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THE
REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND HAS THEREFORE OMITTED CERTAIN ITEMS FROM THIS REPORT IN ACCORDANCE WITH THE REDUCED DISCLOSURE FORMAT PERMITTED UNDER GENERAL INSTRUCTION H(2).
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
þ iYeso No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
þ iYeso
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated
filer
☐
iNon-accelerated filer
☑
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.o
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
i☐Yes þ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Throughout
this report the term “Credco” refers to American Express Credit Corporation and its subsidiaries on a consolidated basis, unless stated or the context implies otherwise.
ITEM 2. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)
Overview
Credco is a wholly owned subsidiary of American Express Travel Related Services Company, Inc. (TRS), which is a wholly owned subsidiary of American Express Company (American Express). Both American Express and TRS are bank holding companies.
Credco is engaged in the business of financing certain non-interest-earning Card Member receivables arising from the use of the American Expresscharge cards issued in the United States and in certain countries outside the United States. Credco also finances certain interest-earning revolving loans generated
by Card Member spending on American Express credit cards issued in non-U.S. markets.
Certain of the statements in this Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Refer to the “Cautionary Note Regarding Forward-Looking Statements” section.
Business Environment
Management’s discussion of the results of Credco is in the context of the wider business environment for American Express.
Businesses and economies around the globe continued to see significant adverse impacts during the second quarter due to the COVID-19 pandemic and the resulting containment measures implemented
by local and national authorities. During the quarter, while the impact of COVID-19 peaked and subsequently declined in some jurisdictions leading to phased re-openings, other areas have seen continuing or renewed containment measures.
Reflective of the broader economy and spending trends in American Express’ customer segments, its billed business for the quarter was down 34 percent versus the prior year. Billed business in the month of April was down 40 percent year-over-year, followed by sequential improvement through May and June with declines of 36 percent and 26 percent, respectively. Non-T&E spend was down 19 percent year-over-year in April, improving to a 5 percent decline year-over-year in June. In contrast, T&E spend saw much larger declines, down 95 percent year-over-year in April, improving to a 77 percent year-over-year decline in June. U.S. billed business declined 32 percent for the quarter versus the
prior year, compared with a 38 percent decline in billed business outside the United States, where T&E volumes make up a higher proportion of spend. American Express’ proprietary consumer and commercial billed business declined by 35 percent and 36 percent year-over-year, respectively. The decline in commercial billed business was driven by continued year-over-year decreases in T&E spend by its large corporate customers, which continued throughout the quarter, with less pronounced billed business declines from small and medium sized corporate customers, where T&E makes up a lower proportion of spend. Consumer billed business was also impacted by declines in T&E, and offline non-T&E spend, which was slightly offset by increased online and card-not-present spend at non-T&E merchants. To the extent American Express continues to see significant year-over-year declines in billed business, its future results will be materially impacted.
Provisions for credit losses increased for American Express, primarily driven by higher reserve builds reflecting the continued deterioration of the global macroeconomic outlook, including unemployment and Gross Domestic Product (GDP), and a shift in the mix of Card Member loans and Card Member receivables, partially offset by a decline in the outstanding balance of Card Member loans and Card Member receivables.Refer to Table 3 in MD&A for additional information for Credco’s provisions for credit losses.
To support its customers and merchants, American Express continued to offer financial and other assistance, adding product benefits to reflect today’s environment, and continuing to provide the high level of customer service they expect and rely on. During the first quarter, American Express created a Customer
Pandemic Relief (CPR) program to provide short-term support for customers impacted by COVID-19. American Express also enhanced its longer-term financial relief programs during the quarter.
Looking ahead, there remains great uncertainty on how the COVID-19 pandemic will progress or what its continued impact will be on the global economy. American Express will continue to focus on what it can control – backing its customers, colleagues and communities, and maintaining a tight rein on expenses, while pursuing opportunities to invest in initiatives that can enable its long-term growth.
See
“Risk Factors” for information on additional impacts of COVID-19 and related containment efforts as well as other matters that could have a material adverse effect on Credco’s results of operations and financial condition.
Critical Accounting Estimates
Please see the “Critical Accounting Estimates” section of Credco’s Annual Report on Form 10-K for the year ended December 31, 2019 for a full description of all of Credco’s critical accounting estimates. The critical accounting estimate
related to Reserves for Card Member Credit Losses presented below has been updated to reflect the adoption of the Current Expected Credit Loss (CECL) methodology.
Reserves for Card Member Credit Losses
American Express has in place an enterprise-wide credit risk management process and manages the overall credit risk exposure associated with the Card Member receivables and loans, including those purchased by Credco.
Reserves for Card Member credit losses represent management’s best estimate of the expected credit losses in Credco’s outstanding portfolio of Card Member receivables and loans as of the balance sheet date. The CECL methodology, which became effective January 1, 2020, requires management
to estimate lifetime expected credit losses by incorporating historical loss experience, as well as current and future economic conditions over a reasonable and supportable period (R&S Period) beyond the balance sheet date.
In estimating expected credit losses American Express uses a combination of statistically-based models that include a significant amount of judgment, primarily related to the determination of the appropriate R&S Period, the methodology to incorporate current and future economic conditions, and the determination of the probability of and exposure at default, all of which are ultimately used in measuring the quantitative components of its reserves. American Express uses these models and assumptions, combined with historical loss experience, to calculate the reserve rates that are applied to the outstanding receivables or loans balances, to produce its reserves for expected
credit losses. Beyond the R&S Period, American Express estimates expected credit losses using its historical loss rates. American Express also considers whether to adjust the quantitative reserves for certain external and internal qualitative factors, which consequentially may increase or decrease the reserves for credit losses on Card Member receivables and Card Member loans.
