Jeff Campbell
Vice Chairman and Chief Financial Officer at American Express
Well, thanks, Steve, and good morning, everyone. It's good to be here today to talk about our third quarter results, which reflects strong momentum in our core business, driven by the investment strategy that Steve just spoke about. You see this momentum in our summary financials on Slide 2 with third quarter revenues of $10.9 billion, up 24% year-over-year on an FX adjusted basis, third quarter net income of $1.8 billion and earnings per share of $2.27.
To get right into a more detailed look at our results, let's talk about how the strategies that Steve just discussed have helped to drive our volumes back above pre-pandemic levels, as you can see on Slide 3. You will notice in the several views of volumes to begin on Slide 3 that we continue to show third quarter volume trends on both a year-over-year basis and relative to 2019 as we find this provides a clearer picture of the progress we are making in building growth momentum.
We did see continued momentum in spending volumes in the third quarter with total network volumes and billed business volumes both up around 30% year-over-year and up 4% relative to 2019 on an FX adjusted basis. This growth in billed business is being driven by continued momentum in spending on goods and services, which you can see on Slide 4, represents 79% of our overall billed business and was up 19% versus 2019 and strengthened sequentially versus Q2. We are very pleased with this continued strength in goods and services spending given the investments we've made in premium card member engagement, prospect acquisition, growing our coverage and expanding relationships with key partners.
Focusing in first on our consumer business on Slide 5, overall spending was 9% above 2019 levels as growth in goods and services volumes accelerated 20% above 2019 in the third quarter. For many years, we've been focused on attracting and engaging younger cohorts of card members through expanding our value propositions and digital capabilities. Aided by these efforts, you see that millennials and Gen Z customers are leading the growth in spending, reaching 38% above 2019 levels for the quarter, while older age cohorts have shown continued steady, though smaller improvement as well.
Turning to our commercial business. As you know, we've been very focused on helping our small and medium size enterprise clients run their business by expanding the range of products and capabilities that meet their B2B payments and working capital needs. This strategic focus on SMEs has been key in driving the performance you see on Slide 6. Global SME spending, which represents the bulk of our commercial billed business, remains the most resilient across all of our customer types with spending up 11% versus 2019 driven by strong growth in B2B spending on goods and services, which grew 21% above 2019 levels in Q3. In contrast, large and global corporate card spending, which historically has been primarily for travel and entertainment, continued to show fewer signs of recovery. We've said all along that we expect this will be the last customer type to see travel recover.
Digging into goods and services spending trends on Slide 7, we continued to see strong growth in online and card-not-present spending, which was up 27% versus 2019 even as offline spending fully recovered in the third quarter, demonstrating the lasting effect of the behavioral changes we've seen during the pandemic. We also saw growth across all categories of goods and services spending with both consumer and SMEs driving the strong growth in retail and wholesale spending, and SMEs leading the growth in advertising and media spending.
Turning now to T&E spending on Slide 8. You continue to see a recovery that is on track with our expectation that will reach 80% of 2019 levels in the fourth quarter. T&E spending improved sequentially versus Q2, and we're pleased to see restaurant spending, our most resilient and now largest T&E category, back above pre-pandemic levels in the quarter. We did see some modest impacts from the Delta variant in the airline category where the pace of recovery slowed a bit in August, but it has strengthened again in September and into early October. The trends we have seen reinforce our view that travel and entertainment spending will eventually fully recover, but at varying paces across customer types and geographies. And we remain focused on maintaining our leadership position in offering differentiated travel and lifestyle benefits to our consumer and commercial customers as they return to travel.
Turning to our last look at volumes on Slide 9. You do see that the overall billed business volume recovery continues to be led by the U.S., which first surpassed 2019 levels in Q2 and was up 9% in the third quarter. Importantly though, growth in goods and services spending has been strong both in the U.S. and outside of the U.S. Overall spending is only weaker outside the U.S. because historically we have more travel-related spending in our international regions. And international T&E is recovering more slowly than in the U.S. given cross-border travel restrictions. Looking ahead, based on current trends, we still assume that overall T&E spending globally will recover to around 80% of 2019 levels in the fourth quarter of 2021. And even more importantly, we expect continued strong growth momentum in goods and services spending. So all in all, a really good story on spending volumes.
