American Express February 3, 2010 Financial Community Presentation Ed Gilligan

Transcription

1 Agenda: Business Unit Overview American Express February 3, 2010 Financial Community Presentation Ed Gilligan As Ken said, last September, he made some changes in the way we re organized to enable growth acceleration. Today I m going to give you an update on credit and spending, as well as talk about a few key opportunities in our core business. Over the past few months, I ve talked to a number of you, and I thought it might be helpful to focus today s discussion on the fundamental questions you ve been asking. - Why is our credit performance better than the competition s? - What s happening with our cardmember and network spending? - And, with all the changes in consumer behavior and regulation, how will you grow? Business Unit Overview The businesses for which I am responsible can be broken down as follows. First is US Card Services. This includes our US Consumer Card business, Consumer Travel, Global Prepaid, and OPEN our collection of products and services for small businesses in the US. The second is International Card Services, which includes consumer card and small business services outside the US. In Global Network and Merchant Services, we have two businesses. The first, Global Merchant Services, acquires merchants, processes transactions, and helps merchants who accept the card to build business. The other, Global Network Services, acquires partners to issue cards on the American Express network and works with them to drive spending on us. We will touch on all of these businesses over the course of this conversation. Payments Landscape Unlike others in the industry, American Express operates across the entire payments landscape. These are our businesses arrayed against this landscape. We are a global merchant acquirer and processor, network, and issuer. The broad range of these businesses sets us apart from the players with whom we compete. Visa, MasterCard, and Discover are networks, and our Global Network Services business competes directly with them. Merchant acquirers and processors include companies listed here. Our Global Merchant Services business operates in this space but with one important difference. These other companies compete with each other primarily to process portions of Visa s and MasterCard s volume. By contrast, Global Merchant Services is the primary American Express acquiring and processing engine across all of our businesses. 1

2 You re well aware of the major companies on the issuing side of the business. And, we are the largest global player here in terms of billings. FY 09 Business Performance Before we move on to the main part of our discussion today, let me just quickly show you how each of the businesses I described contributes to American Express billings and income from continuing operations. It is worth noting that I am including Global Commercial Services, GCS, which is not a business I just talked about, but is large and profitable with great growth prospects. In the reorganization we implemented in October, GCS now reports directly to Ken. I will not review this business today, but it clearly is a critical part of the company. On the left, you can see that US Card Services contributes 55% of billings. On the right, looking at income from continuing operations, the largest contributor in 2009 is the Global Network and Merchant Services segment. The majority of this income comes from our Merchant Services business, which was the largest source of income for the company in Note that the profits in the GMS business are derived from acquiring and processing the global billed business generated by all issuers on our network. Agenda: Why is our Credit Performance Better Than the Competition s? With that as background, let me turn now to the first of our three questions. Why is our credit performance better than the competition s? Drivers of US Lending Deterioration To answer the question, let s start with some of the factors that contributed to the deterioration of our performance in our US Lending business in 2008 and The economy weakened, driven first by the collapse in housing prices, and then by growing unemployment. We were also impacted by the higher concentration of our business in states that were more severely affected by the recession, particularly California and Florida. In addition to geographic mix, we have a higher concentration of small business customers who were also hit hard. And, our lending portfolio had grown significantly in the period leading up to the recession. One result of all of these factors is that we had a rapid rise in delinquencies in high balance accounts across all segments. I ll come back to this in a few minutes. Now, let s look at our overall credit trends in the US. 2