The R&S Period, which is approximately 3 years, represents the maximum time-period beyond the balance sheet date over which American Express can reasonably estimate credit losses, using all available portfolio information, current economic conditions and forecasts of future economic conditions. American Express obtains its forecasts of future economic conditions from an independent third party, and in determining the relevant R&S Period for Card Member receivables and loans, it also considers information arising from other internal processes,
as well as its own past loss experience. Card Member loan products do not have a contractual term and balances can revolve if minimum required payments are made, causing some balances to remain outstanding beyond the R&S Period. Card Member receivable products are contractually required to be paid in full; therefore, American Express has assumed the balances will be either paid or written-off within the R&S Period.
Within the R&S Period, American Express models use past loss experience and current and future economic conditions to estimate the probability of default, exposure at default and expected recoveries to estimate net losses at default. A significant area of judgment relates to how management applies future Card Member payments to the reporting period balances when determining the exposure at default. The nature of revolving loan products inherently includes a relationship between
future payments and spend behavior which creates complexity in the application of how future payments are either partially or entirely attributable to the existing balance at the end of the reporting period. Using historical customer behavior and other factors, Credco has assumed that future payments are first allocated to interest and fees associated with the reporting period balance and future spend. Credco then allocates a portion of the payment to the estimated higher minimum payment amount due because of any future spend. Any remaining portion of the future payment would then be allocated to the remaining balance.
As noted
above, CECL requires that the R&S Period include an assumption about current and future economic conditions. Management incorporates multiple economic scenarios (e.g., baseline, better and worse) obtained from an independent third party. The expected credit losses calculated from each economic scenario are weighted to reflect uncertainty around the baseline economic scenario. Management determines the weighting of each scenario based on its detailed review of the externally sourced information and comparing other economic information it uses throughout other processes.
Macroeconomic Sensitivity
Reserves for credit losses are sensitive to various inputs and assumptions, which may differ by portfolio. Macroeconomic forecasts are critical inputs into American Express’ models and inherently contain multiple variables, of which the U.S. unemployment rate and U.S. GDP growth rate are
the most significant to its estimated expected credit losses. Both variables moved dramatically during the six months ended June 30, 2020 and drove significant credit reserve builds. At December 31, 2019, the U.S. unemployment rate and GDP growth quarter-over-quarter was 3.5 percent and 2.1 percent, respectively. At June 30, 2020, American Express’ weighted economic scenarios, obtained from an independent third party, assumed the U.S. unemployment rate and contraction in U.S. GDP would peak during the second quarter of 2020, with the U.S. unemployment rate between approximately 15 percent to 17 percent and U.S. GDP declines quarter-over-quarter approximately 33 percent to 36 percent, seasonally adjusted to annualized rates. The combination of the material movements in these variables, together with overall changes in Credco’s
portfolios related to volume and mix, resulted in a build to its Reserves for credit losses of $175 million for the six months ended June 30, 2020. These macroeconomic forecasts, under different conditions or using different assumptions or estimates, could result in significantly different changes in reserves for credit losses. It is difficult to estimate how potential changes in specific factors might affect the overall reserves for credit losses and current results may not reflect the potential future impact of macroeconomic forecast changes.
Refer to the “Business Environment” and Table 3 in MD&A and Note 1 and Note 3 to the “Consolidated Financial Statements” for a further description of the impact of CECL, both at implementation and for the six months ended June 30, 2020.
The
process of estimating these reserves requires a high degree of judgment. To the extent American Express’ expected credit loss models are not indicative of future performance, Credco’s actual losses could differ significantly from its judgments and expectations, resulting in either higher or lower future provisions for credit losses in any period.
Results of Operations for the Six Months Ended June 30, 2020 and 2019
Net income depends largely on the volume of Card Member receivables and Card Member loans purchased, the discount rate used to determine purchase price, interest earned, interest expense, collectability of purchased Card Member receivables and Card Member loans, and income taxes.
As a result of the adoption of CECL on January
1, 2020, there is a lack of comparability in both the reserves and provisions for credit losses for the periods presented. Results for reporting periods beginning after January 1, 2020 are presented using the CECL methodology while comparative information continues to be reported in accordance with the incurred loss methodology in effect for prior periods. Refer to Note 3 to the “Consolidated Financial Statements” for further information.
Credco’s consolidated net income decreased by $111 million to $104 million, as compared to net income of $215 million for the same period in 2019. The year-over-year decrease in net income is primarily driven by lower discount revenue earned from Card Member receivables, lower interest income from affiliates and higher provision for credit losses, partially offset by decline in interest expense.
Discount
revenue decreased, due to lower volumes and lower discount rates on Card Member receivables and Card Member loans purchased.
Interest income decreased, primarily due to lower average loan balances and lower average interest rates.
Table 2: Total Expenses Summary
Six
Months Ended June 30,
Change 2020 vs. 2019
(Millions, except percentages)
2020
2019
Provisions for credit losses
$
276
$
114
$
162
#
Interest
expense
132
300
(168)
(56)
%
Interest expense to affiliates
65
235
(170)
(72)
Other,
net
(14)
(48)
34
(71)
Total expenses
$
459
$
601
$
(142)
(24)
%
#
Denotes a variance greater than 100 percent
Total expenses
Provisions for credit losses on Card Member receivables and Card Member loans increased, primarily driven by higher reserve builds, reflecting the continued deterioration of the global macroeconomic outlook, including unemployment and GDP, partially offset by a decrease in the outstanding balance of Card Member receivables and Card Member loans. Refer to Table 3 for additional information.
Interest expense decreased, primarily due to scheduled debt maturities and lower interest rates during the period.
