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American Express Co  (NYSE:AXP)
Q3 2018 Earnings Conference Call
Oct. 18, 2018, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the American Express Third Quarter 2018 Earnings Conference Call. (Operator Instructions) As a reminder, the conference is being recorded.

And I'll now turn the meeting over to our host, Head of Investor Relations, Mr. Edmund Reese. Please go ahead, sir.

Edmund Reese -- 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 third quarter 2018 earnings release and presentation slides as well as the earnings materials from prior periods 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; and then Jeff Campbell, Chief Financial Officer, will provide a more detailed review of Q3 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 Joseph Squeri -- Chairman and Chief Executive Officer

Thanks, Edmund and good afternoon, everyone. I'll start with some of the key highlights from the third quarter results we released earlier this afternoon. From there, I'll give an overview of the year-to-date results. And before turning it over to Jeff for a more detailed discussion of our financial performance, I'll provide a quick progress report on the four strategic comparatives that we focused the organization on at the beginning of the year.

In the third quarter, we saw continued momentum in our business that was in line with the strong growth through the first half. Adjusted revenues grew 10% and we delivered EPS of $1.88. I feel really good about the company's performance. We've had several quarters of higher revenue growth and in fact this marks the sixth consecutive quarter with adjusted revenue growth of at least 8%. Our growth has been broad-based, driven by a well-balanced mix of card member spending, fees and loans and spread across geographies, businesses and customer segments.

We have continued to control our operating expenses and that provides the flexibility to make investments in our brand, customer benefits and digital capabilities. As I reflect on the first nine months of the year, I see very consistent and positive trends. We generated a healthy level of top line revenue growth and delivered strong bottom line results each quarter. Year-to-date, our revenue growth is 10% and our earnings-per-share growth is slightly higher than that, after adjusting for the Tax Act of 2017. We are gaining spending and lending share in almost all the countries in which we operate.

At the same time, our customer engagement expenses which are composed of rewards, card member services and marketing are growing a little faster than revenue. We are seeing very good payback from the targeted enhancements we've made to our customer value propositions. But that does translate into some margin pressure. The remainder of our costs are on operating expenses. For us, these are primarily scalable infrastructure cost and they are growing at a much slower rate than revenues. So in effect, the margin compression created by higher customer engagement expenses is being partially offset by the OpEx leverage.

And as many of you know, we have a proven track record of disciplined control on operating expenses, while growing the rest of the business. We're delivering strong results in a highly competitive and regulative environment where there are higher costs associated with driving growth. And going forward, we are focused on sustaining the high levels of revenue growth that have been delivering steady and consistent double-digit EPS growth. We believe that the best way to do that is to invest in share, scale and relevance for the long-term.

Turning back to our year-to-date performance, we feel good about the advantages that come from our integrated business model and the progress we are making on a four strategic imperatives, which I'll take you through now. We continue to expand our leadership in the premium consumer space. We introduced the new gold card in the U.S. with an enhanced value proposition and an innovative set of rewards. We continue to refresh our international product line with enhancements to our platinum card in Australia, Singapore and Japan.

The U.S. platinum card continued its strong performance. New consumer accounts are up more than 50% and about half of those are from millennials. Building on our strong position in commercial payments, small and medium sized businesses can continue to be our fastest growing customer segment worldwide, with particular strength in our international regions. Continuing to strengthen our global integrated network, we continue to add more places worldwide where American Express cards are accepted.

While I could expand much more on our progress in these first three areas, today I want to focus more on our fourth priority, making American Express a more essential part of our customers' digital lives. Given the announcement we made earlier today about an expanded relationship with PayPal, I wanted to put the many things we are doing here in context. Over the past year, we've steadily gained traction on this critical imperative that cuts across every part of our integrated business model. Our progress on our digital efforts takes many forms; acquiring companies with great technology and AI capabilities like Mezi and KEG and working to integrate those capabilities into our app, creating partnerships with a range of innovative start-ups to stay on the leading edge of exploring new capabilities for our customers, steadily expanding our internal capabilities through new and innovative products such as EarlyPay EmexGo for our commercial clients.

Continuing to drive market efficiencies by having more of our marketing and new card member acquisitions come through our digital channels. And building upon our long-standing relationship with the digital leader like Amazon and our strengthened small business to come together and launch later this quarter what we believe will grow to be one of our leading small business co brands in the U.S. And so like we are excited to expand our long-standing relationship with a digital leader like Amazon, I am also excited about expanding our long-standing relationship within another digital leader, PayPal. PayPal has long been one of our largest merchants and most important partners helping to expand the reach of our digital payments in the American Express network. And I'm really excited about what we're doing together.

As part of our expanded relationship, card members will be able to use membership rewards points for purchases at millions of PayPal merchants online and send money via Venmo or PayPal to friends and family directly from the Emex mobile app. Easily add American Express card to the PayPal wallet directly for mobile app or website from Emex's mobile app or website and pay their American Express bill with their PayPal or Venmo balance via the PayPal Instant Transfer feature. We'll have a more prominent place on the platform and we'll continue to jointly explore additional innovative digital products and experiences.

I believe this is going to be a winning partnership for our customers, for our merchants, for us, and for PayPal, it's truly a win-win. And as I see it, it is just the latest step in our journey to play a more essential role in the digital lives of our customers.

As I said at the start, I feel very good about our performance. The investments we've made in new benefits, services, digital capabilities, and the global marketing campaign that supports them are generating very good momentum. Given that momentum, we now expect full-year 2018 revenue growth to be between 9% and 10% and we are raising our adjusted EPS guidance to $7.30 to $7.40 up from $6.90 to $7.30 range we set at the start of the year. I'm excited about the opportunities that lie ahead and I'm confident in our ability to continue to deliver sustainable growth for our shareholders.

Now let me turn it over to Jeff.