3 USCS Managed Lending Net Write-off and 30 Days Past Due Rates Managed net write-off rates on lending in the US have come down from Q levels. One of the main drivers of this trend is a decline in 30 days past due rates that are shown on the right hand side of the page. 1 US Unemployment Rates and USCS Managed Lending Net Write-off Rates As you can see, our managed net-write off rates are now improving despite the continued rise in unemployment in the US. This is a result of both our high quality customer base and some of the credit actions I am going to discuss in a few minutes. However, unemployment obviously continues to be an ongoing watch-out as it remains stubbornly high. Still, we are encouraged by this improvement in our net write-off rates. USCS Managed Lending Net Write-off Rate vs. Competitors Our managed net write-off rates are also improving at a more rapid rate than those of our competitors. This chart shows that while we tracked with competitors through the second quarter of 2009, our net write-off rates declined in the last two quarters of the year. 1 On the other hand, our competitors rates slightly increased in Q3 and are now declining, but at a slower rate. USCS Managed Lending Net Write-off Rate vs. Competitors Let s focus in more detail on how our managed net write-off rates compare to some of the major issuers. You can see that in the fourth quarter of 2008, our net write-off rates were in line. However, by the fourth quarter of 2009, we had lower write-off rates than this peer set. USCS Managed Lending 30 Days Past Due Rate vs. Competitors Now, let s look at managed delinquency rates. When you compare our US Card Services segment to competitors, you will see that we consistently have had lower rates since Our delinquencies trended higher for most of 2007 and But, over the course of the last year, they had begun to come back down. 1 By contrast, competitor delinquency rates are hovering near their highest levels in the last three years. USCS Managed Lending 30 Days Past Due Rate vs. Competitors As was the case with our managed net write-off rates, our 30-day past due rates were in line with competitors in Q Over the last half of the year, our rates have declined, while most of our competitors have seen increases. So what accounts for our better performance? There are several factors. 1 On a GAAP basis, USCS lending write-off and 30 days past due rates decreased in the last two quarters of USCS owned lending net write-off rates were 8.0% and 9.8% for Q4 09 and Q3 09, respectively; owned 30 days past due rates were 3.7% and 4.2%, respectively. USCS Q4 08 owned lending net write-off and 30 days past due rates were 7.0% and 4.7%, respectively. 3

4 High Quality Customer Base First, we have a high quality customer. And, as you can see, our average FICO score has slightly improved over the last two years. If you look at our risk scores relative to competing issuers, our performance is clearly better than average. These risk scores come from Argus, an independent analyst of card industry data. The scores are calculated based on a sample of consumer credit cards provided by 24 issuers, including American Express, which explains the slight variance with our internal FICO number. Risk Mitigation Another factor contributing to our improved performance was the set of actions we took to mitigate risk. We moved quickly to address softening in the credit environment. We recognized the economic weakness early, believed it was going to last for some time, and took action. We built a new set of capabilities, which included integrating more sophisticated data into our models. Specifically, we incorporated home value, mortgage information, daily credit bureau triggers, and new commercial variables to better manage small business risk. We developed a new set of customer payment capabilities and customer assistance programs to manage high risk accounts. I ll say more about this in a few minutes. And we intensified our focus on high balance accounts, specifically with more selective underwriting and line management. US Consumer Lending Credit Line Decrease vs. Competitors One reason we are improving faster than the competition is the timing and magnitude of our line decreases. What you are seeing on this chart is data again from Argus. If you go back to January 2008, our percentage of accounts with credit line decreases was slightly above that of the competition. Then, in the fall of 2008, we recognized the extent to which the economy was weakening, and took decisive action. At the same time, the actions taken by the competition were less dramatic. In fact, most competitors didn t react aggressively until the spring of Customer Assistance and Relief CARE I wanted to take a moment to mention our customer assistance programs since I get asked about them from time to time. At the same time that we were adjusting line sizes, we launched a program in April of 2008 which we ramped up in March of 2009 to help cardmembers who are facing temporary financial liquidity issues. This was the Customer Assistance and Relief program, also known as CARE. Programs like this have become a standard industry practice. We initiated the program because we also believe it is the right thing to do for our customers during this economic downturn. As many of you know, CARE lowers the APR for cardmembers in the program which in turn effectively reduces their monthly minimum due. To enter the program, a cardmember is required to make the minimum due payment and participation is limited to twelve months. While in this program, cardmembers cannot put additional charges on their cards. 4