Interest expense to affiliates decreased, primarily due to a decrease in average debt balances and lower interest rates.
Other, net expenses increased, primarily driven by lower forward point gains.
(a)Reserve build (release) represents the portion of the provisions for credit losses for the period, related to increasing or decreasing reserves for credit losses as a result of, among other
things, changes in volume, macroeconomic outlook, portfolio composition and credit quality of portfolios. Reserve build represents the amount by which the provision for credit losses exceeds net write-offs, while reserve release represents the amount by which net write-offs exceeds the provision for credit losses.
Income taxes
The effective tax rate was 28.1 percent and 13.8 percent for the three months ended June 30, 2020 and 2019, respectively, and 33.3 percent and 13.7 percent for the six months ended June 30, 2020 and 2019,
respectively. The tax rates for the three and six month periods ended June 30, 2020 included discrete tax charges of $14 million and $32 million, respectively, related to the attribution of income to jurisdictions outside the U.S. Refer to Note 7 to the “Consolidated Financial Statements” for additional information.
Card Member receivables and Card Member loans
As of June 30, 2020 and December 31, 2019, Credco owned $10.1 billion and $25.6 billion, respectively, of gross Card Member receivables. Card Member receivables represent amounts due on American Express charge card products and are recorded at the time they are purchased from the seller. Included in Card Member receivables are Credco Receivables Corporation’s (CRC) purchases
of participation interests from American Express Receivables Financing Corporation VIII LLC (RFC VIII) in conjunction with TRS’ securitization program. As of June 30, 2020 and December 31, 2019, CRC owned approximately $4.0 billion and $8.1 billion, respectively, of such participation interests.
Effective February 1, 2020, TRS removed U.S. Consumer and Small Business Card Member receivables from the American Express Issuance Trust II (the Charge Trust) and substantially replaced them with U.S. Corporate Card Member receivables in two phases. On February 1, 2020 and April 20, 2020, TRS transferred $5.2 billion and $1.7 billion, respectively, of U.S. Corporate Card Member receivables
to the Charge Trust. Since Credco maintains participation interests in the Charge Trust, these transactions resulted in Credco (i) no longer having a $7.2 billion interest in U.S. Consumer and Small Business Card Member receivables and (ii) having an interest in the U.S. Corporate Card Member receivables in the Charge Trust. The settlement of $7.2 billion related to the U.S. Consumer and Small Business portfolio was used to repay borrowings from American Express Company leading to a reduction in Long-term debt to affiliates of $7.2 billion.
The net volume of Card Member receivables and Card Member loans purchased during the six months ended June 30, 2020 and 2019 was approximately $75 billion and $157 billion, respectively.
As of June 30,
2020 and December 31, 2019, Credco owned gross Card Member loans totaling $504 million and $697 million, respectively. These loans generally represent revolving amounts due on American Express lending card products.
The following table summarizes selected information related to the Card Member receivables portfolio as of June 30:
Table 4: Selected
Information Related to Card Member Receivables
(Millions, except percentages and where indicated)
2020
2019
Total
gross Card Member receivables (a)
$
10,109
$
26,319
Loss reserves - Card Member receivables (a)
$
184
$
172
Loss
reserves as a % of receivables
1.8
%
0.7
%
Average life of Card Member receivables (# in days) (b)
37
29
(a)Refer
to Notes 1, 2 and 3 to the “Consolidated Financial Statements” for further discussion.
(b)Represents the average life of Card Member receivables owned by Credco, based upon the ratio of the average amount of both billed and unbilled receivables owned by Credco at the end of each month, during the periods indicated, to the volume of Card Member receivables purchased by Credco.
Loans to Affiliates and Other
Credco’s loans to affiliates and other represent floating-rate interest-bearing borrowings by American Express Company, wholly owned subsidiaries
of TRS and the joint ventures that issue American Express cards in certain countries. The components of loans to affiliates and other as of June 30, 2020 and December 31, 2019 were as follows:
Table 5: Loans to Affiliates and Other
(Millions)
2020
2019
American
Express Company
$
5,215
$
—
American Express Services Europe Limited
2,228
4,206
American Express Australia Limited
1,571
2,052
Amex
Global Holdings C.V.
1,140
888
Amex Bank of Canada
840
1,587
American Express Company (Mexico) S.A. de C.V.
458
534
American
Express Bank (Mexico) S.A.
347
404
American Express International, Inc., Singapore Branch
194
413
American Express International (NZ), Inc.
50
70
American
Express Saudi Arabia (C) JSC
34
71
Alpha Card S.C.R.L./C.V.B.A
11
120
Total (a)
$
12,088
$
10,345
(a)As
of June 30, 2020 and December 31, 2019, approximately $5.4 billion and $8.2 billion, respectively, were collateralized by the underlying Card Member receivables and Card Member loans transferred with recourse.
Due from/to Affiliates
As of June 30, 2020 and December 31, 2019, amounts due from affiliates were $18 million and $652 million, respectively. As of June 30, 2020 and December 31, 2019, amounts due to affiliates were $3.5 billion and $2.1 billion, respectively. These amounts relate primarily to timing differences from the purchase of Card Member receivables, net of remittances from
TRS and its subsidiaries, as well as from operating activities. As of both June 30, 2020 and December 31, 2019, due to affiliates also includes an amount pertaining to tax liability related to the Tax Cuts and Jobs Act of 2017.
In the month of June 2020, Credco restructured a number of
its intercompany loan arrangements to further enhance funding flexibility and effectiveness. Credco borrowed $7.1 billion from TRS to repay borrowings from AE Exposure Management Limited of $4.7 billion. The excess of $2.2 billion was deposited with American Express National Bank (AENB) which is reported as part of “Cash and Cash equivalents” on the Consolidated Balance Sheets.
