 60% of our revenue, was up 8%, which I'll come back to on the next slide. Net card fees growth was 9%, driven by growth in key international markets as well as Platinum and Delta in the US. We continue to feel good about our ability to generate card fee revenues by offering differentiated value propositions right in the face of constant competition. Another example, year to date through May, over 60% of our global consumer new card acquisitions were on fee-paying cards. Other fees and commissions were up 5%, while other revenue was down 8%, driven by several discreet items.

Lastly, let's turn to net interest income, which I would point out is down to being just 18% of our second quarter revenue. For this quarter, net interest income was up 19%, driven by the growth in loans and yield that I mentioned a few moments ago.

Turning now to slide 12 to cover discount revenue, our biggest component of revenue. Starting on the left, discount rate in Q2 was 2.37%, stable for the last few quarters and down 5 basis points from a year ago. As you have heard both Steve and I talk about, our focus is on driving discount revenue growth, not on managing the average discount rate.

This has led us to strategies like increasing coverage with small merchants and deepening relationships with our key strategic partners, which we believe are key components helping drive the strong discount revenue growth you see on the right side of the page. Discount revenue growth was 8% on an FX-adjusted basis for the second quarter, maintaining the strong momentum of the prior quarter.

Turning now to expenses on slide 13. Before coming to the components of customer engagement, marketing and business development, cardmember rewards, and cardmember services on the next slide, let me cover operating expenses.

Operating expenses were down 2% this quarter, and though this reflecting a number of discreet items, even excluding these items, we continue to have well-controlled operating expenses. Our ability to generate steady OpEx leverage continues to be a key part of our financial model and one that we have great confidence in sustaining over the long-term.

So, that brings me next to customer engagement on slide 14. In total, customer engagement expenses were $4.5 billion in the second quarter, up 13% from the prior year. Starting at the bottom, we have the marketing and business development line, which has two components -- our traditional marketing and promotion expenses as well as payments we make to certain partners, primarily corporate clients, GNS partner banks, and co-brand partners.

This line in total is up 14% versus the prior year, and there are three things that I would highlight. As I said last quarter, we have some increases in partner payment this year due to recent cobrand negotiations and agreements and growth in our corporate business. Second, Steve talked about the launch of our new global brand campaign in the second quarter and as you would expect, we have increased marketing spend to support the brand refresh.

And third, the benefits of the Tax Act and our strong performance year to date, have allowed us to ramp up somewhat the spending we do to drive long-term sustainable revenue and earnings growth. As I said on last quarter's earnings call, we began the spending in the second quarter and expect it to continue through the balance of the year.

I would point out that the confluence of all these factors allowed us to acquire 2.9 million new proprietary cards globally this quarter, which is one of our highest acquisition quarters recently when you set aside the Hilton portfolio purchase. Moving up to rewards expense, you can see that it was up 11% from the prior year. Rewards were expected to and did growth roughly in line with proprietary billings growth.

Moving then to the top of the slide, as you have seen for some time and as we continue to expect, cardmember services cost were our fastest-growing expense line, up 22% in the second quarter. The kinds of things that drive cardmember services costs are exactly the things that drive the differentiated value propositions that Steve discussed that are difficult for others to replicate, like this airport lounge access and other travel benefits.

Turning last to capital on slide 15 -- as you know, we suspended share repurchases for the first half of 2018 to rebuild our capital ratios following the $2.6 billion charge we took in Q4 2017 related to the Tax Act. Now, given our high ROE, we can quickly rebuild capital. So, at the end of the second quarter, our common equity tier one ratio had increased to 10.1%.

We are now at the low end of the 10% to 11% range that we are targeting. Given this, we will be resuming share buybacks in the third quarter as the Fed did not object to our CCAR submission that raises our dividend by $0.04 per quarter, beginning in the third quarter and returns $3.4 billion of capital through share repurchases over the next four quarters. Overall, this capital plan is consistent with our objective to target common equity tier one ratios of 10% to 11% while supporting asset growth and distributing capital to shareholders.

