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 third 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 third quarter revenues were $13.6 billion, reaching a record high for the second quarter in a row, up 27% on an FX-adjusted basis. Now I would point out that we continue to see a much stronger U.S. dollar relative to most of the major currencies in which we operate. So you do see a 300 basis point spread between our FX-adjusted revenue growth of 27% and our reported revenue growth of 24%, as we absorb some significant foreign exchange headwinds. Of course, the overall impact on our earnings still a headwind is less significant, because we do have some offsetting positive impacts on the expense side.
Our revenue performance in the third quarter drove reported net income of $1.9 billion and earnings per share of $2.47, representing EPS growth of 9% year-over-year, a great result considering the sizable credit reserve releases we had in the third quarter last year. Because of these prior year reserve releases, we have also included pre-tax provision income as a supplemental disclosure again this quarter. On this basis, pre-tax provision income was $3.2 billion, up 43% versus the same time period last year, reflecting the growth momentum in our underlying earnings.
Before getting into a more detailed look at results, let me spend just a minute briefly explaining how we've evolved our financial reporting for the organizational changes that Steve discussed earlier. You will see in the disclosures of the company earnings release that beginning this quarter, we have moved from three to four reportable operating segments. We first took global consumer services and split the U.S. into its own segment, creating U.S. Consumer Services. We then combine the international consumer business with the international portion of small and medium-sized enterprises and large corporate, creating the new International Card Services segment. Commercial Services, that includes U.S. SME, U.S. large corporate and select global corporate clients. And lastly, our Global Merchant and Network Services segment remains largely unchanged, and as always, includes our global payments network and network partnerships. You will see in the appendix of our disclosures that we have recast prior periods to conform to these new operating segments. The new segments will also be reflected in our third quarter Form 10-Q.
Now let's get into our results, beginning with overall volumes. Looking at Slides 3 and 4, you can see the continued strength in our Card Member spending behavior that Steve noted earlier. Total network volumes and build business were each up year-over-year at 23% and 24%, respectively, on an FX-adjusted basis in the third quarter. If you were to compare to 2019, third quarter billed business grew 30%, accelerating above last quarter's growth rate of 28% relative to 2019. And importantly, despite the uncertainties in the current economic environment, our spending trends with performance relative to 2019 strengthened as we went through the quarter. We are really pleased with this growth. And the fact you see strong growth across all customer types and geographies, driven by both sustained growth in goods and services spending and continued T&E momentum.
On Slides 5 through 8, we've given you a variety of views of this strong growth across our U.S. Consumer Services, Commercial Services and International Card Services segments, and the various customer types within each. Starting with our largest segment, billings from our U.S. Consumer customers grew at 22% in the third quarter, reflecting the continued strength in spending trends from our premium U.S. consumers. Millennial and Gen Z customers, again, drove our highest billed business growth within this segment, with their spending growing 39% year-over-year this quarter.
Turning to Commercial Services, you see that spending from our U.S. SME customers represents the majority of our billings in the segment and that spending from these customers continued its strong growth, up 17% in the third quarter. Our U.S. large and global corporate customers, though a smaller part of billings in the segment, remain an important foundation for the entire company. And these customers continued their steady travel recovery this quarter, though overall billings are still 13% below pre-pandemic levels. We do continue to expect though that this group will fully recover over time.
And lastly, international consumer and international SME -- large corporate customers within the new International Card Services segment were amongst our fastest growing pre-pandemic, as Steve said, and are now in a steep recovery mode. You can see our high levels of growth in Q3 at 34% and 43% year-over-year, respectively. And if you were also to look at international consumer growth by age cohort, you would see, similar to the U.S. that the highest growth levels are from our Millennial and Gen Z customers, who make up an even larger portion of overall billings than they do in the U.S.
One other note on overall billings, the majority of our high level of growth this quarter was again driven by the number of transactions flowing through our network, with some modest impact from inflation. Overall then, we are pleased with the momentum we see across the board in our spending volumes, which is tracking in line with our expectations for both the year and for our long-term aspirations.
Now moving to loan balances on Slide 9, we saw year-over-year growth accelerate to 31% in our loan balances as well as good sequential growth. The interest-bearing portion of our loan balances also continues to consistently increase quarter-over-quarter, surpassing 2019 levels in the third quarter as customers steadily rebuild balances.
As you then turn to credit and provisions on Slides 10 through 12, the high credit quality of our customer base continues to show through in our strong credit performance. Write-off rates for Card Member loans remain well below pre-pandemic levels, flat to where they have been for the last three quarters, as you can see on Slide 10. As expected, you do now see that delinquency rates for loans have started to modestly pick up, but also remain well below pre-pandemic levels.
Turning now to the accounting for this credit performance on Slide 11, as you know, there were two components to our provision expense. Our actual write-off performance in the quarter, which, as we just discussed, remain strong, and second, changes in our credit reserves, where there were a few key drivers. Our loan balances, especially our revolving loan balances grew strongly quarter-over-quarter and the macroeconomic outlook that we flowed through our models, which was informed by third-party macroeconomic forecast as well as the latest Fed outlook, was slightly worse this quarter relative to last quarter. The combination of our strong loan growth -- excuse me, and the updated macroeconomic assumptions resulted in a $387 million reserve build. This reserve build, combined with low net write-offs, drove $778 million of provision expense for the third quarter.