Restricted Cash with Affiliates
As of June 30, 2020 and December 31, 2019, the amount of interest-bearing restricted cash was $112 million and $116 million, respectively, which represents cash deposited with Amex Bank of Canada relating to the purchase of Card Member receivables and the collateralized loan arrangement for transfer of Card Member loans. It is included under “Other assets” on the
Consolidated Balance Sheets.
Short-term Debt to Affiliates
Short-term debt to affiliates consists primarily of interest-bearing master notes payable on demand. Components of short-term debt to affiliates as of June 30, 2020 and December 31, 2019 were as follows:
Table 6: Short-term Debt to Affiliates
(Millions)
2020
2019
American
Express Travel Related Services Company, Inc.(a)
$
7,073
$
—
AE Exposure Management Limited(a)
1,264
5,731
American
Express Holdings Netherlands CV
192
192
Accertify, Inc.
92
82
American Express Swiss Holdings GmbH
1
1
American
Express Europe LLC
—
219
Total
$
8,622
$
6,225
(a) Refer to “Deposits” in MD&A and Note 1 to the “Consolidated Financial Statements”
for additional information.
Long-term Debt to Affiliates
Long-term debt to affiliates consists primarily of master note agreements with original contractual maturity dates of one year or greater and are not payable on demand. Components of long-term debt to affiliates as of June 30, 2020 and December 31, 2019 were as follows:
Table 7: Long-term Debt to Affiliates
(Millions)
2020
2019
American
Express Company (a)
$
637
$
8,959
Amex Funding Management (Europe) Limited (b)
335
333
Total
$
972
$
9,292
(a)Amounts
payable by November 2023. Refer to Note 1 to the “Consolidated Financial Statements” for additional information.
(b)Amounts payable by September 2021.
Service Fees to Affiliates
Credco’s affiliates do not explicitly charge Credco a service fee for the servicing of receivables purchased. Instead Credco receives a lower discount rate on the receivables purchased than would be the case if servicing fees were charged. If a servicing fee had been charged by these affiliates from which Credco purchases receivables, fees to affiliates for servicing receivables would have been approximately $125 millionand $153 million for the six months ended June 30, 2020 and 2019, respectively.
Correspondingly, discount revenue would have increased by approximately the same amounts in these periods.
Credco’s balance sheet management objectives are to maintain:
•A broad, deep and diverse set of funding sources to finance its assets and meet operating requirements; and
•Liquidity programs that enable Credco to continuously meet expected future financing obligations and
business requirements for at least a twelve-month period, in the event it is unable to continue to raise new funds under its traditional funding programs during a substantial weakening in economic conditions.
Credco is closely monitoring the rapidly changing macroeconomic environment and is actively managing its balance sheet to reflect evolving circumstances. Credco’s objective is to remain financially strong against a backdrop of a highly uncertain operating environment and outlook.
Funding Strategy
American Express has in place an enterprise-wide funding policy. The principal funding objective is to maintain broad and well-diversified funding sources to allow American Express, including Credco, to meet its maturing obligations, cost-effectively finance current and future asset growth in its global businesses as well as to maintain a
strong liquidity profile.
Credco has historically relied on intercompany borrowings and the debt capital markets to fulfill a substantial amount of its funding needs. It has a variety of funding sources available to access the debt capital markets, including senior unsecured debt and commercial paper. Credco continues to assess its funding needs and investor demand and could change the mix of its existing sources as well as add new sources to its funding mix. Credco’s funding plans can vary due to various risks and uncertainties, such as the disruption of financial markets or reductions in market capacity and demand for securities offered by Credco as well as any regulatory changes or changes in its long-term or short-term credit ratings. Many of these risks and uncertainties are beyond Credco’s control.
Credco’s funding strategy is designed, among other things, to maintain appropriate
and stable unsecured debt ratings from the major credit rating agencies: Fitch Ratings (Fitch), Moody’s Investor Services (Moody’s) and Standard & Poor’s (S&P). Such ratings help support Credco’s access to cost-effective unsecured funding as part of its overall funding strategy.
Table 8: Unsecured Debt Ratings
Credit
Agency
Short-Term Ratings
Long-Term Ratings
Outlook
Fitch
F1
A
Negative
Moody’s
Prime-1
A2
Negative
S&P
A-2
A-
Stable
Downgrades
in the ratings of Credco’s unsecured debt could result in higher funding costs, as well as higher fees related to borrowings under its unused lines of credit. Declines in credit ratings could also reduce Credco’s borrowing capacity in the unsecured term debt and commercial paper markets. The overall level of the funding provided by Credco to other American Express affiliates is impacted by a variety of factors, among them Credco’s ratings. To the extent that Credco is subject to a higher cost of funds, whether due to an adverse ratings action or otherwise, the affiliates could continue to use, or could increase their use of, alternative sources of funding for their receivables that offer better pricing.
Short-term Funding Programs
Short-term borrowings, such as commercial paper, is defined as debt with original contractual maturity of twelve months or less.
Credco’s issuance and sale of commercial paper is primarily utilized for working capital needs. The amount of short-term borrowings issued in the future will depend on Credco’s funding strategy, its needs and market conditions. As of June 30, 2020 and December 31, 2019, Credco had nil and $3.0 billion, respectively, of commercial paper outstanding. The average commercial paper outstanding was $1.26 billion and $0.30 billion for the six months ended June 30, 2020 and the year ended December 31, 2019, respectively.