So, that brings us to our outlook and then we'll open the call to questions. As Steve mentioned, our expectation continues to be at the high-end of our original EPS guidance range of $6.90 to $7.30. We are really pleased with our revenue performance to date, and given the strong trends that we are seeing and the performance of our recent investments, we now expect revenue growth of at least 9% for the full year.

Our solid performance in the first half of the year has allowed us to raise our guidance to the high end of the original range, while also increasing our investments into areas we believe will drive long-term sustainable revenue and earnings growth.

This guidance is reflective of our simple financial model, in which we invest in our many and diverse growth businesses, generate operating leverage, and return capital to shareholders to drive steady and consistent revenue and EPS growth.

With that, let me turn it back over to Edmund to begin the Q&A.

Edmund Reese -- Senior Vice President, Head of Investor Relations 

Thank you, Jeff. Before we open up the line for Q&A, I'll ask those in the queue to please limit yourself to just one question. Thank you for your cooperation. With that, the operator will now open up the line. Operator?

Questions and Answers:

Operator

Thank you. We have a question from the line of Bob Napoli with William Blair. Please go ahead.

Bob Napoli -- William Blair -- Analyst

Thank you. Steve, just a question on page two, your strategic imperatives. Do you have specific measurements against each of those four that you're comparing yourselves to? Can you give any color on what you're looking at?

Stephen Squeri -- Chairman and Chief Executive Officer

Yeah. So, I think as we look at the four strategic imperatives, we've looked at these over the longer-term. So, while we're not looking at specific year to year growth targets, we really are looking at what from a capabilities and what from an accomplishment perspective -- so, let me just give you an example.

When we look at the premium segment, what we're really looking to do is to expand our definition of premium as you've thought about premium over the years, we've thought about premium from the perspective of premium wallets. We're really looking at that those that really look for premium service, premium access. So, that then includes to expand to more millennials. So, when we look at our Platinum acquisition and over half of our acquisition is coming from millennials. So, from that regard, it really is an expansion of the value proposition.

When we look at the second one as it relates to our competitive position. From a commercial perspective, things like our growth from an SME perspective and international, our continued growth and progress that we made from a cobrand perspective in the US with Hilton, with Marriott and the launch of the Amazon card. So, looking much more than just the metrics we have, but how we're embedding ourselves even more and the launch of working capital and so forth.

When we get into the network piece of it, we're really looking to expand with partnerships. Wells Fargo is a great example of that expansion and in addition, obviously, coverage, we continue to push on coverage and we've stated from a coverage perspective, we wanted to get parity coverage in the US by the end of 2019.

From a digital perspective, when we talk about being more central in people's digital lives, I think here, there's a lot of qualitative stuff that's going on. To be able to go from in the J.D. Power survey from number six last year from a mobile app perspective to number one -- why did we do that? Well, we really focused on engaging our customers in that app, number one, putting chat-based services within that, looking at other things from a digital perspective, whether it's the blockchain test that we're doing, our acquisition of Mezi and our acquisition of Cake.

So, as we think about those four things, we're really looking from an initiative perspective in how we're moving those things forward. I think the initiatives that I laid out and the specific actions that we've done is moving those business priorities forward for us.

Bob Napoli -- William Blair -- Analyst

Thank you. Appreciate it.

Operator

Thank you. Our next question will come from Chris Brendler with Buckingham. Please go ahead.

Chris Brendler -- The Buckingham Research Group -- Analyst

Hi, thanks for taking my question. To circle back on the US card business for a second, you said you had a Platinum refresh last quarter. How much of that Platinum refresh was lapping in the second quarter and more broadly, as you look out the rest of the year and all the marketing investments you made this quarter, is the plan for the second half to really continue to put the pedal to the metal on marketing and what does that mean for US bill business growth? Thanks.