Jeffrey Campbell -- CFO

Well, thanks Steve and good afternoon, everyone. It's good to be here today to talk about another quarter of steady and consistent revenue and earnings growth. Let's get right into our summary financials on slide 3. Third quarter revenues, $10.1 billion, grew 10% on an FX adjusted basis with this growth again driven by a well-balanced mix of growth across discount revenue, fee revenue and net interest income. I would point out that the FX adjusted growth rate now exceeds our reported growth of 9% given the strengthening of the U.S. dollar against the major currencies in which we operate. This 10% revenue growth then drove net income of $1.7 billion, up 22% from a year ago and earnings per share was a $88 for the quarter, up 25% from the prior year. Our shares outstanding were down 2% from the prior year, a little less than recent quarters due to the suspension of our share repurchases in the first half of the year which resulted from the onetime impact of the Tax Act last December. We are now back within our targeted capital level range and as a result, resumed share buybacks this quarter. All in, these results, we feel really good about.

Looking at the details of our performance, I'll start with build business which you see several views on slides 4 through 6. Starting on slide 4, our FX adjusted total billings growth accelerated sequentially to 10% in Q3, or significantly. As you can see on the top right, our proprietary business which makes up 80% or the majority of our total billings was up 12%, maintaining very strong growth levels. The remaining 15% of our overall billings, which comes from our network business, GNS, continues to see the expected impact of regulation in the European Union and Australia. And as a result, GNS billings were down 1% on an FX adjusted basis. The steady and strong growth across all of our proprietary segments has shown clearly as you turn to slide 5, which gives you a segment oriented view of our billing.

Turning to slide 6, we have a more detailed view of billings by customer segment and also a reminder that global commercial and global consumer are roughly the same size, representing 41% and 44% of Q3 Billings respectively while global network services makes up the remaining 15% billings. Starting on the left with our small and mid-sized enterprise card members or SMEs, U.S. SME was up 10% as the leader in the U.S. SME space, we feel good about that consistently strong billings growth that we have shown for many years in this customer segments.

International SME remained our highest growth customer segment with 23% FX adjusted growth in the third quarter. Our growth in this segment has accelerated significantly in the last year and we continue to believe that we have a long runway for growth, given the low penetration we see in the top countries where we offer international small business products. In the large and global customer segment, we saw 10% growth on an FX adjusted basis. As you know, this is an important segment for us as it helps strengthen our network by driving acceptance and coverage. Now in any given quarter, our growth rate in the segment can vary a bit given the large volumes a few customers can drive. This segment is heavily T&E oriented and you can see in the earnings table that the company's overall U.S. T&E and global airline billings also accelerated sequentially to 9% on an FX adjusted basis this quarter.

Moving to U.S. consumer, which made up 32% of the company's billings in the third quarter, we are pleased to report our third consecutive quarter with double digit growth. Our double digit billings growth in U.S. consumer reflects our strong acquisition efforts through digital channels as well as the general strength that we're seeing in consumer spending and confidence within our premium U.S. consumer base.

Moving to the right, international consumer growth remains high at 18% on an FX adjusted basis consistent with Q2. We have widespread growth in key markets with FX adjusted growth of 13% in Japan, 14% in Mexico and over 20% in both Australia and the U.K. (inaudible) on the right, as I mentioned earlier, Global Network Services was down 1% on an FX adjusted basis driven by the impacts of regulation in the European Union and Australia. Although the 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 these European Union and Australia markets, the remaining portion of GNS was up 8%.

Overall, our growth has been diverse. And this is the first quarter in some time in which we have had double digit billings growth across all of our proprietary groups, U.S. and international SME and consumer as well as large global corporate.

Turning next to the loan performance on slide 7. Total loan growth was 16% in the third quarter and in line with prior few quarters. We continue to be focused on driving growth with our existing customers and about 60% of our growth in lending came from existing customers once again this quarter. I would remind you that we've completed the Hilton portfolio acquisition earlier this year which contributed around 120 basis points to growth this quarter, roughly in line with the contribution to growth in the first half of the year.

On the right hand side of slide 7, you see that net interest yield was 10.8%, up 10 basis points versus the prior year. As we have been saying for some time, we have expected net interest yield to stabilize which would cause year-over-year growth to moderate and you're clearly seeing that playing out over the last few quarters. While net yield is still growing over the prior year, the increase continues to moderate as we lap some of our pricing initiatives.

To spend a minute on funding, I'd remind you that over half of our funding comes from deposits and over half of our deposits are in our online personal savings program. We resumed actively growing our online personal savings program this year and in a rising rate environment, it is generally our least expensive source of funding. Our beta on this program has been around 0.7 of late, consistent with the assumption we use for internal planning. Stepping back, while we view a rising rate environment as a modest headwind to us, it is usually mitigated by a stronger economic environment, which is certainly what we are seeing now.

Turning next to the credit metrics on slide 9, on the left side you can see that the lending write-off rate was 2.1%, up 30 basis points from the prior year and stable on a sequential basis. As a reminder, we have been saying for some time now that we expect these rates to gradually increase as they have and in fact, the rates continue to be slightly better than we expected for this year.

On the bottom left, we have added delinquency rates which you can see have been relatively stable now for several quarters. On the right side, you can see similar metrics on our charge portfolio. The charge write-off rate excluding GCP was 1.7% in the third quarter, up 20 basis points from a year ago but down on a sequential basis. Here I'd remind you that there can be some quarterly volatility in these charge rates due to seasonality and looking forward, we do not see anything in the performance of our tenured customers to suggest any change in the broader environment.

Turning next to provision on slide 8. Provision was $817 million. I would point out that our reserve build was $92 million this quarter versus $229 million in the third quarter of 2017. And also remind you that the third quarter of 2017 reserve build took into account a number of factors at the time, including recent hurricanes, accelerating loan growth and seasoning in the portfolio. But this year, as you just saw in the prior slide, delinquency rates have remained relatively stable for several quarters so that is what you see reflected in our reserve build this quarter.

Based on our year-to-date performance, we are now lowering our full year provision growth expectation from the mid 30% range to less than 30%. We feel good about our ability to continue growing our lending a bit faster than the industry by focusing on our existing customers while retaining best in class metrics.

Turning now to revenues on slide 10, FX adjusted revenue growth was 10% in the third quarter. As Steve mentioned, this represents the sixth straight quarter of having adjusted revenue growth of at least 8%, driven by steady growth from a well balanced mix of spending fees and lending.