Long-term debt is raised through the offering of debt securities both in and outside the United States. Long-term debt is generally defined as any debt with an original contractual maturity greater than twelve months. During the six months ended June 30, 2020, Credco did not issue any unsecured debt securities. Credco had the following long-term debt outstanding as of June 30, 2020 and December 31, 2019:
Table 9: Long-Term Debt Outstanding
(Billions)
2020
2019
Long-term
debt outstanding (a)
$
9.0
$
13.5
Average long-term debt (b)
$
10.7
$
16.4
(a)The
outstanding balances include (i) unamortized discount, (ii) the impact of movements in exchange rates on foreign currency denominated debt and (iii) the impact of fair value hedge accounting on certain fixed-rate notes that have been swapped to floating rate through the use of interest rate swaps.
(b)Average long-term debt outstanding during the six months ended June 30, 2020 and the year ended December 31, 2019, respectively.
Credco has the ability to issue debt securities under the shelf registration statement filed with the Securities and Exchange Commission (SEC). The latest shelf registration statement filed with the SEC is for an unspecified amount of debt securities. As of June 30, 2020 and December 31,
2019, Credco had $8.9 billion and $13.5 billion of debt securities outstanding, respectively, issued under the SEC registration statement. Credco may redeem from time to time certain debt securities within 31 days prior to the original contractual maturity dates in accordance with the optional redemption provisions of those debt securities.
Credco has a program in Australia for the issuance of debt securities of up to approximately $4.1 billion (AUD 6 billion). There were no outstanding notes under this program as of June 30, 2020 and December 31, 2019.
During the six months ended June 30, 2020 and 2019, Credco did not pay any dividends to TRS. When considering the amount of dividends
it pays, Credco takes into account the amount of capital required to maintain capital strength, support business growth and meet the expectations of debt investors, including the covenants of debt instruments issued by Credco that impose the requirement for Credco to maintain a minimum consolidated net worth of $50 million. To the extent excess capital is available, it may be distributed to TRS, Credco’s parent company, via dividends. There are no significant restrictions on the ability of Credco to obtain funds from its subsidiaries by dividend or loan. As of June 30, 2020, Credco was in compliance with all restrictive covenants contained in its debt agreements.
Liquidity Management
The liquidity objective of American Express and its subsidiaries,
including Credco, is to maintain access to a diverse set of on-and off-balance sheet liquidity sources and seek to maintain liquidity sources in amounts sufficient to meet their expected future financial obligations and business requirements for liquidity for a period of at least twelve months in the event they are unable to raise new funds under their regular funding programs during a substantial weakening in economic conditions.
The liquidity management strategy includes a number of elements, including, but not limited to:
•Maintaining diversified funding sources;
•Maintaining unencumbered liquid assets and off-balance sheet liquidity sources;
•Projecting cash inflows and outflows under a variety of economic and market scenarios;
•Establishing
clear objectives for liquidity risk management, including compliance with regulatory requirements; and
•Incorporating liquidity risk management as appropriate into American Express’ capital adequacy framework.
Credco believes that it currently maintains sufficient liquidity sources to meet all liquidity requirements. As of June 30, 2020, Credco had cash and cash equivalents of $2.3 billion. The increase of $2.2 billion during the period was primarily driven by an increase
in interest bearing deposits with AENB due to the restructuring of a number of its intercompany loan arrangements to further enhance funding flexibility and effectiveness. Refer to “Deposits” in MD&A for additional information. In addition to its actual holdings of cash and cash equivalents, Credco maintains access to additional liquidity, in the form of cash and cash equivalents held by certain affiliates, through intercompany loan agreements, access to securitizations of Card Member receivables through sales of receivables to TRS for securitization by RFC VIII and the Charge Trust, and a committed bank credit facility.
Committed Bank Credit Facility
Credco maintained a U.S. dollar-denominated committed syndicated bank credit facility as of June 30, 2020 of $3.5 billion with a maturity date of October
15, 2022. As of June 30, 2020, no amounts were drawn on this facility. Credco may, from time to time, use this facility in the ordinary course of business to fund working capital needs. Any undrawn portion of this facility could serve as backstop for the amount of commercial paper outstanding. The availability of this facility is subject to Credco’s compliance with certain financial covenants that require maintenance of a 1.25 minimum required fixed charge coverage ratio (FCCR). The FCCR is the ratio of income before fixed charges (interest expenses including to affiliates) and income taxes to fixed charges for the applicable period. The FCCR for Credco was 1.79 and 1.54 for the six months ended June 30, 2020 and year ended December 31, 2019, respectively.
The committed syndicated
bank credit facility does not contain a material adverse change clause, which might otherwise preclude borrowing under the credit facility, nor is it dependent on Credco’s credit rating.
OTHER MATTERS
Certain Legislative, Regulatory and Other Developments
Government Responses to COVID-19 Pandemic
In response to the COVID-19 pandemic, authorities around the world have implemented numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders and business shutdowns. In addition to these measures, which have substantially curtailed household and business activity, fiscal and monetary policy measures have been deployed for the stated purpose of attempting to mitigate the adverse effects on the economy. In the United States, this has included the
enactment of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and a number of emergency lending and liquidity facilities established by the Federal Reserve.
There have also been various governmental actions taken or proposed to provide forms of relief, such as limiting debt collections efforts and encouraging or requiring extensions, modifications or forbearance with respect to certain loans and fees.
Governmental actions taken in response to the COVID-19 pandemic have not always been coordinated or consistent across jurisdictions but, in general, have been expanding in scope and intensity. The efficacy and ultimate effect of these actions is not known. Credco continues to monitor federal, state and international regulatory developments in relation to COVID-19 and their potential impact on its operations.