Jeffrey Campbell -- Chief Financial Officer

Well, I think Chris, to be clear, as you recall, in the US, we refreshed both the consumer as well as the small business Platinum products in the early part of 2017. We've been thrilled with the reaction to both of those upgrades.

One of the things I cautioned people about last quarter on the April call was that well, the second quarter was going to be the first quarter where we fully lapped all those changes and that might cause a little bit of a moderation in growth in those two products. To be honest, what surprised this quarter was really didn't.

So, we were particularly pleased to see on the consumer side that the growth rate did not slow at all, even though we have completely lapped now all of those changes we made and I think it really goes back, Steve, to the strategic imperative. It's all about differentiated value propositions that we can put in the marketplace and we feel really good about that platinum.

The other comment I'd make is we are in an unusual situation as a company in that we have tremendous opportunities to invest and accelerate our growth across both consumer, commercial, US and international, and we are always leaving a few really good opportunities on the table as we balance short and long-term financial performance. So, when we have really good performances we have had year to date, it allows us to dip a little deeper into those really good opportunities, and I think that bodes really well for long-term sustainability of the kind of revenue growth we're seeing now.

Stephen Squeri -- Chairman and Chief Executive Officer

To Jeff's point about continuing to invest in unique and differentiated services, we announced we're going to implement three new lounges, which adds, again, some new value for our traveling Platinum Card members. We've also added to the Platinum Card merchant-funded value offers from Saks. So, that adds more value and it shows the power of the integrated model. We're able to take our merchant relationships that we have and marry those up with our high-spending card members and it obviously works for our merchants as well.

The other point that I did make and that may have caused a little bit of the confusion -- in addition, obviously we refreshed the Platinum Card products in the United States -- we did in the second quarter refresh the Platinum Card products that we have in Hong Kong and in Mexico. Those cards are of a smaller footprint, obviously, than both US Platinum Cards, but I think it is important to show that as we think about the premium segment, you tend to focus on the premium segment as the US. There is a large premium segment outside the United States and it is really important for us to continue to refresh the product line on a global basis.

Chris Brendler -- The Buckingham Research Group -- Analyst

Thanks, guys.

Operator

Thank you. Our next question will come from Sanjay Sakhrani with KBW. Please go ahead.

Sanjay Sakhrani -- KBW -- Analyst

Thank you. Steve, good to have you on and hi, Jeff. Thanks for taking my question. As you mentioned, your topline expectations are now better than expected and your EPS guidance didn't really change. Should we assume all of the incremental revenues are being spent and that marketing and business development line, that was up quite considerably and you mentioned several reasons why. Should we expect that to continue to grow at the rate it is going forward? Maybe you can just talk about the payback on those returns. Thanks.

Stephen Squeri -- Chairman and Chief Executive Officer

Let me make a couple comments and then I'll ask Jeff to jump in. Again, we try and be as transparent as we can. From an EPS perspective, we've adjusted at the end of the first quarter as we looked out, we said -- obviously it was $6.90 to $7.30. We said we'd be to the high end. We feel really good about 25% EPS growth this quarter and 38% growth in the first quarter, adjusted revenue growth of at least 8% for five consecutive quarters.

I think what's important to think about when you think about customer engagement is that we're making investments not only to drive results this year, but we're looking to drive results in the moderate to long-term. So, our objective is really to make sure that our revenue growth levels are sustainable and our objective is also to make sure we're taking advantage of those opportunities as they present themselves. Jeff just made this point -- we don't want to have opportunities go by the board. So, that's how we think about it.

Jeffrey Campbell -- Chief Financial Officer

I don't really have a lot to add. Sanjay, the second quarter marketing and promotion was a particular spike because you only launch a new brand campaign every couple of years. But to Steve's point, that is also the line where a lot of the things we do that we think are about driving longer term growth go. So, we feel good about the fact that we're hitting the high end of the guidance range we started out with and we feel really good about the revenue growth sustainability we're building.