5 As you can see, the percentage of A/R in CARE today is very small approximately 2% of our total USCS managed loans and the volumes in the program have remained stable over the last nine months. This program has provided valuable assistance to many cardmembers. Let me take a moment to talk about another standard industry practice, re-aging, a program that is different from CARE. We began re-aging in November of 2008 to ensure cardmembers in financial distress who demonstrate a commitment to make payments have the benefit of having their account moved to current status. To qualify for re-aging, a cardmember must make payments of an amount equivalent to three min dues within three billing cycles or 90 days. We allow re-aging once in the lifetime of the account. It is important to note that not all CARE accounts are re-aged. In fact, our cumulative A/R balances that have been re-aged are lower than our A/R inventory in the CARE program in December. Neither CARE nor re-aging has had a significant impact on our improving credit trends. And our provision expense already recognizes the risk inherent in the CARE program and re-aged accounts. USCS High Balance Accounts Now let s talk in a little more detail about high balance customers, who are defined as having $10 thousand dollars or more in balances outstanding. This is a segment that is important to our business model, and will continue to be, because they also have high levels of spend and tend to be very profitable. This recession impacted affluent, high spending consumers more severely than previous recessions, and some of these consumers also happened to be highly levered, particularly with mortgage and housing-related debt. Consequently, when the real estate sector collapsed, high balance customers had delinquency rates that were higher than the rest of the base. So we had to take specific action to manage this segment, allowing our best customers to spend while controlling risk. You can see that our mix of A/R is changing, and high balance customers now represent a lower proportion of our receivables than they did at the beginning of And the delinquency rate for high balances is coming down at a faster clip than the rate for low balances. These two metrics demonstrate not only the impact our actions have had on this portfolio, but also the broader de-levering that is taking place in the consumer economy overall. US Consumer Managed Lending Average Write-Off Balance When you look at our average write-off dollar amount per account over a four year period, you can see that the amount increased starting in December 2005, and peaked in December of Since then, the average amount has fallen sharply and is now trending towards historic levels. US Consumer Managed Lending Average Write-Off Balance vs. Competitors Let s look at the last twelve months where we can compare our average write-off balances to those of our competitors. Our average write-off balance declined over this period, whereas the average balance of our competitors increased. This is yet another reason we are getting better faster than the competition. High Balance Summary High balance customers continue to be an important part of our portfolio. They are an affluent, high spending base that has favorable economics. 5

6 Delinquency rates for this segment are improving and trending toward historic levels, and the percentage of high balance loans in our portfolio has been declining. USCS Managed Lending Roll Rates and Bankruptcy Filings In the US consumer business, 30-days past due rates are coming down from a peak in January I will talk more about the implications of this on the next slide. 30 days past due to write-off rates, and the number of bankruptcy filings among our US Card Services customers, have stabilized over the last three quarters. We continue to monitor the environment very carefully. While bankruptcy filings are stabilizing, they do remain at a relatively high level. But, assuming that bankruptcies, recoveries, and 30 day past due to write-off rates remain steady, the chart in the upper left hand portion of the slide gives you a good window into likely write-offs during the first half of this year. USCS Managed Lending Current to 30 Days Past Due Write-off in Q1 10 Now, I want to make an important point about our expected write-off rates in Q1 and Q2 of this year. Focusing on the yellow portion of this graph, you can see that while current to 30-day past due rates were relatively stable for the third quarter of 2009, rates rose marginally in August and September. While there are a number of factors that influence write-off rates, this is a key driver of the dollar amounts we would expect to write off in Q1. Seasonality could also have an effect on the actual rates we report. Consumers typically pay off their holiday spending over the course of Q1, which would impact the denominator in the writeoff rate calculation. In light of these dynamics, in Q1 we could see individual monthly write-off rates increase sequentially during the quarter. However, in the aggregate, all these moving pieces indicate that the quarter is likely to be similar to Q4. USCS Managed Lending Current to 30 Days Past Due Write-off in Q2 10 Now, looking at the green portion of the chart, you can see that current to 30 days past due rates in the fourth quarter declined. This impacts what we would expect to write off in April and May. So, assuming that bankruptcies, recoveries, and past due to write-off rates remain steady, we would expect monthly write-off rates to drop during Q2, and for the second quarter to have lower write-offs compared to Q4 09 and Q1 of this year. I hope that helps to frame the math around delinquencies in 2009 and provide visibility into what 2010 writeoffs could be if current trends hold. USCS Charge Card Net Write-off and 30 Days Past Due Rates Our Charge Card portfolio is the foundation of our card business and will remain so. What you see here is our net write-off and 30 days past due rates for our US Card Services business. Performance in this portfolio is 6