Moving on then to receivable and loan balances on Slide 10. Loan balances continued to slowly recover in the third quarter and were up 9% year-over-year and 2% sequentially. Relative to 2019 though, loan balances remained down 10% as we continue to see the liquidity and strength amongst our customer base leading to higher paydown rates, which is also driving the very strong credit performance, I'll talk about in a moment. I would point out that we have hit an inflection point on revolving loan balances. It will take time for those balances to rebuild as paydown rates are likely to remain elevated in the near-term. We believe over the long-term, we can get back to growing our loan volumes faster than the industry. For the next few quarters though, I continue to expect the recovery in loan balances to lag the recovery in spending volumes.
Turning next to credit and provision on Slides 11 through 13. As you flip through these slides, there are a few key points I'd like you to take away. Most importantly, we continue to see extremely strong credit performance with card member loans and receivables write-off and delinquency rates remaining around historical lows. As loan balances begin to rebuild more meaningfully, we do expect delinquency and low loss rates to slowly move up over time. However, given how low delinquency rates are today, we don't expect to see a material increase in write-off rates in the next few quarters.
This strong credit performance, combined with further improvement in the macroeconomic outlook, drove $191 million provision expense benefit in the third quarter as the low write-offs were fully offset by the reserve release, as shown on Slide 12. That said, we are mindful that the last of the government stimulus and industry forbearance programs have yet to roll off and that there are remaining uncertainties in the medical and macroeconomic environment. In addition, we are closely monitoring how the card members exiting our financial relief programs are performing, though the early performance of the card members that have exited these programs has looked quite strong.
As you see on Slide 13, we ended the quarter -- third quarter with $3.6 billion of reserves, representing 4.5% of our loan balances and 0.1% of our card member receivable balances respectively, which is only slightly below the reserve levels we had pre-pandemic. So given that our credit metrics are still around historical lows, I would say that we continue to hold an appropriately significant amount of reserves, driven by the remaining uncertainties I just spoke about.
Moving next to revenues on Slide 14. Total revenues were up 25% year-over-year in the third quarter. We had double-digit growth in all of our non-interest revenue lines. And we are starting to see growth in net interest income as well. Before I get into more details about our largest revenue drivers in the next few slides, I would note that other fees and commissions and other revenue were both up sharply year-over-year in the third quarter, primarily driven by the uptick in travel-related revenues we are beginning to see, though they still remained well below 2019 levels.
Turning to our largest revenue line, discount revenue, on Slide 15, you see it grew 33% year-over-year on an FX-adjusted basis and is now comfortably above 2019 levels. This growth is primarily driven by the steady momentum in goods and services spending that we've seen over the past few quarters. Net card fee revenues continued to grow as consistently as they have throughout the entire pandemic, up 27% year-over-year in the third quarter. These card fee revenues are now 27% higher than they were back in the third quarter of 2019, as you can see on Slide 16. The resiliency of these subscription-like revenues demonstrates the impact of the continued attractiveness of our premium value propositions to both prospects and existing customers.
Turning to net interest income on Slide 17, you can see that it was up 6% year-over-year, though still growing slower relative to the other revenue lines. We have clearly hit an inflection point. This growth is slower than the growth in lending AR due to the strong liquidity demonstrated by our customers, which is leading to both our historically low credit costs into higher paydown rates that are driving lower net interest yields and a slower recovery in revolving loan balances. We did see a modest sequential improvement in revolving loan balances in the third quarter. But looking ahead, I continue to expect the recovery in net interest income to lag the recovery in loan volumes.
So to sum up on revenues, the momentum of our revenue recovery strengthened in Q3, as you can see on Slide 18 with revenue up 24% year-over-year on an FX-adjusted basis. Looking forward, with the strength in goods and services spend growth we've seen in the first three quarters of the year, we now assume that full year revenue growth could be around 15% if current trends continue.
The revenue momentum we've seen this year has clearly been accelerated as a result of the investments we've been making in marketing, value propositions, technology and people, and those investments show up across the expense lines you see on Slide 19. Let me start at the bottom with operating expenses, which were up 3% year-over-year in the third quarter. Looking forward, I still expect our full year opex to be below the $11.5 billion we originally expected as we continue to keep tight control over our operating expenses, while also investing in technology and our people to drive long-term growth in our business.