Sanjay Sakhrani -- KBW -- Analyst

Thank you.

Operator

Thank you. Our next question will come from Bill Carache with Nomura Securities. Please go ahead.

Bill Carache -- Nomura Securities -- Analyst

Thank you. Good evening. It looks like the contribution of your discount revenue as a percentage of revenues net over words expense increased to 50% this quarter from 48% last quarter, while your net interest income contribution actually decreased. That seems to mark a reversal in the trend we've been seeing. My question is as we look ahead, is it reasonable to expect that we'll continue to see a growing mix of your revenues coming from spend versus lend?

And if I may just tack on to that, there's been some focus on the other operating expenses being better and part of that being from reserve releases. Perhaps could you comment whether consistent with your philosophy of reinvesting gains in the business that perhaps part of the reason for the increase in marketing and promotion was the opportunistic reinvestment of some of those releases? Appreciate that.

Jeffrey Campbell -- Chief Financial Officer

Well, let me see if I missed one -- first, I guess I'd make a couple points on the net interest income discount rate mix in that on the discount revenue side, you do have a couple of things like OptBlue, like the immediacy of the regulation in Australia and Europe, like some of the big strategic partner renegotiations we had last year that are causing a little bit more reduction in the discount rate this year than we would probably expect on a run rate basis. So, by definition, that tells you over time discount revenues should move up a little bit in the mix.

On the opposite side, we've had a really good run on that net interest income of doing a lot of really good stuff on the pricing side, but I've been pointing out for a few quarters there is an end to that, so I do expect the growth in net interest income to moderate down to where loan growth is. So, I do think those two things in the absence of other changes in the business will cause a continuation of the trend that you called out.

In terms of reserve releases, I guess, Bill, I'm a little puzzled by that. There's nothing in particular unusual going on in our operating expense line. We're just, as we always will be and as we will be for many years, very focused on the aspect of our business model. That is, we can grow and pump a lot of revenue through our fixed cost infrastructure without adding a lot of cost. Technology helps us do that more efficiently every year. That's really what you see happening on the operating expense side.

When you hear Steve and I talk about investing a little bit opportunistically this year, it really comes from the revenue upside that we're seeing.

Stephen Squeri -- Chairman and Chief Executive Officer

One other point that I'll make is as you look at the shift, I guess, the little bit of shift mix and it's a slight shift mix, this particular quarter, we're really focused on driving spend. So, if you dig within the numbers and you go within the slide that shows the breakout of billings, you see across every single one whether it's SME, SME international, US consumer, and consumer international -- these are all double-digit growth numbers. If you net out GNS, we had 12% proprietary billings growth in the second quarter. We've had the GNS drag due to regulatory issues in Europe and in Australia.

Well, that spending is obviously driving the discount rate revenue, but that's the spending as well, where the lending comes in. We drive spend and from that spend, we look to get whatever lend we can get from our existing customers.

Again, and Jeff mentioned this in his remarks as well, 60% of our AR growth this particular quarter came from existing card members. So, we feel good about how the model is working. The whole thing works together. The discount rate is working for us as well. It's driving more spend. That spend drives more lend with existing customers, hence drives what we believe is very good revenue growth at 9%.

Bill Carache -- Nomura Securities -- Analyst

Thank you very much.

Operator

Thank you. Our next question will come from Ryan Nash with Goldman Sachs. Please go ahead.

Ryan Nash -- Goldman Sachs -- Managing Director

Good evening, guys. Jeff, I wanted to ask a question on capital. You talked about the 10% to 11% CT1 as defined and constrained as you shift from CCAR to the rating agencies. I guess given the lower risk and less NII dependency of your model, why is that the right the number given that your model is less lend-centric and a lot of the other traditional card lenders will be running at 10% to 11%. I guess what do you think is the right level of capital to actually run the business relative to what the rating agencies are telling you? Thanks.