7 showing continued improvement on both dimensions. In 2010, both of these metrics are likely to rise, and move towards historic norms as we continue to invest in acquiring new profitable customers. ICS Charge Card Net Loss Ratio and 90 Days Past Due Rates Let s move to our international business and look at Charge Card net loss ratios and the 90 days past due rate. Charge Card loss rates have remained stable. 90 days past due rates are improving. ICS Lending Net Write-off and 30 Days Past Due Rates In our international lending business, we also look at net write-off and 30 day past due rates as a percentage of receivables. Both of these metrics improved in the fourth quarter. ICS Lending Net Write-off Rates by Market Staying with international lending, here are net write-off rates for the key markets that comprise approximately 80% of our managed loan portfolio. Improvement has tracked across all four markets in December. GCS & GNMS Provision as a Percent of Total Revenues Net of Interest Expense Before I close out this section, let me quickly show you the credit performance of our other sectors. Both Global Commercial Services and Global Network and Merchant Services had strong and stable performance. As you can see, provision for loss as a percentage of revenue remains low. Credit Summary I hope that I have given you some understanding of why we believe our credit performance is better than that of our competitors. To summarize: We have a high quality customer base. We took actions earlier and more aggressively. We changed our models, policies, and procedures to improve our risk management in a volatile environment. And, we focused on high balance accounts, managing the risk in a targeted fashion while preserving the important relationship with this key customer segment. As a result of these actions, we are seeing overall improvement faster than our competitors are. If current economic conditions remain stable, we believe we ll see an improvement in managed lending net write-off rates in the second quarter of this year. Agenda: What s Happening to Spending? I have also been asked if our credit actions have constrained spending in a significant way. I ll show you some data that demonstrates this is not the case. 7

8 Worldwide Billed Business After seeing declines in worldwide billed business in late 2008, and in the first three quarters of 2009, spending turned a corner and grew in the fourth quarter. December 09 was the highest billed business month in our history on an FX-Adjusted basis. Billings Growth by Business Let s now look at monthly billings growth by business. All of our businesses are trending upward. GNS in particular maintained growth in every month. I have not said a lot about Global Commercial Services, but I want to point out that while GCS experienced the deepest declines, its growth rate in December was below that of only GNS. This Corporate Card spend rebound is reminiscent of some previous economic cycles. USCS Spending by Product By Quarter If we take a closer look at spending by product in our US consumer portfolio vs. last year, you can see that there is improvement across the board. It is important to note that Charge Card in the fourth quarter improved substantially. Co-Brands turned positive in the fourth quarter, driven largely by ongoing investments in our business. For instance, we made focused investments in winning Northwest customers when we signed the co-brand agreement following the Delta / Northwest merger. Proprietary Lending represents the credit products we issue without a co-brand partner, such as Blue, Blue Cash, and Blue Sky. While Proprietary Lending is facing some headwinds, it represents only 13% of our US Card Services billings. USCS Spending by Product Q4 09 By Month Now, if you look at spending by product over the last three months of the year, you ll see that Charge turned positive in December, and Co-Brand spending grew in each of the last three months. As I ve already highlighted, this growth reflects our investment focus in the second half of US Consumer Spending by Size of Wallet Let s look at how consumer spending is broken down by size of wallet. This data captures customer spend on all plastic, excluding debit. We are seeing improvements in all wallet sizes. The trends for high wallet customer spending improved in the fourth quarter. Even better, in December, their growth turned positive as it did for all other wallet sizes. 8