On slide 11, you see the components of our total revenue. Discount revenue, which makes up 61% of our revenue was up 8% on a reported basis, which I'll come back to on the next slide. Net card fees growth was 11%, driven by growth in Platinum and Delta in the U.S. as well as growth in key international markets like Japan and Australia. We continue to demonstrate the ability to generate card fee revenues by offering differentiated value propositions, even in the face of the steady competitive challenges that others present.

Lastly, net interest income was up 17%, driven primarily by the growth in loans that I mentioned a few moments ago.

Turning now to slide 12 to cover the largest and most important component of our revenue, discount revenue. Starting on the left, our average discount rate in Q3 was 2.38%. This is down just 2 basis points from a year ago, a much smaller decline than we have been seeing in recent quarters. For some time now, we have been talking about how there were several factors driving a larger decline in the average discount rate that we did expect to fade over time. These factors included the impact of regulatory changes in Europe and Australia, the continued rollout of our OptBlue program to drive toward parity merchant coverage in the US and some impacts from decisions we made to deepen the broad relationships we have with certain strategic partners. You see this quarter, that these impacts are indeed beginning to moderate. In addition, mix also plays an important role in our average discount rate and the higher growth in travel and entertainment spending this quarter that I discussed earlier also helped the average discount rate. As a result, we now expect the average discount rate for the full-year to be down less than the 5 to 6 basis point expectation that we originally shared at our March Investor Day.

Moving beyond the discount rate and really more importantly, for many quarters, you've heard us say that our main focus is on driving discount revenue growth, not managing to an average discount rate. And what you see on the right hand side of page 12 is that discount revenue growth was up 9% on an FX-adjusted basis. This represents the highest FX-adjusted growth rate and discount revenue that we have shown since 2012. And we feel really good about the momentum in our largest and most critical revenue line.

Turning now to expenses on slide 13. Let me start with operating expenses which were down 1% this quarter. While there were a number of discrete items that impacted the growth rate in both the current and prior year, if you were to adjust for all of the various discrete charges, we would have seen a modest increase in operating expenses from the prior year, consistent with our long-standing trend of getting operating expense leverage relative to our revenue growth. We continue, as Steve said, to have great confidence in our ability to deliver steady operating expense leverage.

So that brings me next to customer engagement costs on slide 14. In total, customer engagement expenses were $4.5 billion in the third 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 driven by two factors. First, as we've said for the last few quarters, we have some increases in partner payments due to co-brand agreements that we signed in the last year and growth in our corporate business. Second, as you may recall, we launched a new global brand campaign earlier this year. And as you would expect, we increased our spending in marketing to support our brand refresh.

I would add that we feel good about our continued ability to drive marketing efficiencies in our Card Member acquisition efforts. As we have grown our acquisitions to $3 million new proprietary cards globally this quarter without a corresponding increase in our levels of direct spending. This marks our highest quarter of acquisition in many years, when you set aside the Hilton portfolio acquisition earlier this year.

Moving up to rewards expense, you can see that it was up 11% from the prior year, roughly in line with proprietary billings growth. Moving then to the top of the slide, Card Members services costs was up 30% in the third quarter. We continue to expect this line to be our fastest growing expense category, as it includes the cost of many components of the differentiated value propositions, which we believe are difficult for others to replicate such as airport lounge access and other travel benefits.

Turning last to capital on slide 15. You can see that we ended Q3 with a CET1 ratio of 10.8%. Our high ROE business model has allowed us to quickly rebuild our capital levels to our target range of having a 10% to 11% CET1 ratio after last December's Tax Act charge briefly dropped us below lower target range. This has allowed us to resume share repurchases in Q3 and to raise our dividend consistent with the CCAR approvals we've received from the Fed in June.

So that brings us to our outlook, and then we'll open the call for questions. First, we now expect full-year revenue growth to be 9% to 10%. As both Steve and I have pointed out, our revenue growth has been at least 8% on an adjusted basis for six consecutive quarters and that strong growth has been driven across a diverse mix in both geographies as well as business and customer segments. We can directly link our decisions and investments to the strong revenue growth that we have seen year-to-date, and we'll continue to make investments that we believe will drive share, scale and relevance and will sustain our strong level of revenue growth. Our confidence in this revenue growth leads us to raise our adjusted EPS guidance to $7.30 to $7.40, excluding any potential discrete tax benefits and other contingencies. This is up from our original guidance range of $6.90 to $7.30.

Taking a step back, our performance year-to-date and full-year guidance reinforced several points that Steve let off with. First, over the last several quarters, we have had strong revenue growth and tax adjusted earnings-per-share growth slightly above that as we offset some of the increased customer engagement cost with operating expense leverage. Second, while our business model has the flexibility to throttle back spending on value propositions and Card Member engagement in ways that contribute to EPS in the short term, we believe that our decisions today are driving share, scale and relevance which support the business over the long term.

Finally, we are focused on sustaining high levels of revenue growth which we believe is the best way to generate steady and consistent double digit EPS growth.

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

Edmund Reese -- Head of Investor Relations

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

Questions and Answers:

Operator

(Operator Instructions) Our first question from the line of Sanjay Sakhrani with KBW. Please go ahead.

Sanjay Sakhrani -- KBW -- Analyst

Thanks. Great quarter.

Jeffrey Campbell -- CFO

Sanjay, thank you.

Sanjay Sakhrani -- KBW -- Analyst

(inaudible) and it seems like the growth is diverse and accelerated.

Stephen Joseph Squeri -- Chairman and Chief Executive Officer

Sanjay, you cut out for a minute. So, would you mind starting again?

Sanjay Sakhrani -- KBW -- Analyst

Absolutely. Okay, good. So the revenues have been consistently surpassing your expectations this year and it seems that the growth is diverse and accelerating. Could you talk guys talk about where specifically, you know the outperformance is coming from? Is it macro, is it investments, is it a favorable competitive environment and what gives you the confidence that it's going to persist? And just on a related note on the discount rate, Jeff, you mentioned that you expected to not be down as much as you guys envisioned. So what would be the trajectory going forward given there's not as many of these partnership discounts or anything else sort of affecting that number.