Jeffrey Campbell -- Chief Financial Officer

Well, you know, Ryan, maybe I should bring you with us on our next round of meetings with the rating agencies. You are correctly pointing out that as I think about what the Fed as said publicly about where they're likely to be taking the CCAR process. I think the Fed ceases to be the constraint on our capital. I do think it's about the rating agencies. We are very comfortable with the way we are rated today, but we think the ratings we have are important to sustain. The reality of the way we work with the rating agencies today is going to require us to stay with the tier on common equity ratio and the 10% to 11% range.

Certainly, we have lots and lots of discussions with them about this unique strength of our business model, about how strongly we performed in economic downturns. That would be something you see in the Fed's latest modeling of CCAR results. But I'm trying to be very transparent. 10% to 11% is where we are today unless we succeed in further working with the rating agencies. So, I'll give you a call to tell you when the next meeting is and you can join us.

Ryan Nash -- Goldman Sachs -- Managing Director

Got it. Thanks.

Operator

Thank you. Our next question will come from Eric Wasserstrom with UBS. Please go ahead.

Eric Wasserstrom -- UBS -- Managing Director

Thanks very much. Just following up on the topline discussion, it would seem that except for the impact from regulation on discount revenue, discount revenue would have continued to accelerate year over year. So, what is your sense about some of the underlying drivers, such as the benefits of corporate tax reform about commercial T&E growth and that kind of thing to the extent that these can continue to maintain accelerating discount revenue as the comps begin to get a little bit tougher relative to the back-half of last year.

Jeffrey Campbell -- Chief Financial Officer

Well, let me start Steve and then maybe you can continue. It's a good question, Eric. When you think about sustainability, I'd make a few comments. We can look at the acceleration in revenue growth we've seen over the last few years and very, very much link it to changes we have made in the business and that really builds confidence in us as to the sustainability. A couple things around the edges, though, that I would say go a little bit beyond that is clearly, in this calendar year, we're benefiting a little bit from buying the Hilton portfolio. So, that goes away next year.

The other thing is last quarter, I brought up the fact that we had seen a modest acceleration in organic growth that began very late last year. It has now sustained itself for the first half of 2018 and that clearly is indicative of the fact that at least for the demographic of customers we serve, there is clearly some increased level of confidence.

So, that could strengthen. It could weaken. We'll have to see where the economy goes, but other than those two pieces, I think we feel pretty good about the things we have done that are driving the revenue growth and their sustainability.

Stephen Squeri -- Chairman and Chief Executive Officer

I think two of those things that we're doing that are really driving the revenue growth are really those coverage initiatives. When there's more and more places to use the card -- last year, we signed over a million merchants in the United States. What happens is that gives us an opportunity to go after a higher share of wallet with our existing cardmembers. It's also a very good way to attract new cardmembers. We're doing a really good job from an acquisition perspective, both in the United States and in our international markets, of gaining new cardmembers, both from a commercial perspective, and from a consumer perspective.

Just to put a highlight on the volume growth, when you look at the second quarter, 25% SME international growth and 18% consumer growth in international, that shows us that the investments that we've made and we're going to continue to dwell on those same investments because they are truly working for us. Look, the SME business in the US and the consumer business in the US are obviously more mature than the businesses that we have and a little bit more competitive than from an international perspective. But again, double-digit growth in both those portfolios as well.

So, again, really a lot of focus on our cardmember acquisition efforts. Coverage is really helping. And then what we also do is the journeys we take our cardmembers through to get more and more of their spend from a trigger marketing perspective, we continue to do that and will continue to do that as we look to get more and more pockets of their spend.

Eric Wasserstrom -- UBS -- Managing Director

Thanks. If I can just follow-up on one question -- you indicated that there's some increase in investment coming from the topline strength. I think previously, Jeff, you indicated that might be something around $200 million in the second, third, and fourth quarters. Is that still the same enforcement level?

