Investors who were stunned by American Express(NYSE:AXP) fourth-quarter loss may want to read the fine print. Earnings were negatively impacted by a one-time tax charge related to the December passage of the Tax Cuts and Jobs Act. Excluding the impact of tax changes, adjusted net income grew to $1.4 billion, or $1.58 per diluted share, in the fourth quarter.

American Express' fourth quarter: By the numbers

The "closed-loop" card company reported solid, mid-single-digit increases in net revenue and discount revenue (fees earned when its cardholders make purchases), driving increases on the top and bottom lines in the fourth quarter.


Q4 2017

Q4 2016

Year-Over-Year Change

Net revenue

$8 billion

$7.4 billion


Discount revenue

$5.1 billion

$4.7 billion


Adjusted net income

$1.4 billion

$825 million


Adjusted diluted EPS




Data source: American Express. Adjusted net income figures exclude the impact of tax charges taken in the fourth quarter of 2017. EPS = earnings per share.

What happened this quarter

  • Let's get the tax mess out of the way first. American Express took a total of $2.6 billion of one-time tax charges this quarter. The bulk of these charges relate to "deemed repatriation" of overseas profits, resulting in an accounting charge today for taxes that will be paid over the course of the next eight years. It makes the income statement look bad this quarter, but it comes with a payoff in the form of an estimated 22% tax rate on profits in the future. (Almost every bank is taking a tax-related accounting hit this quarter, and AmEx is no exception.)
  • Total loans grew to $76.1 billion in the fourth quarter, up 14% compared to the year-ago period, or 13% when adjusted for currency fluctuations. American Express has made loan growth a priority, seeking out customers who will "revolve" or carry balances from one month to the next, and thus pay interest on their balances. 
  • Total billed business increased 11% compared to the year-ago period, or 9% when adjusted for currency fluctuations. Small and mid-sized enterprise (SME) card users were standout stars, as billed business among this cohort increased 9% year over year in the United States, and 20% on a currency-adjusted basis internationally, according to conference call commentary.
  • Credit quality remains excellent. American Express wrote off about 1.8% of loans on an annualized rate in the fourth quarter, up slightly from 1.6% on a worldwide basis in the year-ago period. Loans 30+ days past due stood at 1.3% of total loans, up marginally from 1.2% in the same quarter last year. No matter how you slice it, American Express' credit metrics are excellent for a credit card issuer, though rapid loan growth may lead to an increase in charge-offs in 2018. (To put AmEx's write-offs in perspective, consider that JPMorgan Chase reported a net charge-off rate of nearly 3% its card business during the fourth quarter of 2017.)
  • Discount revenue fell to 1.75% of billed business in the second half of 2017, down 0.04 percentage points from the first half of 2017, which was in line with expectations laid out at its investor day earlier this year. The company's OptBlue program for small businesses and international pricing changes were the primary drivers of a declining discount rate. That said, billed business is growing at a faster clip than discount rates are falling, leading to an increase in discount revenue compared to the year-ago period.

What management had to say

American Express will likely always have a "spend-centric" business model, which refers to the fact that it generates more of its revenue from discount fees when cards are used than interest on balances its cardholders carry from month to month. This stands in stark contrast to the rest of the industry, which typically earns far more from interest than discount or interchange fees. 

That said, the company's book of credit card loans is growing like wildfire, and management suggested that provisions for loan losses will grow in 2018 as it builds reserves against bad loans. In response to an analyst's question, Jeff Campbell, AmEx executive vice president and CFO, said that its new loans and credit extensions are hitting the "key seasoning time period" in which losses begin to tick up. 

Close-up shot of a credit card.

Image source: Getty Images.

Growing a book of credit card loans isn't just costly from a marketing perspective; card companies often see losses rise one to two years after a new card is issued, at which time bad credits are worked out and the remaining borrowers perform more like its seasoned relationships.

Note that the 33% year-over-year increase in loan-loss provisions in the fourth quarter was far higher than the 11% increase in card member loans outstanding. American Express expects higher provisions throughout 2018, as it continues to seek out opportunities to drive loan growth, though management said that provisions were in line with their expectations.

It's no cause for concern, as people who carry balances on credit cards are obviously more likely to default than those who always pay off their cards in full (AmEx's legacy business), but it's something to watch throughout 2018 as AmEx looks to loans to drive revenue and profit growth. American Express will start looking more like a lender than a card network, and that means more earnings volatility thanks to provisions.

Looking ahead

American Express pointed out that due to charges resulting from the Tax Cuts and Jobs Act, its Common Equity Tier 1 (CET1) to risk-weighted assets ratio fell to 9%, below its projections during the 2017 CCAR (stress test) process. As a result, AmEx will simply allow its buyback authorization for the first half of 2018 to go unused to rebuild its capital base. Its dividend, however, will not be affected.

It's often said that companies keep two sets of books: one for investors using generally accepted accounting principles (GAAP) and another for tax purposes (for determining how much they owe Uncle Sam). It's fair to say that "too big to fail" banks keep a third set of books for regulators. The tax charges this quarter impacted the ratios regulators use to determine how much capital banks like AmEx can pay out to shareholders, so AmEx has decided to forgo buybacks in 2018 to "repair" its balance sheet for regulatory purposes. 

Is AmEx in trouble? No. Is AmEx worse off than it was before the tax change? Perhaps only under the metrics regulators use. In prepared remarks on the conference call, the company said that "[g]iven the lower tax rate, we expect that over time, we will more than make up for any reductions in the buyback in 2018 and generate more earnings and return more capital than we would have without tax reform." One-time tax charges for lower taxes in perpetuity are a trade-off that any bank would take time and time again, even if the result is temporary pain from a regulatory perspective.

The company guided for earnings per diluted share of $6.90 to $7.30 in 2018, which, at the midpoint of $7.10, represents a 21% increase over its results in 2017. Shareholders should like the sound of that. 

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