Stephen Joseph Squeri -- Chairman and Chief Executive Officer

So Sanjay, let me sort of start out and maybe get the first part of the question. You know look, what we have really focused on and you know, not just this year but over the last couple of years is we've really focused in on investing, we've invested in value, for our Card Members, we really invested in value propositions and we've certainly invested in coverage. And Jeff will talk about sort of discount rate but you've seen discount revenue. But when you look at the -- you look at our growth, it's across the board. You've got double digit growth in every billing segment that we report with the exception GNS which has the issue as we wind down Australia, wind down Europe but you know whether it's a small middle market in the US, even large in global accounts, certainly international both consumer and small business was really high double-digit growth rates and you know with SME up in the 20% and US consumer as well. And look we continue to grow our lending book judiciously not only in the US but in international. So I think we've spoken in times that maybe from an organic perspective, there's a little bit of the economy but certainly we believe that the investments that we're making are really driving this sustainable -- what we believe is sustainable growth and we believe our value propositions are resonating with what would be our traditional customers and what I think a lot of people are surprised that as millennials. And so it really is across the board growth.

Jeffrey Campbell -- CFO

Yes, the only thing I'd add on that Sanjay, then I'll talk about discount rate is, we did talk going actually all the way back to January call about the fact that late in last year's fourth quarter, we did see a noticeable uptick in what we would call organic growth and we really can't particularly attribute that last little uptick to anything other than the economy. And it sustained itself this year, though not further accelerated. So there is a modest boost from economic growth, but I think all of the factors Steve talked about are the much larger drivers for us. On discount rate, Sanjay, you have enough history to know that for many years, we used to talk about it, 2 basis points to 3 basis points a year decline and this average discount rate due to the mix, people hitting volume triggers et cetera, in fact if you look at the history, it was using more 1 to 2 basis points. And then for a couple years now, we've said because of OptBlue; because of regulation in Europe, Australia; because of a few strategic agreements we've done that has driven it down an unusual amount for all those you see this quarter are beginning to fade. Now I'm not going to give you guidance for the future beyond that because I think Steve and I have been very clear this year that our focus is on driving discount revenue growth. And so we're going to make decisions sometimes that leverage our integrated business model, if we think they're going to drive discount revenue growth and we're not going to worry about the average discount rate. What I would say is we feel good within any given category of merchants about the stability of the rate and about where we are.

Sanjay Sakhrani -- KBW -- Analyst

Thank you.

Jeffrey Campbell -- CFO

Thanks, Sanjay.

Operator

Our next question from the line of Don Fandetti with Wells Fargo. Please go ahead.

Jeffrey Campbell -- CFO

Hey Don.

Donald Fandetti -- Wells Fargo Securities, LLC -- Analyst

Good evening, Jeff. If I look at sort of forecasted revenue estimates, they are probably around a 7-handle yet, you guys are doing a 9, 10. And so I guess the question is, on sustainability. So you talked a little bit about build business, but you are facing tougher comps on proprietary yet easier on GNS. I guess my question is, can your build business growth accelerate or is it more likely that we've peaked out here?

Jeffrey Campbell -- CFO

Well, I'll make a few comments and then Steve, you can add. Look, I think Steve and I couldn't have been clearer about the focus we have on sustaining the kind of revenue growth that you have now seen for six consecutive quarters. And of course that revenue growth is coming from a mixture of great rate billings growth, steady loan growth, steady growth in all the fees that we generate and the key to sustaining the overall revenue growth we have is we see a long run way to sustain growth in all three areas. So I would say we're not particularly trying to drive or forecast or suggest acceleration from where we are, we feel really good about the share and scale gains that we're getting with our performance right now and that's what we are focused on sustaining.

Stephen Joseph Squeri -- Chairman and Chief Executive Officer

Yes. Look, I think what we have said is, we have lots of great investment opportunities and we're going to take advantage of those investment opportunities and those opportunities are not only within our commercial business and consumer business, but they're broad-based. And so what you will continue to see us do is invest in card acquisition and you will continue to see a focus on investing in coverage. And we believe that as we have invested in coverage here in the United States, that has made a huge difference and you're seeing that play out in discounts, you've seen that played out in the growth, you've seen that played out in discount revenue growth and we're not at where we want to be even in the United States at this particular point in time, as we've said we want to get to virtual parity coverage by end of 2019. And so you will continue to see us focus there, you will continue to see us focus internationally on coverage which there is a relationship between improved coverage and driving build business and the more build business, if you think about our spin-centric model, then you actually can drive -- continue to drive the revenue growth that we're also getting from lending. So bottom line is, we're going to be investing for share and for scale as we continue moving forward.

Donald Fandetti -- Wells Fargo Securities, LLC -- Analyst

Thank you.

Jeffrey Campbell -- CFO

Thanks, Don.

Operator

And our next question from Jill Shea from Citi. Please go ahead.

Jill Shea -- Citigroup Inc. -- Analyst

Thanks, good evening.

Jeffrey Campbell -- CFO

Hello.

Jill Shea -- Citigroup Inc. -- Analyst

Related to build business from large and corporate customers, you saw some accelerating trends there. Can you just speak to the strength and how should we think about growth going forward? And then perhaps also touch on airline and US T&E and the strength that you saw this quarter and how you should think about the outlook going forward there?

Jeffrey Campbell -- CFO

Yes, I think for large and global, it was a particularly good quarter, I think there are some -- we will have some grow over issues as we move forward but what you're seeing is a little bit more diversification in terms of -- we're getting some more B2B within that space. But we also continue to see our large corporates and our global accounts continue to spend in the in the T&E space. So we're really happy with the -- the sort of a double digit growth, it's not something that we've experienced in quite a while. In fact if you go back a few quarters, you saw this sort of at a 2% level at negative level and we've had that uptick partially due to our focus on B2B, but also due to increased T&E spending with our large and corporate accounts.