Various statements have been made in this Quarterly Report on Form 10-Q that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be made in Credco’s other reports filed with or furnished to the SEC and in other documents. In addition, from time to time, Credco, through its management, may make oral forward-looking statements. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from such statements. The words “believe,”“expect,”“anticipate,”“intend,”“plan,”“aim,”“will,”“may,”“should,”“could,”“would,”“likely,”“estimate,”“predict,”“potential,”“continue,” and similar expressions are intended to identify forward-looking statements. Credco cautions you that the risk factors described below as well as those in Credco’s Annual Report on Form 10-K for the year ended December 31, 2019 and the “Risk Factors” section in this Quarterly Report are not exclusive. There may also be other risks that Credco is unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. Credco undertakes no obligation to update or revise any forward-looking statements.
Factors that could cause actual results to differ materially from Credco’s forward-looking statements include, but are not limited to, the following:
•a further deterioration in global economic and business conditions and consumer and business spending generally; an inability or unwillingness of Card Members to pay amounts owed to American Express; uncertain impacts of, or additional changes in, monetary, fiscal or tax policy to address the impact of COVID-19, including the end of programs and funding designed to support the economy; prolonged measures to contain the spread of COVID-19 or premature easing of such containment measures, both of which could further exacerbate the effects on its business activities and results of operations, Card Members and partners; Credco’s inability to manage risk in an uncertain and fast-changing environment; further market volatility, changes in capital and credit market conditions and the availability and cost of capital; issues impacting brand perceptions and its reputation; changes in foreign currency rates
and benchmark interest rates; an inability of its business partners to meet their obligations to American Express and its customers due to slowdowns or disruptions in their businesses, bankruptcy and liquidation, or otherwise; and pricing changes, product mix and credit actions, including line size and other adjustments to credit availability;
•future credit performance, which will depend in part on changes in consumer behavior that affect loan and receivable balances (such as paydown rates) and delinquency and write-off rates; macroeconomic factors such as unemployment rates, GDP and the volume of bankruptcies; collections capabilities and recoveries of previously written-off loans and receivables; the enrollment in, and effectiveness of, hardship programs and troubled debt restructurings; and governmental actions that provide forms of relief with respect to certain loans and fees, such as limiting
debt collections efforts and encouraging or requiring extensions, modifications or forbearance;
•the amount of loans and receivables outstanding being higher or lower than current expectations, which will depend on the behavior of Card Members and their actual spending and borrowing patterns, American Express’ ability to manage risk and enhance the Card Member value proposition, and competition;
•factors beyond Credco’s control such as outbreaks and future waves of COVID-19 cases, severe weather conditions, natural and man-made disasters, power loss, disruptions in telecommunications, or terrorism, any of which could significantly affect demand for and spending on American Express cards, delinquency rates, loan and receivable balances and other aspects of its business and results of operations or disrupt its global network systems and
ability to process transactions;
•the effectiveness of Credco’s risk management policies and procedures, including ability to accurately estimate the provisions for losses in Credco’s outstanding portfolio of Card Member receivables and Card Member loans, and operational risk;
•fluctuations in foreign currency exchange rates;
•negative changes in Credco’s credit ratings, which could result in decreased liquidity and higher borrowing costs;
•changes in laws or government regulations affecting American Express’ business, including the potential impact of regulations adopted by regulators relating to certain credit and charge card practices;
•the effect of fluctuating interest rates, which could affect Credco’s borrowing costs and have an adverse effect on the market price of notes issued by Credco;
•the impact on American Express’ business of changes in the substantial and increasing worldwide competition in the payments industry;
•the impact on American Express’ business resulting from a failure in or breach of operational or security systems, processes or infrastructure, or those of third parties, including as a result of cyberattacks, which could compromise the confidentiality, integrity, privacy and/or security of data, disrupt operations, reduce the use and acceptance of American Express cards and lead to regulatory scrutiny, litigation, remediation and response costs, and reputational
harm;
•the impact on American Express’ business that could result from litigation such as class actions or from government regulation or supervision; and
•Credco’s ability to satisfy its liquidity needs and execute on its funding plans, which will depend on, among other things, Credco’s future business growth, the impact of global economic, political and other events on market capacity, Credco’s credit ratings, demand for securities offered by Credco, performance by Credco’s counterparties under its bank credit facilities and other lending facilities, and regulatory changes.
A further description of these uncertainties and other risks can be found in the 2019 Form 10-K and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2020,
filed with the Securities and Exchange Commission.