9 US Consumer Spending by Key States Now let me make some observations about spending by state. These eight states represented just over 40% of our US Consumer total billings in December. After three quarters of significant declines, performance in the fourth quarter improved dramatically with five states growing for the first time in And in fact, December was positive in all these states. US Consumer Discretionary vs. Non-Discretionary Spending Discretionary spending forms an important part of our overall billings. When the recession took hold, discretionary spending experienced a steady decline, but has now returned to growth. Non-discretionary spending also fell, but it too has now rebounded. December 09 US Consumer Discretionary Spending by Industry As I ve said before, December was a strong month for us in the US. In all of the discretionary spending categories highlighted, total spending was up, which was primarily driven by growth in the number of transactions. Also helping was the growth in average transaction size in three of these categories Department Stores, Fashion, and Airlines. December was the first time we experienced growth in transaction sizes in these industries since October of US Consumer Spending Highlights When we look back to the beginning of the recession, one of the first signs of cutbacks in discretionary spending was a drop in jewelry sales in the fourth quarter of 07. Jewelry is just one example of a highly discretionary category that now appears to be rebounding. The fourth quarter performance is yet another sign of improvement in customer spending, as is the December performance in Travel. International Card Services Spending We have just spent a lot of time talking about the US. It is worth noting we see similar signs of recovery in our international proprietary issuing business, which experienced growth in November for the first time in over a year. Global Network Services Spending In addition, GNS, which represented 12% of our billings in 2009, has bounced back nicely. In the US part of GNS, growth slowed but never went negative. International, which accounted for 83% of GNS spending in 2009, has exhibited strong growth since July. Improvement in Billed Business In summary, when we cut the data by business segment, you can see improving spending trends across the board, with everything turning positive in December. 9

10 US Consumer spending grew 2% in the quarter after strong performance in December. US Small Business spending turned positive for the first time in the quarter in December, as did International Card Services. Global Corporate Services achieved double digit growth in December, and GNS led the pack with 27% growth in the month and 22% growth for the quarter. Global Spending Summary Back to the question: What s happening to spending? After a reduction in spending by consumers and companies globally, we are starting to see improvements across the board. All business segments, all wallet sizes, and all regions are improving. And in total, January looks fairly consistent with the month of December. Agenda: How Will We Grow? The final question is: With changes in consumer behavior and regulation, how will we grow? Key Risks and Challenges To understand our growth plans, let s first look at the risks and challenges we face. On the customer side, consumer behavior is evolving. Consumers are saving more and revolving less, and debit card use is rising. In addition, our small business customers are still challenged by the current environment, and unemployment remains high. While our premium customer base is a competitive advantage for us, this has not gone unnoticed by our competitors, who have designs of their own on this attractive segment. And new forms of payment are also emerging to compete for our customers business. In addition, the regulatory environment remains a wild card. The industry faces regulatory challenges both here and abroad. Strong Hand to Play Despite these risks and challenges, I believe we have an incredibly strong hand to play. We are the world s largest issuer in terms of billings. We are a large global merchant acquirer. We have a global network that is expanding. And we have a broad array of assets that position us well to grow, including a strong & resilient brand, highly talented people, and award-winning customer service. High Average Cardmember Spend Yet another important asset that continues to demonstrate the power of our unique business model is our high spending customer base. As Ken said, on average our cardmembers spend four times more than MasterCard s and three and a half times more than Visa s customers. 10