Jill Shea -- Citigroup Inc. -- Analyst

Very helpful. Thank you.

Operator

And our next question from the line of Betsy Graseck with Morgan Stanley. Please go ahead.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi. Good evening.

Jeffrey Campbell -- CFO

Hi Betsy.

Betsy Graseck -- Morgan Stanley -- Analyst

I just wanted to change the conversation a little bit and talk about the very fast loan growth you've been generating with strong credit quality, a little bit of an uptick in net charge offs but not that much. And related to how you're thinking about reserving as we go into the (inaudible) world, really the question has to do with the fact that you've got obviously a lot of transactors. Does that mean that you could potentially pull back on some of the reserving that you're doing and drive that into even faster loan growth or potentially buybacks or is that not part of the equation and if you can speak a little to how you're thinking the new accounting world and when we would be getting some information with regard to how that's going to impact you, that would be helpful. Thanks.

Jeffrey Campbell -- CFO

So, let me first just remind you, we're now four years into growing a little faster than the industry because of our unique focus on capturing a bigger share of our own customers' borrowing behaviors which frankly we've historically underpenetrated and that's why we have 60% of our loan growth coming from our existing customer base, I'd point out, if you take that growth out, you would be growing at about at the industry (inaudible) four years into this exercise, we still buy quite a stretch, best-in-class credit metrics and credit has consistently performed as we have told people it would. So, we feel really good about the growth and we actually think we have a very, very long runway to continue to grow a little faster than the industry. On (inaudible), Betsy, I'm afraid I'm not going to give you a lot of insights that are much different from what others have said. If you look at our card lending book, I would suggest that you are liable to see larger reserves that are somewhere in the range of what you've heard others talk about, somewhere in the 10%, 20%, may be a little higher percent range. What is unique about us, as you pointed out is, we are the only financial institution in the world that has a really large charged card franchise that obviously has some different dynamics than a (inaudible) world. Frankly, we're still working through that, partly because of our uniqueness, there's a lot through with regulators and auditors and accounting authorities. The net of all that, we'll have to see, I guess I will go on record as saying we're one of the great majority of financial institutions who think that there is incredibly complexity to this accounting standard, there is probably also some pro-cyclicality which maybe the opposite of what the regulators set out to accomplish when they went down this path, and we'll have to see what that means overall. We'd also hope, but boy, it's way too early to say that this is a pure accounting change, which you would think shouldn't affect ratings, shouldn't affect capital requirements, although there are no certainly no commitments out there right now from the Fed or the rating agencies to in fact take that approach. So, I think there is still a lot of discussion to have on this, Betsy and I actually see that discussion growing a little bit in the industry and as well as NDC. I will say, like most other institutions in 2019, we'll be running parallel and that's really when we'll be able to get people more specific insights.

Betsy Graseck -- Morgan Stanley -- Analyst

Thank you.

Jeffrey Campbell -- CFO

Yes. Thank you.

Operator

And we'll go next to David Togut with Evercore ISI. Please go ahead.

Anthony Cyganovich -- Evercore ISI -- Analyst

Hi, good evening, this is Anthony Cyganovich on behalf of David Togut. Do you expect to reduce merchant discount rates further in Europe, as PSD2 goes into effect in Continental Europe next year, which may more promote ACH based payments?

Jeffrey Campbell -- CFO

So, look, as we look at Europe, as we're outside of the regulation, but our competitors aren't and so we still have a premium. Our business in Europe is very different, it is a corporate card, SME, really high-end consumer business which merchants value and when you look at that business, that's a business that's grown in the high, high, double digits at this particular point for us all across the board, international and in Europe. So I don't see that happening and I don't see us having actually the exact same coverage needs that we do in the United States. But what we will do is we will use discount rate as a tool to provide coverage where we need coverage, whether that be B2B, whether it's a different value equation, and remember again, here is where the integrated model helps us out, because we have both sides of that equation and especially in Europe because we're not able to use sort of the same models we have in the United States. And as we need small merchants, we may run our own, what I'd call our own theoretical OptBlue program here from a pricing perspective. But other than that I don't see us -- I see us maintaining that premium. And again, I wouldn't look at that as it relates -- share this obviously but I wouldn't look at that as it relates to the discount rate in Europe, I would look at us as using that discount rate as a tool to get coverage when and where we need it.

Analyst -- -- Analyst

Thank you.

Operator

We have a question from Bob Napoli with William Blair. Please go ahead.

Bob Napoli -- William Blair -- Analyst

Thank you. And nice job on the quarter. The International SME and consumer businesses continue to grow at a very high rate. What is specifically driving that? I think, it's still relatively small relative to the opportunity. Are we early days -- what is driving that? And if I could, the Amazon program, how are you going to manage that with all the other SMB programs -- the small business programs you have in US., how does that fit in and compete with your other programs?

Stephen Joseph Squeri -- Chairman and Chief Executive Officer

Let me go with the second one first here. I think, we'll be launching the Amazon product soon. And we have a range of small business products. We have a Delta co-brand, a Hilton co-brand, a Marriott co-brand, a Lowes co-brand and now we have an Amazon co-brand, and additional proprietary products. And the proprietary products, whether those be cashback, whether they be charge products or what have you, and a lot of our customers actually use multiple products. You will see small businesses that use a corporate card product; you'll see small businesses that use a Marriott product and use an Amex SimplyCash product. And I think the beauty of the Amazon and Delta, Marriott and so forth and so on is that, we provide small businesses the opportunity to use the variety of products that meet their rewards needs and spending needs and so forth. And so our view is, I'd rather have that sort of arsenal of products all under the American Express umbrella then certainly have to compete there. And so it will be -- you may see customers that have our small business product today, also get the Amazon products, just like they also got the Marriott product. And so I just think it's one of the ways that we will continue to drive our billings and drive our position in commercial payments in the US. As far as your first question, when you look at the SME segment internationally and then I'll get into consumer, when you look at the SME segment internationally, which is a relatively newer segment that is being penetrated, here's the advantages of global scale. We're able to do is leverage our global infrastructure, leverage our global footprint, leverage everything that we have in our commercial business in the United States and our global business outside the United States. And we've been driving that business and the way we drive that business is we drive it in multiple ways, we drive that from a telesales perspective and in person sales perspective and a digital perspective. And the reality is we see that as a large growth opportunity. And when you look at that business for us, right now, we are growing that primarily on from a billings perspective, but over time it will be a working capital component we believe to that base that we have. From a consumer perspective, American Express has been a premium product brand outside the United States for many many years. And look, we are continuing to inject value and what's really interesting about our business outside the United States is that in a lot of places or in a lot of cases, our fees that we charge to our consumers are actually higher than they are in the United States and the services that we provide are on par or even better. So we see that opportunity, still as a growth opportunity for us. And as we continue to increase the coverage, we believe spending will increase as well.