Jeffrey Campbell -- Chief Financial Officer

Well, to be clear, the $200 million, Eric, is when the Tax Act passed in December, we actually made a very conscious choice, even though we had the plan done for the year, to add another $200 million because we didn't make that choice until the beginning of January, we couldn't thoughtfully spend it in the first quarter.

What we're telling you on this call is above and beyond that $200 million, our revenue strength is allowing us to both get to the high-end of our guidance range, but also put some additional money to work, making sure we're doing all the kinds of things, Steve, you just talked about that are going to really sustain the sort of revenue growth we're getting.

Eric Wasserstrom -- UBS -- Managing Director

Thanks very much.

Operator

Thank you. We have a question from the line of Mark DeVries with Barclays. Please go ahead.

Mark DeVries -- Barclays -- Analyst

Thanks. I was hoping to better understand strategically why you decided to add this new shop Saks benefit to the Platinum Card at a time where you'd indicated you're already very pleased with the reengagement and the customer acquisitions you were getting from that card. What was the need to do that? Also give us a sense of the cost to you. Presumably, you're not paying your merchant partner 100 cents on the dollar for the benefit. I assume the same goes for the benefit you provide through Uber. If you could just give us a sense of what the cost might be relative to the percent back.

Stephen Squeri -- Chairman and Chief Executive Officer

I'm going to give you a sense of what the cost is for Saks -- zero. It's fully funded by the merchant partner. One of the unique advantages of our model is we manage a lot of our merchants. As we manage them, what the objective is is to help them drive and grow their business. In conversations with Saks, they're very interested in our Platinum Card holders. Our Platinum Card holders tend to spend money at Saks or merchants like Saks.

So, in working with Saks, we came up with a $100.00 annual credit on Saks purchases. So, the real question is why wouldn't you? If someone's handing you $100.00 and it hits from a premium perspective, it fits from a demographic perspective, it's going to help drive value to Saks, and it helps drive value to our customers as well. So, that's why we added the benefit. I think we will continue to add merchant-funded benefits when they make sense.

What happens also with the Platinum Card, this is an offer that sticks with the whole year. What we will do from time to time is doe time-based offers for our Platinum Card holders and for our Centurion Card holders because merchants want access to those customers. That's why we did it.

Mark DeVries -- Barclays -- Analyst

Okay. Fair enough. Thank you.

Operator

We have a question from the line of Don Fandetti with Wells Fargo. Please go ahead.

Don Fandetti -- Wells Fargo -- Managing Director

I was wondering if you could talk about the commercial segment. The bill business is obviously performing well. You've got the Amazon cobrand. Can you talk about the competitive intensity in commercial? Maybe contrast it with consumer. Do you think there's more upside to the growth rates that you're seeing today?

Stephen Squeri -- Chairman and Chief Executive Officer

It's different. Let's talk about international. In international, from an SME perspective, it is really an open playing field. When you look at the penetration, I think the market is a couple of percent penetrated.

We have not only replicated what we've been doing in the United States form a salesforce perspective, but a tele perspective and really engaging from a digital perspective. That's why you're seeing these growth rates. So, I'm sure over time, it will become competitive as well. We believe it's a huge opportunity, which is why we continue to invest and why we continue to see large growth rates.

When you look at the SME segment in the United States, it's competitive regionally. Different banks do different things because customers mean different things to them. So, we compete regionally. We'll compete with Capital Ones and we'll compete with Wells and Citi and JP Morgan and so forth. But I would say it is probably not as intense as the competition we typically see in the US consumer business.

The other thing is we are truly leveraging scale here. We're leveraging the assets that we have from a large and middle market and global corporate card perspective. We're leveraging that global footprint. That's really helping us out. So, we'll continue to do that.