Adjustments
to reconcile net income to net cash provided by operating activities:
Provisions for credit losses
i276
i114
Amortization
of underwriting expense
i7
i11
Deferred
taxes
(i44)
i8
Changes
in operating assets and liabilities:
Interest, taxes and other amounts due to/from affiliates
i11
i40
Other
operating assets and liabilities
i433
i208
Net
cash provided by operating activities
i787
i596
Cash
Flows from Investing Activities
Net decrease (increase) in Card Member receivables and Card Member loans (a)
i10,019
(i1,847)
Net
increase in loans to affiliates and other (a)(b)
(i1,812)
(i234)
Net
increase in due to/from affiliates
i1,918
i518
Net
cash provided by (used in) investing activities
i10,125
(i1,563)
Cash
Flows from Financing Activities
Net decrease in short-term debt
(i3,216)
(i806)
Net
increase in short-term debt to affiliates
i2,397
i203
Principal
payments of long-term debt
(i4,600)
(i4,250)
Proceeds
from long-term debt to affiliates
i8,006
i17,631
Principal
payments of long-term debt to affiliates (a)(b)
(i11,251)
(i11,847)
Net
cash (used in) provided by financing activities
(i8,664)
i931
Effect
of foreign currency exchange rates on cash, cash equivalents and restricted cash
(i5)
i4
Net
increase (decrease) in cash, cash equivalents and restricted cash
i2,243
(i32)
Cash,
cash equivalents and restricted cash at beginning of period
i149
i195
Cash,
cash equivalents and restricted cash at end of period
$
i2,392
$
i163
Cash,
cash equivalents and restricted cash reconciliation
Jun-20
Dec-19
Jun-19
Dec-18
Cash and cash equivalents per Consolidated Balance Sheets (c)
$
i2,280
$
i33
$
i66
$
i102
Restricted
cash included in Other assets per Consolidated Balance Sheets (d)
i112
i116
i97
i93
Total
cash, cash equivalents and restricted cash
$
i2,392
$
i149
$
i163
$
i195
Supplemental
cash flow information
2020
2019
Non-cash Investing activities
Sales of U.S. Corporate Card Member receivables to TRS (a)
$
i5,493
$
—
Lending
to American Express Company (a)
(i416)
—
Termination of intercompany loan agreement with American Express Limited and American Express International,
Inc.(b)
i—
i5,109
Non-cash
Financing activities
Settlement of borrowings with American Express Company (a)(b)
$
(i5,077)
$
(i5,109)
(a)Primarily
driven by removal of U.S. Consumer and Small Business Card Member receivables from the American Express Issuance Trust II (the Charge Trust) and replacement of the same with U.S. Corporate Card Member receivables by American Express Travel Related Services Company, Inc. (TRS) during the three months ended March 31, 2020. To effect this change, on January 7, 2020, Credco sold $i5.2 billion of U.S. Corporate Card Member receivables to TRS. Settlement of this transaction was undertaken
through borrowings from American Express Company.
(b)As a result of funding structure changes in the ordinary course of business, Credco terminated the intercompany loan agreement with American Express Limited and American Express International, Inc. and settled the related borrowings from American Express Company during the three months ended June 30, 2019.
(c)Primarily represents deposits with American Express National Bank (AENB). Refer to Note 1 for additional information.
(d)Represents cash deposited with Amex Bank of Canada relating to the purchase of Card Member receivables and the collateralized loan arrangement for transfer of Card Member loans.
(a)Represents
$i140 million, net of tax of $i21
million, related to the impact as of January 1, 2020, of adopting the new accounting guidance for the recognition of credit losses on certain financial instruments.
American Express Credit Corporation (Credco) is a wholly owned subsidiary of TRS, which is a wholly owned subsidiary of American Express Company (American Express).
Credco is engaged in the business of financing certain non-interest-earning Card Member receivables arising from the use of the American Express charge cards issued in the United States and in certain countries outside the United States. Credco also finances certain interest-earning revolving loans generated by Card Member spending on American Express credit cards issued in non-U.S. markets.
Credco executes material transactions with its affiliates. The agreements between Credco and its affiliates provide that the parties
intend that the transactions thereunder be conducted on an arm’s-length basis; however, there can be no assurance that the terms of these arrangements are the same as would be negotiated between independent, unrelated parties.
Credco maintains its fixed charge coverage ratio (FCCR) at a minimum of i1.25, which is achieved by charging appropriate discount rates on the purchase of receivables Credco makes from, and the interest rates on the loans Credco provides to, TRS and other American Express subsidiaries.
Each monthly period, the discount and interest rates are determined to generate income for Credco that is sufficient to maintain its minimum FCCR, whilst maintaining the intention for these transactions to occur on an arm’s-length basis. Should it be required, American Express would provide Credco with financial support with respect to maintenance of its minimum FCCR. The revenue earned by Credco from purchasing Card Member receivables and Card Member loans at a discount is reported as Discount revenue earned from purchased Card Member receivables and Card Member loans on the Consolidated Statements of Income.
The accompanying Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements included in Credco’s Annual Report on Form 10-K for the year ended December 31, 2019. If not materially different, certain note disclosures included
therein have been omitted from these Consolidated Financial Statements.
The interim Consolidated Financial Statements included in this report have not been audited. In the opinion of management, all adjustments, which consist of normal recurring adjustments necessary for a fair statement of the interim Consolidated Financial Statements, have been made. Results of operations reported for interim periods are not necessarily indicative of results for the entire year.
iThe preparation of Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These accounting estimates reflect the best judgment of management, but actual results could differ.
i
Recently Adopted Accounting Standards
Effective January 1, 2020, Credco adopted the new credit reserving methodology, applicable to certain financial
instruments, known as the Current Expected Credit Loss (CECL) methodology under a modified retrospective transition. The CECL methodology requires measurement of expected credit losses for the estimated life of the financial instrument, not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information. Upon implementation, Card Member receivable reserves decreased by $i147 million and Card Member loan reserves
increased by $i7 million, along with the associated current and deferred tax impact of $i21
million, and cumulative effect adjustment to the opening balance of retained earnings, net of tax, of $i119 million. There were no material changes to Credco’s business processes or internal controls as a result of adopting the new guidance. Refer to Note 3 for additional information on how management estimates reserves for credit losses in accordance with CECL methodology.
Effective February 1, 2020, TRS removed U.S. Consumer and Small Business Card Member receivables from the Charge Trust and substantially replaced them with U.S. Corporate Card Member receivables in two phases. On February 1, 2020 and April 20, 2020, TRS transferred $i5.2
billion and $i1.7 billion, respectively, of U.S. Corporate Card Member receivables to the Charge Trust. Since Credco maintains participation interests in the Charge Trust, these transactions resulted in Credco (i) no longer having a $i7.2
billion interest in U.S. Consumer and Small Business Card Member receivables and (ii) having an interest in the U.S. Corporate Card Member receivables in the Charge Trust. The settlement of $i7.2 billion related to the U.S. Consumer and Small Business portfolio was used to repay borrowings from American Express Company leading to a reduction in Long-term debt to affiliates of $i7.2
billion.