Bob Napoli -- William Blair -- Analyst

Thank you. Appreciate it.

Analyst -- -- Analyst

Our next question from James Friedman, Susquehanna.

Operator

Hi, let me me echo the congratulations, this is Jamie of Susquehanna. Since you called it out, Steve, I just wanted to probe about trending the leverage and the margin trajectory, especially with regard to Card Member services. Just kind of philosophically, I realize you conclude that it's a good area of investment. But I'm just getting questions from investors, at what point will it likely stabilize because 30% is a pretty big ticket? Thank you.

Jeffrey Campbell -- CFO

You know let me make financial comments Steve and then you can comment on a strategy. One caution, James, one for you and really for everyone is, we pull different levers at different times in different geographies, in different parts of our business. And one of the reasons why we slipped a while back to talking broadly about Card Member engagement costs, which includes rewards, which includes business development, payments to partners, traditional marketing and it includes cost of Card Member services, although I would point out that's by far the smallest component. It's because at different times, the growth rates are going to vary across those three depending on what we think is going to produce best return. So I encourage you to look in many ways across all three of those categories. But we've been pretty clear today that look, those have been growing a little faster than revenue. But we actually feel great about the revenue growth that that's generating. We feel great about the platform that provides to produce steady double-digit EPS growth and we think it is allowing us to build scale and relevance in a way that quite frankly we haven't in a number of years.

Stephen Joseph Squeri -- Chairman and Chief Executive Officer

Yes. Look, I think, it really gets down to sort of how we inject value and I think, Jeff is right, I mean we look at multiple levers to do that. And I think as we continue to get more customers, as we continue to get more of their billings, it provides us that platform to do more things with them as we continue to develop more and more products and services. So again, our strategy here is really about more share, really about more relevance and really about more scale. And we believe that's the right lever for us to pull at this particular point in time.

James Friedman -- Susquehanna -- Analyst

Thank you.

Unidentified Speaker --

Thanks James.

Operator

And we go to Moshe Orenbuch with Credit Suisse. Please go ahead.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. Thanks. I wanted to talk about the reserving, because obviously very strong results, both somewhat in Q2, but even more so in Q3 when you did lower your expectations for the full year. How do we think about it going into 2019, just because the portfolio is obviously growing at a fairly fairly high rate and while credit ratios are good, the dollar amounts of both delinquencies and loss are growing and I guess, how do we think about that into 2019?

Unidentified Speaker --

Well, Moshe we'll have to give you a -- of course much more thorough answer in 90 days when we are on the January call and we'll provide a lot of commentary on 2019. But look, I'd make a few comments. As you very well understand, provision is affected by a lot of things, including sequential rates of growth in your loan. So in a world though, where let's say, our loan growth in 2019 roughly looks like where it is today, I think, what you're seeing in our trends of late is we're getting past some of the more dramatic seasoning that we had to go through. And we're starting to get to the point where your provision growth will begin to add some (inaudible) down, all else being equal, toward your loan growth rate. Now, we are growing loans in the mid teens. So that tells you that you should expect the provision to at least grow at that level, even as we maintain the kind of credit performance that we've had. But we feel really good about the economics we've been getting from four years of growing lending a little faster than the industry and well, I think we can do this in the current kind of economic climate for many years to come.

Analyst -- -- Analyst

Thanks so much.

Operator

Our next question from the line of Rick Shane with JP Morgan. Please go ahead.

Richard Barry Shane -- JP Morgan Chase & Co, Research Division -- Analyst

Guys, thanks for taking my question. Look, you guys have articulated and really executed on a wallet share driven loan growth strategy. I am curious if there are any differences in how seasoned customers build balances and if there is any more concentration in terms of transaction, higher utilization initially or how we think about (inaudible) and future growth given that this portfolio could be constructed a little bit differently?

Stephen Joseph Squeri -- Chairman and Chief Executive Officer

I think Rick the thing that I always keep trying to bring people back to is historically our customers don't think of American Express as a place to do borrowing on a card and that's why Doug Buckminster, see myself, we talk a lot about this statistic in the U.S. consumer segment, which is where most of our lending is, and we capture roughly 50% of our customer spending behaviors and only 25% of their borrowing behavior. So what we have consistently worked at now for the last two years is trying to do lots of different things in marketing, in product, in pricing, in incentives to try to change that mindset and that's why 60% of our loan growth is coming from our existing customers, it's why we're able to keep credit metrics at the levels that I was just talking about in response to Moshe's question and it's why we think we can keep at this for a long time.

Jeffrey Campbell -- CFO

Yes, the only thing I would say is that, and I've said this before in meetings and at our analyst calls and so forth, it is important for us to have a broader relationship with our customers and if they're going to go and borrow money someplace else, that also provides the possibility of them spending someplace else as well. So it really is important, which is why it is important for us from a small business perspective to continue to talk about and expand what we're doing with small businesses whether that be cross-border payments, whether that be merchant financing, 90-day working capital loans and things like that, because they do have other options and it really is important, especially in a world where things are still accessible from a digital perspective, that they don't look at us as a one-trick pony and that they're looking at us as a source of their -- and look, this applies from a small business (inaudible) and a consumer (inaudible) as a source of their working capital needs. And that's what we're really trying to do, and so that's why this messaging, and you see this a little bit with some of our advertising of it, when you look at it and you see somebody applying for a loan, a small loan online as they're watching TV. So you're going to continue to see us expand to what we're doing with our customers.