If you look at Amazon, you look at Marriott -- I'll just pick those two out in particular because they truly had a choice -- the split portfolio with Marriott, Marriott could have gone either with us or with Chase or could have split it. What they liked was our assets, our ability to reach small businesses. So, we won that part of the portfolio and Amazon obviously looked at it the same way.

So, we're excited about not only the growth opportunities here, but the new partnerships that we've really just engaged with. We're going to continue to aggressively compete in these segments. The large segment, 9% growth. So, that's what I've always talked about when we've had the one on one analyst meetings.

I've talked about how our value is to really help companies control their spending and reduce their spending. As Jeff said, we're seeing an uptick in T&E, an uptick in airline spending, and we're winning more accounts. We believe we play really well in this space and we're going to continue to compete very vigorously as we move forward.

Don Fandetti -- Wells Fargo -- Managing Director

Thanks.

Operator

We have a question from the line of Moshe Orenbuch with Credit Suisse. Please go ahead.

Moshe Orenbuch -- Credit Suisse -- Managing Director

Great. Thanks. So, maybe could you talk a little about how we should think about the provision in reserve build over the course of the next year, given you've still got 30%+ growth and losses on both the charge and the credit portfolios this quarter are fairly small, but if the double-digit loan growth continues, how should we think about that?

Jeffrey Campbell -- Chief Financial Officer

Well, if you think about it, we went into this year with a very clear expectation. We communicated publicly that we thought provision would grow 30% given the growth we've seen and very importantly, as you understand, the accelerating growth you've seen over the last few years as we go through a seasoning process on some of the vintages from the last couple of years. That's playing out actually a little better than we thought. So, our loan growth is a little higher than we expected. Provision is coming in right where we thought this year. So, we feel very comfortable and good about the trends and good about the overall economics.

I'd also make the point that -- I think you can kind of see this if you look at the provision slide -- when you think about 38% for the year, in 2017, the first two quarters were much lower, then you had kind of a step up as we started building reserve. That factors into a little bit of the trend I would expect for the next two quarters.

Now, once you get beyond 2018, we'll have to see what rate loan growth continues to perform. I mean, I don't want to govern our team, I want to pursue as much really good, really economic through the cycle loan growth as we can achieve, particularly with the focus we have on our existing customers. Depending on what happens in 2019, we'll have to see exactly what it means to provision. I think what we feel comfortable with is we are getting really good through the cycle economics, even net of the provisions when you're accelerating growth.

Moshe Orenbuch -- Credit Suisse -- Managing Director

Thanks very much.

Operator

Our next question will come from the line of Chris Donat with Sandler O'Neill. Please go ahead.

Chris Donat -- Sandler O'Neill -- Managing Director

Thanks for taking my question. Jeff, I wanted to ask one question on Australia of all places, just because I'm trying to understand the dynamic there. I thought you said that build business was up 20% year on year in Australia, but then you've got the headwinds from GNS. Is there something in the dynamic where you were going to lap pricing?

Jeffrey Campbell -- Chief Financial Officer

Yeah. Chris, I should probably clarify that. To remind everyone, what's going on in Australia is with the latest round of regulatory changes, we are in the process of shutting down our network business. So, we had some great bank partnerships that are slowly going away. So, that's why when you look at the GNS business, it is shrinking in Australia and will eventually shrink to essentially zero.

But that very fact is creating some really interesting growth opportunities for us on what the term we use as our proprietary side, where we are the card issuer, including a cobrand that we have launched with one of our former network bank partners, Westpac. So, that is fueling really, really high growth rates for us in Australia. Over 20% is the number I cited. I just remind everyone that when you replace $1.00 of network billings with $1.00 of proprietary billings, that is a really, really good trade economically.

So, in some ways, this is just a commentary on the flexibility of our business model as the world changes competitively or from a regulatory perspective, but I'd say we'd feel good about the overall business in Australia.