11 Stable Discount Rate Our cardmember base is a driver of value for us with merchants, and helps us sustain our premium discount rate. On an annual basis, our worldwide discount rate has remained relatively stable, moving only four basis points in the past five years. Driving Growth From this foundation, we have a number of opportunities to accelerate growth by: Focusing on premium customers, Leveraging our unique business model to create new revenue streams, And, driving network growth. First, let s talk about our focus on premium customers. Focus on Charge One important investment area for us at the end of 2009 was Charge Card. The current environment and changing customer behavior make this an excellent time to invest in our charge products. Consumers are looking for financial discipline, they are looking for value, and Charge Card fulfills both these needs. Charge also provides customers with rewards and reporting capabilities that are unique in the marketplace, and comes with customer service that is the best in the industry. Charge is a smart alternative to debit for all these reasons. It also has no preset spending limit, builds positive credit history, and has best-in-class fraud protection both online and offline. We believe Charge is the right product for the times. We are investing in our Charge portfolio to offer greater value to customers and expand our premium customer base. To grow Charge, we are doing many things, including launching new products, increasing awareness of our value proposition, and continually improving and innovating rewards. Let me give you a few examples. New Entry Level Charge Product One of our new products that is currently being tested, the Zync card, is targeted towards younger cardmembers who will grow with us. A key differentiating feature of the product is the ability to customize with Lifestyle Packs. We offer four Packs today: A Social Pack, focused on restaurants and events, A Connect Pack, geared towards mobile and cable services, A Go Pack, which features travel benefits, And an Eco Pack, which is environmentally oriented. 11

12 This is just the beginning. You ll be seeing more Packs added to this collection in the coming months. Premier Rewards Gold Also in 2009, we launched the new Premier Rewards Gold Card, which is one of the major investments we made in the Charge portfolio to provide even greater value to our premium customers. This product was built for high spending reward enthusiasts, and offers best in class rewards in a construct. 3 times points on airfare, 2 times points on gas and groceries, and 1 times points on everything else. It also has bonus points when cardmembers reach spending thresholds. We are very excited about the introduction of this product, and look forward to it becoming a staple in our Charge portfolio going forward. Increasing Awareness of Charge We have also invested in advertising to change the way people think about the Charge Card. This advertising and marketing investment is not just about acquiring cards. It s a strategy to build the category and differentiate American Express. We haven t embarked on an advertising campaign like this for several years in the US or worldwide. Our flexible business model gives us the capability to either dial up or down on this sort of investment to respond to opportunities. World Class Rewards Program Membership Rewards plays a critical role in our Charge value proposition, and we are continually investing in improvements. There are currently more than 1 million redemption options in the US through 150 partners, and we have more than 1,500 partners worldwide. Some of those we added in 2009 are highlighted here. This is truly a world class program that gives us a strong advantage in the marketplace. And we re constantly adding new partners and new functionality to Membership Rewards to meet our customers changing needs. Everyday Redemptions A recent innovation to Membership Rewards in the US is Everyday Redemptions. This new benefit builds on the Pay with Points capability we launched in 2005, and gives cardmembers even greater flexibility in redeeming. Everyday Redemptions allows cardmembers to offset charges on their statement with Membership Rewards points in select categories, including business services, communications, merchandise & supplies, utilities, and transportation. Continued Strength in Co-Brands Co-brands are another important growth priority. They create a loyal customer base, and give us access to a highly effective distribution channel. 12