Richard Barry Shane -- JP Morgan Chase & Co, Research Division -- Analyst

Got it. And again look, I'm just sort of curious presumably a seasoned American Express customer has a different balance build behavior than a millennial? And that totally makes sense. I'm trying to understand what the implications are in terms of future growth that we should think about how those loan seasons -- no judgment one way or the other, better, worse, faster, slower, but how we think about the difference in terms of how that initial entry behavior translates into long-term performance?

Stephen Joseph Squeri -- Chairman and Chief Executive Officer

I guess, Rick, I'm going to come back to, remember the diversity of our product portfolio, U.S., international, consumer, small business, lots of different cards, people borrow on the platinum card, they borrow every day cards. Those kinds of generalizations, I am just not sure, frankly we don't look at the world that way because of the diversity of our base. I'm just going to come back to, we see a long runway to continue what we're doing here.

Richard Barry Shane -- JP Morgan Chase & Co, Research Division -- Analyst

Got it. Thank you very much, guys.

Operator

Thank you. Our next question from Mark DeVries with Barclays. Please go ahead.

Mark C. DeVries -- Barclays Bank PLC, Research Division -- Analyst

Thanks. Coming back to the topic of the relationship between your revenue growth, engagement expenses and EPS, I think you indicated, given the faster engagement expense you were seeing, EPS growth adjusted for the tax benefits, it's slightly ahead of the revenue growth, and I think the Amex of all, we could kind of reliably expect that a mid to high-single-digit revenue growth that translated into kind of a mid-teens EPS growth. Would you expect to widen back out to that kind of relationship over time or do you see that margin pressure persisting?

Jeffrey Campbell -- CFO

Well, Mark it's a very good question. And let me just may be clear with everyone. So Steve and I were very clear on the call that we are focused on sustaining the high levels of revenue growth we have. We think we have a good runway to do that and we think it's a great basis to produce double-digit EPS growth. If you look at Q2 and Q3 though, just to look at some actual results and there's a little complexity to the taking out the impact of the Tax Act. But if you do take the impact of the Tax Act out, you see 9% to 10% EPS growth in those two quarters and you see 10% to 12% EPS growth excluding the impact of the Tax Act. In history, to your point, 2012 to 2014, we were getting very little revenue growth, 4% frankly losing share, losing some scale, but we squeezed 11% EPS growth out of that, pre-crisis. You saw some numbers like that, we don't think that's the right way to run the company in the current competitive and regulatory environment. We don't think that produces the sustainable foundation that's going to build scale and relevance and share that will allow us to really sustain double-digit EPS growth.

Stephen Joseph Squeri -- Chairman and Chief Executive Officer

Right. I mean, look, the Amex of all, the Amex of today from a numbers perspective, we're in a very different environment as Jeff just said. We're in a different environment competitively, we're in a different environment from a regulatory perspective, we're in different mindset to though. And I think that mindset that we have is it is really important that we continue to grow our share and we continue to grow our relevance and scale. And you don't need any more proof of that than what we've been doing from a coverage perspective, and just how important it is, and what we've been doing from the value injection perspective with our card members. And so we're going to continue to do that as well as continue to build capabilities so that we can expand our relationships with them. So we believe the right way to win is to really focus in as we both said on higher revenue growth with a narrowing of that revenue and that EPS number. But just to point out, it is with a lot higher revenue growth.

Mark C. DeVries -- Barclays Bank PLC, Research Division -- Analyst

Got it. Thank you.

Operator

And we go toBill Carcache with Nomura. Your line is open.

Stephen Joseph Squeri -- Chairman and Chief Executive Officer

Hey Bill.

Bill Carcache -- Nomura Securities Co. Ltd., Research Division -- Analyst

Thank you. Good evening. Hi Steve and Jeff. I had a follow up on Moshe's question earlier. Credit has held up much better than many expected with Amex never really facing the severe normalization headwinds that some of your lend-centric competitors did? Can you help us understand the role that your closed loop things like machine learning and other technologies have played in driving your strong credit performance and maybe speak to the extent to which you think those assets provide you guys with an edge over your competitors who operate in an open loop environment?

Stephen Joseph Squeri -- Chairman and Chief Executive Officer

It's -- other than if you look at the sort of blip during the credit crisis, the financial crisis, the closed loop is a secret sauce, it's the secret sauce from a fraud perspective, it's a secret sauce from an underwriting perspective, its a secret sauce from a targeting perspective upfront and who you acquire. And reality is that good credits starts right at the beginning of the funnel, in terms of who you're targeting, who you're letting in, how much money you're lending, and all of that is all about how we continue to invest in our machine learning capabilities and our data capabilities and all of that's really powered by the closed loop and all the data that we have. So it has been a tremendous advantage for us from day one. The other thing I will add on this is that the other thing that's really important within the closed loop which absolutely has nothing to do with the closed loop is no pre-set spending limit. And so when we look at our machine learning capability, it also helps to drive just how we set that no pre-set spending limit. And one of the huge advantages that we have is in the small business space, because in the small business space, small businesses use credit card products as a form of working capital, whether it's charged or whether it's lending. And to be able to set a no preset spending limit where we're dynamically determining what the level of spend is based upon data from millions of small businesses and historical data and so forth is a huge advantage to us as well. So, look there's many models that are out there in this business, there's a PayPal model, there's Visa Master Card model, there's JP Morgan Chase model. Our model is unique and the uniqueness is it's integrated that integration gives you the closed loop, the closed loop gives you the data, it gives you the relationships on either side and it gives you the ability to have the -- to play with the economics which becomes even more important down the road from a B2B perspective. So closed loop is key for us.

Bill Carcache -- Nomura Securities Co. Ltd., Research Division -- Analyst

Thanks very much.

Stephen Joseph Squeri -- Chairman and Chief Executive Officer

Thank you, Bill.

Operator

Our next question from the line of Jeff Cantwell with Guggenheim Securities. Please go ahead.