As you see on Slide 12, we ended the third quarter with $3.5 billion of reserves, with reserves for loans representing 3.2% of our balances. I would point out even with this quarter's reserve build, this remains well below the reserve levels we had pre-pandemic driven by our improved portfolio quality today compared to that prior time period. Going forward, we continue to expect delinquency and loss rates to move up slowly over time, but to remain below pre-pandemic levels this year. I do expect to end the year with a higher level of reserves on our balance sheet and where we ended this quarter given our expected loan growth, the overall level of reserve adjustments will again be influenced by how the macroeconomic outlook evolves in the fourth quarter.
Moving next to revenue on Slide 13, total revenues were up 24% year-over-year in the third quarter or 27% on an FX-adjusted basis. 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 39% year-over-year. Similar to last quarter, this strong growth was largely driven by a recovery in travel-related revenues. Our largest revenue line, discount revenue grew 26% year-over-year in Q3 on an FX-adjusted basis, as you can see on Slide 14, driven by both our sustained growth in Goods & Services spending and the continued momentum in T&E spending that you saw in our spending trends.
Net card fee revenues were up 23% year-over-year in the third quarter on an FX-adjusted basis, with growth continuing to accelerate, as you can see on Slide 15, largely driven by the continued attractiveness to both prospects and existing customers of our fee-paying products through the investments we've made in our premium value propositions. This quarter, we acquired 3.3 million new cards with acquisitions of U.S. Consumer Platinum and Gold Card members and U.S. business Platinum Card members, all reaching record highs in the quarter and now each more than two times higher than pre-pandemic levels, demonstrating the great demand we're seeing, especially for our premium fee-based products.
Moving onto Slide 16, you can see that net interest income was up 30% year-over-year on an FX adjusted basis due to the recovery of our revolving loan balances. While generally speaking, a rising rate environment would be a modest headwind for us due to our sizable non-interest-bearing charge balances and actual fact, it has been fairly neutral in terms of impact for us year-to-date. Over time, though, I would expect rising rates to represent a modest headwind.
To sum up on revenues, we're seeing strong results across the board and really good momentum. When looking at Slide 17, I would point out that we have now seen six consecutive quarters of revenue growth above 24% on an FX-adjusted basis as we are now showing strong growth even on top of the strong recovery-led growth in the prior year quarter. I would also point out that we have a couple of hundred basis points of difference when looking at revenue growth on an FX-adjusted basis versus our reported results. So while we are leaving our full year reported revenue guidance at 23% to 25% for 2022, I would expect to be above that growth rate range on an FX-adjusted basis.
Now, all this 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 18. Starting with variable customer engagement costs, these costs, as you see on Slide 18, came in at 41% total revenues for the third quarter roughly in line with what I still expect variable customer engagement costs to run for the full year at around 42% total revenues.
On the marketing line, we invested $1.5 billion in the third quarter, on track with our expectation to spend over $5 billion in 2022. We feel really good about the strong demand of card acquisitions, especially premium card acquisitions as we showed on Slide 15. And more importantly, we feel good about the spend, credit and revenue profiles of the customers we are bringing into American Express membership, which continue to look strong relative to what we saw pre-pandemic.
Moving to the bottom of Slide 18 brings us to operating expenses, which were $3.3 billion in the third quarter, essentially flat to last quarter. As Steve and I have both discussed all year, these results reflect the impact inflation has had on our operating expenses, in addition to our investments in other key growth underpinnings to support our tremendous revenue growth. You can see, based off our third quarter results that we are tracking with our expectation for operating expenses to be around $13 billion for the full year. And looking at the year-over-year opex growth of 22% this quarter, it is also important to note that we see an impact from the prior year, including a sizable benefit from net mark-to-market gains in our Amex Ventures strategic investment portfolio, while this year we saw a modest impairment charge. More generally, we continue to see operating expenses as a key source of leverage moving forward, and we'd expect to have far less growth in opex than revenues in our ambitious growth plan.
Turning next to capital on Slide 19, we returned $1 billion of capital to our shareholders in the third quarter, including common stock repurchases of $600 million and $391 million in common stock dividends on the back of strong earnings generation. Our CET1 ratio was 10.6% at the end of the third 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.
That then brings me to our growth plan and 2022 guidance on Slide 20. With each quarter of this year, we have demonstrated consistent progress against our 2022 guidance and our long-term growth aspirations of delivering sustainable high levels of revenue and EPS growth. For the full year 2022, we are reaffirming our reported revenue growth guidance of 23% to 25%. Although I would point out, as I said earlier, that I would expect our FX-adjusted revenue growth to be above that range. And we now expect to be above our original EPS guidance range of $9.25 to $9.65. And uncertainty in the level of our final EPS for the year remains the possible impact on credit reserves of how the macroeconomic outlook evolves in the fourth quarter, while I expect our actual credit performance and metrics to remain healthy. It's harder to predict exactly how the macroeconomic outlook might evolve.
In addition, we are working towards our 2023 plan and expect revenue [Technical Issues] remain above our long-term aspirational targets, which should create a platform for producing strong EPS growth. Of course, we'll have to see how the economic environment evolves versus where we are today. In any environment, though, 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.
And with that, I'll turn the call back over to Kerri to open up the call for your questions.