13 Across the globe, we have a strong array of co-brand partners that are helping us attract and retain highspending loyal customers. We have a total of 47 co-brands in our proprietary markets worldwide. In the US, co-brands represented 28% of our billed business in And internationally, they comprised 33% of our billed business. Recent Co-Brand Highlights We have achieved significant success in expanding and deepening our co-brand relationships around the world. As Ken mentioned, we are particularly pleased with our extended co-brand relationship with Delta. In fact, we have surpassed our expectations for new accounts acquired by over 50%. We have invested heavily in the partnership with Delta, and we have successfully marketed to the Northwest customer base. We also re-signed major co-brands with British Airways, Starwood, Hilton, and Jet Blue, just to name a few. We launched a new small business co-brand with Lowe s in the US, and consumer co-brands with SAS in the Nordic region, David Jones in Australia, and Cathay Pacific in Hong Kong. USCS Proprietary Lending Portfolio Overview We also want to grow selectively in our Proprietary Lending business. This is the part of our business that is still evolving because it is impacted by the CARD Act and by changing consumer behavior. However, it represents only 13% of our billings in USCS and 7% of our billings worldwide. As consumer behavior and needs evolve, we are testing different approaches to offering lending products to our affluent customers who want to revolve. Our Proprietary Lending customers are also a high quality base with an average FICO score of 748 in USCS Managed Lending Balances While we are on lending, I would like to digress for a moment to discuss trends in average balances and net yield. When you look at our A/R dollars over 2009, you will see that in December, our managed receivables were down 16% since the beginning of the year. And compared to our full year 2009 average A/R, December managed receivables were also down 4%. 2 Given our focus on co-brand investments, we expect the A/R for that portfolio to grow over time. Proprietary Lending is still a work in progress, and we will continue to test and learn as we go. USCS Net Interest Yield on Managed Cardmember Loans Our net yield in 2009 was impacted by re-pricing actions, the CARD Act, and changing consumer behavior. Going forward, these same dynamics will apply, with more impact from the CARD Act in front of us. So, as Dan said in the analyst call, we expect yields to trend down closer to historic levels over time. 2 On a GAAP basis, as of 12/31/09, USCS owned loans declined 28% since the beginning of the year. Compared to full year 2009 owned USCS average AR, ending owned loans as of 12/31/09 were down 9%. 13

14 Driving Growth Drive New Revenue by Leveraging Unique Business Model Now, let me get back to our growth story. Let s talk about how we are creating new revenue streams through fee-based products and services. As Ken mentioned, we have a number of opportunities to generate fee revenue. Our current Insurance businesses in the US and abroad are significant contributors to revenue today and are expected to continue to grow. And, in the second half of 2009, we launched several new fee offerings that I will describe in more detail. LoyaltyEdge SM The most recent innovation was announced 12 days ago. It s called Loyalty Edge. This is a promising new line of business that will assist partners with developing, running, and improving their own loyalty programs. We believe we have a lot of experience in managing loyalty programs that we can leverage to drive this business. Delta Air Lines is our first customer. So now, when a Delta SkyMiles member redeems points for any non-air reward, they will be doing it through a platform established and run by American Express. But to the customer, it still looks like Delta. American Express Business Insights Another area in which we have experience is bringing value to merchants. Business Insights is a new business that incorporates analytics and consulting to assist merchants with: Identifying new trends, Enabling product innovation, Expanding geographically, And improving the effectiveness of their marketing. The products and capabilities from Business Insights are derived from our unique business model and closed loop network. We have already begun to provide companies with a competitive advantage through in-depth analyses of our aggregated trend data from more than four billion transactions across 127 markets. This is a new business focused on generating revenue from merchants and other business partners. OPEN Forum Another growth area is in the small business segment. Despite the challenges facing small businesses, there are several things we are doing to innovate for, build connections with, and generate revenue from, our small business customers. This is a very large segment with almost $5 trillion in annual spend in 2008, according to industry sources. For example, OPEN Forum is an online resource and networking site for business owners. The site is designed to create business connections and provide practical and actionable information and insights from influential bloggers, industry leaders, and savvy entrepreneurs. 14