Jeff Cantwell -- Guggenheim Securities -- Analyst

Can you talk a little more about today's announcement with PayPal? I guess what I'm curious about is how much opportunity is there for Amex card holders who might be interested in using Amex rewards points for purchases at the PayPal merchants online. Can you maybe tell us why this is something where you think you'll see a lot of demand from your cardholders? And then if I coudl -- I just thought -- if you don't mind, just a related question, how eager are Amex card holders to add their Amex cards to the PayPal wallet through the mobile app or the website and then start to spend via wallet? I'm really just try to get a framework for how incremental this might be for you (inaudible)?

Stephen Joseph Squeri -- Chairman and Chief Executive Officer

Yes. So look, I think what you saw today really is a multifaceted expansion of our relationship with PayPal. Our relationship with PayPal goes way back. They are a huge partner of ours from a merchant acquiring -- merchant perspective. They're a leader in the digital space. I think that's very, very clear. My perspective is it always made sense for us to expand our relationship with them. And you know, look -- and it's (inaudible) really great to work with. I mean, I have a long term relationship with Dan, we worked really well together here. And the teams, as we went through this what we tried to think about is ways we could add incremental value to American Express, ways we could add incremental value to our merchants, ways we could add incremental value to PayPal, in ways we could add incremental value to our card members. And so when you think about sort of this integration within the app and within the wallet but one thing that you realize is, the more seamless you can make things, the easier it is for your card members, your customers to transact. I mean, when you think about merchants for example, one of the things that they look for is to make sure that they don't they don't use shopping carts and that they make sure it is easy as possible online and not shopping carts -- sort of in the supermarket but online and what we wanted to make sure that we can make it as seamless as possible for our card members to be loaded their cards into PayPal because PayPal offers us a tremendous expansion of our network today. And so to be able to make those millions of merchants available to our card members in a more seamless way is a win win for everybody, it's a win win for merchants, it's a win win for us it's a win win for PayPal, it's a win win for our card members. As far as the American Express pay with points and how many card members will use those points to PayPal merchants, this is the most valuable bank of points anywhere in the world bar none. It's a behemoth and the reality is that we were looking for more ubiquity. Our card members use points for a variety of things at a variety of places and this expands that ubiquity and it is going to be good for merchants, it's going to be good for our card members, can I put a number around it, I can't put a number around it but the reality is I think this will be an uptick in points burned, I think this will be an uptick in card member satisfaction, I think it's going to be an uptick in merchant satisfaction as well. So we're really pleased with this and obviously there will be more announcements as we move along from a timing perspective and what have you, but we're really excited about this expansion of strategic partnership.

Operator

Thank you. And now the last questions comes from the line of Christopher Donat with Sandler O'Neill. Please go ahead.

Christopher Donat -- Sandler O'Neill -- Analyst

Hey, good afternoon. Thanks for tucking me in. Wanted to ask one strategic question on a piece of the revenue that you haven't touched on much today is the annual fees because with the platinum and gold cards, you've seen some increases and Jeff mentioned some increase or some growth in Japan and Australia on fees. I'm just wondering if you're strategically thinking about fee increases being more likely in the future? It seems like that was something -- there were some hesitancy around in past years but it seems like there's more appetite among consumers for higher fees, I'm also wondering if there's also more trade off on some of your member services with that too?

Stephen Joseph Squeri -- Chairman and Chief Executive Officer

So if you look at it right or now our card members are looking for value and our experiences is that card members will pay for value and so what you have seen is lots of value injection and that value injection takes many forms. I mean, when we look at card member engagement costs, you look at some fixed -- you look at some fixed cost which could be your allowances and things like that which get consumed as as people go through but they don't get charged out on a variable basis. You look at rewards costs and you look at deals we may do with some of our merchant partners where both of us can bring value to that equation as well. And so our belief is if you are bringing value, you should charge for that value and there's no better proof in the pudding then when -- in a very, very difficult competitive environment with the launch of Chase Sapphire, we put in a $100 increase in our in our platinum card and so attrition goes down and so our acquisition go up and so more acquisition though up from a millennial perspective as well. And reality is (inaudible) value. People will pay for value and American Express is known as a brand that does provide value, and so where we have opportunities to raise our fees, we will raise our fees and we did that just with the gold card, we've done that in various international markets but we've injected value. And when you inject value, the other benefit of injecting value is people will use the card more. When they use the card more, they spend more, when they spend more, you give them an opportunity to to revolve more. So it's a virtuous cycle as far as we're concerned and we're going to continue to pursue that strategy as well.

Edmund Reese -- Head of Investor Relations

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

Operator

Thank you. Ladies and gentlemen, this conference call will be made available for digitized replay that begins at 8:00 PM Eastern today, running until October 25th at midnight Eastern. You can access the AT&T TeleConference replay system by dialing 1800-475-6701 and enter replay access code, 454803. International participants me dial 1320-365-3844 with the access code 454803. Those numbers again are U.S., 1800-475-6701 and international participants dial 1320-365-3844 and the replay access code, 454803. And that will conclude our teleconference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

Duration: 68 minutes

Call participants:

Edmund Reese -- Head of Investor Relations

Stephen Joseph Squeri -- Chairman and Chief Executive Officer

Jeffrey Campbell -- CFO

Sanjay Sakhrani -- KBW -- Analyst

Donald Fandetti -- Wells Fargo Securities, LLC -- Analyst

Jill Shea -- Citigroup Inc. -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

Anthony Cyganovich -- Evercore ISI -- Analyst

Analyst -- -- Analyst

Bob Napoli -- William Blair -- Analyst

James Friedman -- Susquehanna -- Analyst

Unidentified Speaker --

Moshe Orenbuch -- Credit Suisse -- Analyst

Richard Barry Shane -- JP Morgan Chase & Co, Research Division -- Analyst

Mark C. DeVries -- Barclays Bank PLC, Research Division -- Analyst

Bill Carcache -- Nomura Securities Co. Ltd., Research Division -- Analyst

Jeff Cantwell -- Guggenheim Securities -- Analyst

Christopher Donat -- Sandler O'Neill -- Analyst

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