Moving on to variable customer engagement expenses at the top of Slide 19, there are a few things to think about. Most importantly, in 2020, we added some incremental benefits to many of our premium products in an effort we refer to as value injection, because our customers were not able to take advantage of many of the travel-related aspects of our value propositions. The cost of this value injection effort generally showed up in the marketing investment line and are now winding down. We are able to wind them down because our customers are again engaging more with the travel aspects of our value propositions, which is a good thing in terms of a longer term customer retention and growth prospects.
It does however mean you see more year-over-year growth in these variable customer engagement costs. As one example of the financial implications of customers again engaging in travel-related aspects of our membership rewards program, in the rewards line, we made a roughly $200 million adjustment this quarter to our membership rewards liability to reflect a higher mix of redemptions in travel-related categories. Looking forward, as I've said the past few quarters, I'd expect these variable customer engagement costs overall to run at around 40% of total revenues.
Turning next to the marketing investments we're making to build growth momentum. You can see on Slide 20 that we invested $1.4 billion in marketing in the third quarter as we continued to ramp up new card acquisition while winding down our value injection efforts. We acquired 2.6 million new cards, up 87% year-over-year and 6% sequentially in the third quarter. Much more importantly though than just the total number of cards, we focus internally on the overall level of spend and fee revenue growth we'll bring on from new acquisitions and revenues from this quarter's acquisitions are trending stronger than what we saw pre-pandemic.
One key driver of this performance is the great demand for our premium fee-based products with new accounts acquired on these products more than doubling year-over-year and representing 65% of the new accounts acquired in the quarter. In particular, acquisitions of new U.S. consumer and small business platinum and gold card members were all time highs this quarter. And this was again one of the best quarters for small business new account acquisitions in the U.S. Based on the opportunities we've seen in the first three quarters of 2021, we now expect to invest over $5 billion in marketing for the year. We feel really good about the results we've seen from our strategic investments and see an opportunity to continue to invest during the recovery to maximize sustainable long-term growth.
Turning next to capital on Slide 21. Our CET1 ratio was 12.6% at the end of the third quarter, which declined from the prior quarter, but remained above our target ratio of 10% to 11%. In the quarter, we returned $3.6 billion of capital to our shareholders including common stock purchases of $3.3 billion and $337 million in common stock dividends on the back of a starting excess capital position and strong earnings generation. Looking forward, we expect our CET1 ratio to migrate to our target range over the next few quarters as we continue to return to shareholders the excess capital we hold and generate while supporting balance sheet growth.
So let's close by talking about what the signs and momentum we saw in the first three quarters of this year might mean for the future. As a reminder, we started the year with a wide range of scenarios of potential outcomes for 2021 as we did not know how the medical and economic environment would evolve during the year and the impact it would have most importantly on our credit reserves. Now, three quarters into the year, macro outlook has steadily improved and our actual credit performance has remained incredibly strong. We've already released $2.3 billion of reserves, accounting for over $2 of EPS year-to-date. That still leaves us however with a lot of reserves due to the remaining uncertainties I spoke about earlier.
So our updated Scenario 1 on Slide 22 assumes that this uncertainty persists that the medical environment and economic outlook does not improve further and that we therefore don't release any additional credit reserves this year. That could lead to an EPS outcome as low as around $8.90 per share. Our updated Scenario 2 in contrast assumes that we continue to see strong credit performance as the remaining stimulus and forbearance programs roll off. And that we also see continued improvement in the economic outlook, leading to less uncertainty, and in all likelihood, a lower level of credit reserves. In this scenario, our 2021 EPS could be as high as around $9.50.
In closing, we feel really good about the progress we've made this year as a result of our investments in marketing, value propositions, technology and our people. And as the year has gone on, we've gotten even more confident in our ability to deploy significant resources towards building sustainable long-term growth momentum. Based on all these current trends, we are confident in our ability to be within the high end of the range of EPS expectations we originally had for 2020 and 2022 and to continue to drive towards higher levels of sustainable growth over the long-term.
And with that, I'll turn the call back over to Vivian.