Three months ago, Stephen Squeri, the chairman and CEO of American Express, declared a global "economic free fall" due to the coronavirus. Its second-quarter earnings show how far a fall it has been.
The card brand reported Friday that its second-quarter net income was $257 million, an 85% drop compared to $1.8 billion a year earlier.
Travel-related spending was a significant spending category for Amex, accounting for 30% of its proprietary volume in 2019. By the end of its first quarter of 2020, Amex saw a 95% drop in its travel and entertainment business. There are signs of recovery, but they are slow; the segment was still down 75% during the first part of July, said Jeffrey Campbell, Amex's chief financial officer.
However, Amex cardholder spending outside of travel and entertainment has increased, Campbell said.
"Our non T&E billing is up 5%; this difference particularly shows in our commercial business, as our spending from small and midsize business customers has held up much better during this period than our larger corporate clients," he added. "The majority of our spend from our small-business clients is B2B spending, while the spend from our large corporate global clients is T&E historically."
Amex products generally cater to high-end, luxury spending.
"Over the last few months, it has been hard to take those trips or to go shopping for luxury goods," Squeri said. "We are seeing more grocery spend and online spending, and also seeing a lot of spending in home improvement areas."
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Though corporate spending is down 50%, mostly because of travel, the B2B segment remains strong, Squeri said.
"We haven't seen our consumers really break out a lot of their spending at this point, and from my perspective, this is not necessarily a bad thing," Squeri added. "It gives us more opportunity down the road, and we are more than holding our own now from both credit and profitability, and a card-value perspective."
Squeri said he remains optimistic, mainly because of Amex's past track record. "Our consumers like to consume and they will find other ways to spend and they will find more ways to get luxury goods and things like that."
Amex announced Friday that it has renewed its co-brand relationship with British Airways through 2028, a deal that follows its extension with Marriott hotels earlier in the quarter.
"In the long term, these companies have been terrific co-brand partners," Squeri said. "These are cards that perform well because it is two great brands working together with a value proposition."
Amex considers the long-term value of such relationships, as opposed to rushing into decisions because of the current crisis, Squeri added. "It helps our partners and our shareholders," he said.
Concerns about consumer loan default are likely to be a theme for most card brands during second-quarter earnings, but Amex expressed positivity about how it was managing credit risk.
With the U.S. economy remaining uncertain because of a pandemic that has not abated, Amex is hoping the clearing license it received from the People's Bank of China last month results in a profitable market expansion for the card brand by year's end.
However, recent political disputes were evident in the U.S. and China pushing out each other's consulates.
Second-quarter consolidated total revenue net of interest expense for Amex was $7.7 billion, down 29% from $10.8 billion a year earlier. The quarter primarily reflected a decline in cardmember spending and a lower average discount rate compared to the prior year.
The company's strategy last year of refreshing older products and contemplating new ones to create more appeal among U.S. merchants and younger consumers continues to be an important driver for Amex.
While the company continues to consider offering a debit card, it is not likely to rush into launching one at this time, even though a down economy often brings more consumer interest to a debit product.
"It is something we look at on an ongoing basis," Squeri said. "The economics of a debit product are a little different, and the value that you are able to put on a debit card is different."
The focus for Amex regarding debit, at this time, is continuing the deal with PayPal to allow money from the Venmo P2P service to transfer to American Express and vice versa. The Chinese market may also be a better opportunity to offer a debit product, Squeri explained.
Squeri also noted Amex has issued up to $3 million in grants to support Black-owned small businesses and has studied how the company can expand financial inclusion for cardmembers as well as embrace diversity within its workplace.
