Jeff Campbell
Vice Chairman and Chief Financial Officer at American Express
Well, thank you, Steve and good morning everyone. Good to be here to talk about our second quarter results, which reflect another strong quarter and great progress against our multi-year growth plan. Starting with our summary financials on Slide 2, most importantly our second quarter revenues were $13.4 billion, up 33% on an FX adjusted basis, strengthening sequentially from last quarter's already strong 31% year-over-year growth rate. Our reported second quarter net income was $2 billion with earnings per share $2.57.
Now, as I said last quarter, given the year-over-year comparisons of net income have been challenging due to the volatility that the pandemic caused in credit reserve adjustments, we are including pre-tax pre-provision income as a supplemental disclosure again this quarter, which we believe gives you additional insight into the trends of our underlying earnings. On this basis, second quarter pre-tax pre-provision income was $3 billion, up 27% versus the same time period last year.
So now let's get into a more detailed look at our results beginning with volumes. Starting on Slide 3, you can see the continued momentum in spending from our strong customer base that Steve noted earlier. Business and total network volumes were up around 30% year-over-year on an FX adjusted basis in the second quarter. We feel really good about both our year-over-year growth as well as our sequential growth. The second quarter saw us achieving our highest ever level of quarterly build business and if you were to compare to 2019, the first quarter grew 18%, while the second-quarter growth rate accelerated even further to 28%. Importantly, our spending volumes strengthened as we went through the quarter, with the month of June also reaching a new monthly record high and as we sit here today, this momentum has continued into early July.
Now, I would point out that when you think about a year -- about year-over-year growth rates, volumes in 2021 were of course in a steep phase of recovery as the year progressed. So, I do expect that our year-over-year growth rates will moderate as we progress through the rest of 2022. Our spending metrics are being driven by both sustained growth in goods and services spending and by an acceleration in T&E recovery in the second quarter.
Starting first with goods and services spending on Slide 4, we saw year-over-year growth of 18% in the second quarter. We are now multiple quarters into seeing the effects of the structural shift in online commerce spending patterns accelerated by the pandemic with our growth rates remaining steady, specifically online and card-not-present spending grew 15% in the second quarter. In contrast total T&E spending, as you see on Slide 5 showed an acceleration in its recovery this quarter even more than we and many others would have expected, reaching a 108% 2019 levels. The high demand for travel drove a steep recovery across all customer types. This strength in both goods and services and T&E spending is also evident as we break spending trends down across our consumer and commercial businesses with a few other key points that I'd suggest you take away.
First, beginning on Slide 6, Millennial and Gen Z customers continue to drive our highest Global Consumer Build business growth with their spending of 48% year-over-year. I'd also call out that this quarter all other age cohorts have now reached pre-pandemic levels of T&E spending including Baby Boomers who had been slower to recover.
In our Commercial business on Slide 7, spending from our small and medium size enterprise clients continues to drive our overall growth with spending up 25% year-over-year. While a smaller part of our business, it is worth noting the significant acceleration in growth 58% of the large and global corporate customers significantly above last quarter's growth rate. This is a sign of a more meaningful business travel recovery. So overall, we are pleased that our strength in spending volumes has exceeded our original expectations for the year and again this quarter, the majority of our high level of growth was driven by the number of transactions flowing for our network, with some modest additional impact from inflation. This positions us well for our long-term growth aspirations.
Moving on now to receivable and loan balances on Slide 8. We saw a good sequential growth in our loan balances which are now well above pre-pandemic levels this quarter. The interest bearing portion of our loan balances also continues to consistently increase quarter-over-quarter, but remains a bit below 2019 levels as pay down rates have remained elevated.
As you then turn to credit and provision on Slides 9 through 11, the high credit quality of our customer base continues to show through in our extremely strong credit performance. Card Member loans and receivables write-off and delinquency rates remain well below pre-pandemic levels and though they did continue to tick up slightly, overall this quarter as we expected, they are trending a bit better than our expectations when we started the year.
Turning then to the accounting for this credit performance on Slide 10. As you know there are couple of key drivers of provision expense. First actual credit performance, which as we just discussed is extremely strong. And second, changes in credit reserves under the CECL methodology. We've built a small amount of reserves this quarter as our loan balances grew in the macroeconomic outlook that we flowed through our CECL models that slightly worse, relative to the outlook back in Q1. Both partially offset by improved portfolio quality. This reserve build combined with our low net write-offs drove $410 million of provision expense for the second quarter.
As you see on Slide 11, we ended the second quarter with $3.2 billion of reserves, representing 3.1% of our loan balances and 0.2% of our Card Member receivable balances respectively. This remains well below the reserve levels we had pre-pandemic. Going forward, we continue to expect delinquency and loss rates to move up slowly over time, but to remain well below pre-pandemic levels this year. I do expect to end the year with a higher level of reserves on our balance sheet than where we ended this quarter given our expected loan growth, but the overall range and timing of reserve adjustments will be heavily influenced by how the macroeconomic outlook evolves between now and the end of the year.