15 OPEN Forum is a critical component of understanding our small business customers, and helping them grow their businesses. We have launched an advertising campaign promoting the benefits of OPEN FORUM and we are very pleased with the results. This is just one way we are deepening relationships with small business customers. OPEN AcceptPay SM Building strong relationships with our small business customers will enable us to cross-sell value-added services to help them, and generate new revenue for us. Our first such product is AcceptPay. This is an online invoicing and payment tool that helps small businesses get paid faster. AcceptPay is just one example of the types of products and services we will be offering our small business customers. Driving Growth Drive Network Growth Finally, let s review how we are driving network growth. We are focused on growing our network in two ways through increased merchant coverage and driving more GNS partner volume onto the network. Expanding Global Footprint We have a broad set of channels through which we can sign merchants. Our proprietary sales force and client managers focus on signing larger merchants. As you can see, we have signed, or expanded, our relationship with several larger merchants worldwide over the last eighteen months via our Proprietary Sales teams. Growing Coverage We are also focused on expanding our merchant network to take advantage of opportunities related to the signing of co-brand relationships. This strategy targets specific merchants in defined geographic areas to match the demand for spending from our customer bases. In Australia, we signed an important new co-brand partnership with David Jones, a major retail chain. To serve these new customers, we signed over 40,000 new merchants in 2008 and another 18,000 more last year in areas where David Jones customers live and shop. After the merger of Delta and Northwest, we won the new RFP for their combined loyalty program credit card. We already had good coverage in Delta cities and have now successfully expanded coverage in Northwest hubs. This approach to expanding coverage is resulting in increased billings volume. You can expect to see more in the coming year. 15

16 Growing Small Merchant Coverage Another strategy for expanding merchant coverage is by engaging third party partners to sign smaller merchants. In the US, our One Point Program employs external parties to add merchants to our network across the country. One Point already accounts for 29% of new merchant signings in the US and includes FDC, Heartland, and Elavon. Global Network Services Growth Trajectory As we look toward the future, GNS presents strong growth opportunities from both our existing base and from new partners. GNS is 12 years old and represents 12% of our billings. From 2004 through 2008, this business grew at a compounded annual rate of 40%. Growth slowed in 2009, but still grew at 7% despite the global recession. GNS billings grew 27% in December, which is on par with historical growth rates. We expect GNS to continue its strong performance. Network Growth in Emerging Markets GNS operates in many developed markets, and is also the way we effectively reach emerging markets. About 40% of GNS billings comes from less developed markets such as China, Brazil, Russia, Korea, and South Africa. Some of our key GNS partners in these markets are shown here. Broad Network of Partnerships And GNS continues to form a key part of our global growth strategy. To date, we have 130 partners in 129 markets that issue American Express Cards on our network. We offer a diverse range of products through our issuing partners including co-brands (we have 49 today), wealth management products, and dual account products. Here are some of the partners in our growing network across the globe. Driving Growth Summary Let me recap our priorities for growth and investment. Charge card presents a significant opportunity around the world in the Consumer, Small Business, and Corporate segments. We are committed to further strengthening our co-brand relationships worldwide which give us access to a loyal, high-spending customer base. We will continue to selectively invest in Proprietary Lending as we test and learn. We are pursuing opportunities to create new sources of revenue from our merchant and small business partners through innovative offerings like LoyaltyEdge, Business Insights, and AcceptPay. And, we continue to use our proprietary sales force, programs like One Point, and our GNS Partners to increase coverage and build volume on our network. As Ken mentioned, we also have significant growth opportunities in our Global Corporate Services business to drive B2B spend and further develop our presence in the middle market. 16

17 We clearly have a wide variety of products, initiatives, and markets in which to invest that will contribute to improving the financial health of the company. And so we believe we are well positioned for 2010 and beyond. Closing Thoughts Despite the challenging environment and new consumer behavior, we have a very strong hand to play. We believe that we can grow. I think our performance coming out of the recession demonstrates that we are up to the challenge. I hope I ve answered the key questions many of you have been asking. We are performing better than our competitors because we have a high-quality customer base. The quick and aggressive actions we took to address credit issues especially with high balances have given us a head start on the competition. And while spending dropped off, it is now recovering across the board. All indications are that barring a serious relapse in the economy, we believe our performance will continue to improve. Our high-spending customers are still with us. Finally, we believe we have the right products and the right strategies to succeed in the new normal. Given all of the above, there is no hand I would rather play in the payments industry than the one we are holding at American Express. Thank you. 17