Chris Donat -- Sandler O'Neill -- Managing Director

Okay. You've got a decent runway too to grow the business as you move more proprietary in Australia? It had been, I think in the past, you disclosed that Australia was, I want to say, like 4% to 5% of revenues or when you did sort of FX exposure, it was in one of your large markets, at least.

Jeffrey Campbell -- Chief Financial Officer

Yeah. Australia is one of the five or six markets that are very significant to us outside. When you look at our non-US results, you can pick eight or ten markets and that's most of the economics. Australia would be near the top of that list.

Chris Donat -- Sandler O'Neill -- Managing Director

Thank you.

Operator

Thank you. Our last question will be from the line of Craig Maurer with Autonomous Research. Please go ahead.

Jeffrey Campbell -- Chief Financial Officer

Hey, Craig.

Craig Maurer -- Autonomous Research -- Analyst

How are you?

Jeffrey Campbell -- Chief Financial Officer

Good.

Craig Maurer -- Autonomous Research -- Analyst

I wanted to drill down if I can a little bit on what you're seeing in the US. From our vantage point, we've seen deceleration in all your competitors in the US and their US purchase volume. You guys have done an amazing job sustaining growth. So, I guess the question begs -- who are you taking share from and in what categories in the US?

Stephen Squeri -- Chairman and Chief Executive Officer

You know, look, from an SME perspective, we continue to grow. Even large market customers are even growing because if you look at large market and global results in the US, just look at it sort of a year ago, these were stagnant numbers for us. Our consumer business, we feel really good. We feel really good about the US consumer business, double-digit growth, two quarters in a row, and we feel good about the cobrand partnerships that we just announced and launched, obviously, two of them.

So, the networks report, I guess, next week. We'll find out where we are from a share perspective, at least directionally. You've seen Citi and JPM and US Bank and so forth report, so you can sort of look at their results and our results and make your own assertion of where it may be coming from.

Craig Maurer -- Autonomous Research -- Analyst

Thank you.

Stephen Squeri -- Chairman and Chief Executive Officer

Okay. So, anyway, thank you, everybody for participating today. Let me just give a couple of closing thoughts.

Hopefully what you've seen as a globally integrated payments company, our business model, we hope the commentary did this today, does set us apart from the card issuing and merchant acquiring competitors. I think Saks was a really great example of just what we can do with relationships on both parts. It's different in the networks and certainly different than the pure fintechs, which really don't have the relationships, the brand, or the scale to do some of the things we've been doing.

We operate, we believe, in an industry that has a long runway for growth. We think that differentiated business model that we have will provide us with many ways to take advantage of the opportunities that lie ahead. We feel good about the results we've generated by focusing on the four strategic imperatives that Jeff and I discussed, not only in our prepared remarks, but certainly through the questions. Again, once again, thanks for all of you for joining us today and for your continued interest in American Express.

Edmund Reese -- Senior Vice President, Head of Investor Relations 

With that, we'll bring the call to an end. Thank you, Jeff and Steve, and thank you to those of you on the phone. The IR team will be available for any follow-up questions. Operator, back to you.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconference Service. You may now disconnect.

Duration: 62 minutes

Call participants:

Edmund Reese -- Senior Vice President, Head of Investor Relations 

Stephen Squeri -- Chairman and Chief Executive Officer

Jeffrey Campbell -- Chief Financial Officer

Bob Napoli -- William Blair -- Analyst

Chris Brendler -- The Buckingham Research Group -- Analyst

Sanjay Sakhrani -- KBW -- Analyst

Bill Carache -- Nomura Securities -- Analyst

Ryan Nash -- Goldman Sachs -- Managing Director

Eric Wasserstrom -- UBS -- Managing Director

Mark DeVries -- Barclays -- Analyst

Don Fandetti -- Wells Fargo -- Managing Director

Moshe Orenbuch -- Credit Suisse -- Managing Director

Chris Donat -- Sandler O'Neill -- Managing Director

Craig Maurer -- Autonomous Research -- Analyst

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