Moving next to revenue on Slide 12. Total revenues were up 31% year-over-year in the second quarter or 33% on an FX adjusted basis as we continue to see a stronger US dollar relative to most of the major currencies in which we operate. Overall, these results were above our original expectations. Before I get into more details about our largest revenue drivers in the next few slides, I would note that service fees and other revenue was up sharply 79% growth year-over-year, largely driven by the uptick in travel related revenues that accelerated this quarter with cross-border spend in particular surpassing pre-pandemic levels. Our largest revenue line, discount revenue, grew 32% year-over-year in Q2 on an FX adjusted basis. As you can see on Slide 13 driven by both our sustained growth in goods and services spending and the accelerated T&E recovery that you saw in our spending trends. Net card fee revenues were up 19% year-over-year in the second quarter on an FX adjusted basis with growth continuing to accelerate as you can see on Slide 14, largely driven by the continued attractiveness to both prospects and existing customers of our fee-paying products as a result of the investments we've made in our premium value propositions. This quarter, we acquired 3.2 million new cards with acquisitions of US Consumer Platinum Card members again reaching a record high and increasing 20% above last quarter's record level, demonstrating the great demand we're seeing, especially for our premium fee-based products.
Moving on to net interest income on Slide 15, you can see that it was up 31% year-over-year on an FX adjusted basis, accelerating above last quarter's growth rate, due to the continued recovery of our revolving loan balances. Looking forward, well, I would expect our loan balances to continue to recover at higher growth rates, the rising rate environment will likely cause our net interest income growth rate to slow given our sizable non-interest bearing charge balances.
To sum up on revenues on Slide 16, we are seeing continued strong results and sustained momentum across the board. So looking forward, we now expect to see revenue growth of 23% to 25% for the full year of 2022. So the revenue momentum we just discussed, has been driven by the investments we've made in our brand, value propositions, customers, colleagues, technology and coverage and those investments show up across the expense lines you see on Slide 17. Starting with variable customer engagement expenses. These costs came in as expected at 42% of total revenues for the quarter and are tracking with our expectations for variable customer engagement costs to run at around 42% of total revenues on a full year basis. On the marketing line, we invested $1.5 billion in the second quarter. We feel really good about the strong demand for new card acquisitions as we showed on Slide 14. More importantly, we feel good about the spend, credit and revenue profiles of the customers we are bringing in to American Express membership, which continue to look strong relative to what we saw pre-pandemic. I would now expect to spend a little over $5 billion on marketing in 2022.
Moving to the bottom of Slide 17, brings us to operating expenses, which were $3.3 billion in the second quarter. There's often some quarterly volatility in this number due to the varied timing of certain accruals and entries. This quarter for example, we see the impact of the prior year including a sizable benefit from net mark-to-market gains in our Amex Ventures strategic investment portfolio. As I said last quarter, and as Steve discussed earlier, inflation, while driving some modest positive impact on volumes is also putting pressure on our operating expenses, particularly in our compensation costs, taking everything into account, we now expect our full year operating expenses to be around $13 billion as we invest in our talented colleague base, technology and other key underpinnings of our growth, given our tremendously high levels of revenue growth.
Turning next to capital on Slide 18, we returned $1 billion of capital to our shareholders in the second quarter, including common stock repurchases of $611 million and $394 million in common stock dividends on the back of strong earnings generation. Our CET1 ratio was 10.3% at the end of the second quarter within our target range of 10% to 11%. We plan to continue to return to shareholders the excess capital we generate while supporting our balance sheet growth. Given the concerns about the macro economy in the market, it is worth noting that in the Fed's CCAR stress test results released last month, American Express was again one of the few firms that remain cumulatively profitable under the Fed's macroeconomic stress scenario and we have the highest profit margin as a percentage of assets of any participating Bank.
That brings me to our growth plan and 2022 guidance on Slide 19. Our performance year-to-date and our full year guidance reinforce several points that Steve and I have now both discussed. First and most importantly, we clearly have momentum across all of the areas critical for us to drive sustained high levels of revenue growth, including customer acquisition, engagement and retention evidenced by our strong Q2 results. Inflation is additionally providing some modest benefit to our revenues. The combination of all these things led us to increase our expectations for full year revenue growth of 23% to 25%, up from our original range of 18% to 20%. For now though, our EPS guidance remains unchanged from between $9.25 and $9.65.
Let me walk you through our thinking here. As I talked about earlier, we feel really good about the strong results generated by our marketing investments this year and that's why we now expect to spend a little over $5 billion for the full year, modestly above our original expectations. Both Steve and I also talked about the fact that there are some pressures on our operating expenses, particularly around compensation and partially fueled by inflation. And therefore, we now expect our operating expenses to be around $13 billion this year. Lastly, and most importantly, as we think about our EPS this year, as I talked about in the credit section, while our credit performance and metrics remain extremely healthy, we can't predict how the macroeconomic outlook will evolve? That makes it difficult sitting here today to predict a precise range of outcome for any potential CECL reserve adjustments for the balance of the year. That said, should the macroeconomic outlook not change meaningfully between now and the end of the year and therefore not have a large impact on credit reserves in the balance of the year, we would expect to be at or even a bit above the high end of our EPS guidance range. In any environment, we remain committed to executing against our growth plan and running the company with a focus on achieving our aspiration of delivering revenue growth in excess of 10% and mid-teens EPS growth on a sustainable basis in 2024 and beyond.
With that, I'll turn the call back over to Kerri to open up the call for your questions.