In the month of June 2020, Credco restructured a number of its intercompany loan arrangements to further enhance funding flexibility and effectiveness. Credco borrowed $i7.1 billion from TRS to repay borrowings from AE Exposure Management Limited of $i4.7
billion. The excess of $i2.2 billion was deposited with AENB which is reported as part of Cash and Cash equivalents.
2.iCard
Member Receivables and Card Member Loans
American Express’ charge and lending payment card products result in the generation of Card Member receivables and Card Member loans. Reserves for reporting periods beginning after January 1, 2020 are presented using the CECL methodology, while comparative information continues to be reported in accordance with the incurred loss methodology in effect for prior periods.
(a)Comprised
of International Consumer Services as of June 30, 2020 and U.S. and International Consumer Services as of December 31, 2019.
(b)During the three months ended March 31, 2020, $i7.2 billion of U.S. Consumer and Small Business Card Member receivables were transferred out of the Charge Trust resulting in a reduction
of the same amount in Credco’s participation interest in such receivables. Refer to Note 1 for additional information.
(c)Net of deferred discount (expense) revenue totaling $(i73) million and $i75
million as of June 30, 2020 and December 31, 2019, respectively.
(d)Card Member receivables modified in a troubled debt restructuring (TDR) program were immaterial.
Card Member Receivables and Card Member Loans Aging
Generally,
a Card Member account is considered past due if payment is not received within 30 days after the billing statement date. iThe following table presents the aging of Card Member receivables and Card Member loans as of June 30, 2020 and December 31, 2019:
2020
(Millions)
Current
30-59 Days Past Due
60-89 Days Past Due
90+ Days Past Due
Total
Card Member Receivables:
Global
Consumer Services Group
$
i1,503
$
i7
$
i5
$
i17
$
i1,532
Global
Commercial Services
Global Small Business Services
i782
i2
i2
i7
i793
Global
Corporate Payments (a)
(b)
(b)
(b)
i154
i7,784
Card
Member Loans:
Global Consumer Services Group
$
i493
$
i3
$
i2
$
i6
$
i504
2019
(Millions)
Current
30-59 Days Past Due
60-89 Days Past Due
90+ Days Past Due
Total
Card Member Receivables:
Global
Consumer Services Group
$
i9,766
$
i29
$
i16
$
i36
$
i9,847
Global
Commercial Services
Global Small Business Services
i1,996
i10
i5
i9
i2,020
Global
Corporate Payments (a)
(b)
(b)
(b)
i105
i13,690
Card
Member Loans:
Global Consumer Services Group
$
i689
$
i3
$
i2
$
i3
$
i697
(a)Global
Corporate Payments (GCP) reflects global, large and middle market corporate accounts. Delinquency data is tracked based on days past billing status rather than days past due. A Card Member account is considered 90 days past billing if payment has not been received within 90 days of the Card Member’s billing statement date. In addition, if collection procedures are initiated on an account prior to the account becoming 90 days past billing, the associated Card Member receivable balance is classified as 90 days past billing. These amounts are shown above as 90+ Days Past Due for presentation purposes. See also (b).
(b)Delinquency data for periods other than 90+ days past billing is not available due to system constraints. Therefore, such data has not been utilized for risk management purposes. The balances that are current to 89 days past due can be derived as the difference between the Total and the 90+
Days Past Due balances.
Credit Quality Indicators for Card Member Receivables and Card Member Loans
i
The following tables present the key credit quality indicators as of or for the six months ended June 30:
2020
2019
Net
Write-Off Rate (a)
30+ Days Past Due as a % of Total
Net Write-Off Rate (a)
30+ Days Past Due as a % of Total
Card Member Receivables:
Global Consumer Services Group
i1.45
%
i1.89
%
i1.11
%
i0.65
%
Global
Small Business Services
i2.13
%
i1.39
%
i1.36
%
i0.94
%
Global
Corporate Payments
i1.26
%
(b)
(c)
(b)
Card Member Loans:
Global
Consumer Services Group
i2.03
%
i2.18
%
i1.55
%
i0.90
%
(a)Represents
the amount of Card Member receivables or Card Member loans owned by Credco that are written off, net of recoveries, expressed as a percentage of the average Card Member receivables or Card Member loans balances in each of the periods indicated.
(b)For GCP
Card Member receivables, delinquency data is tracked based on days past billing status rather than days past due. Delinquency data for periods other than 90+ days past billing is not available due to system constraints. 90+ Days Past Billing as a % of total is i1.98% and i0.66%
for the six months ended June 30, 2020 and 2019, respectively.
(c)Net loss ratio was the credit quality indicator for GCP Card Member receivables for prior periods, and represents the amount of Card Member receivables owned by Credco that are written off, net of recoveries, expressed as a percentage of the volume of Card Member receivables purchased by Credco. The net loss ratio for the six months ended June 30, 2019 was i0.06%.
Refer to Note 3 for additional indicators, including external environmental qualitative factors, management considers in its evaluation process for reserves for credit losses.
3. iReserves for Credit Losses
American Express has in place an enterprise-wide credit risk management process and manages the overall
credit risk exposure associated with the Card Member receivables and loans, including those purchased by Credco. Reserves for credit losses represent management’s best estimate of the expected credit losses in its outstanding portfolio of Card Member receivables and Card Member loans, as of the balance sheet date. The CECL methodology, which became effective January 1, 2020, requires management to estimate lifetime expected credit losses by incorporating historical loss experience, as well as current and future economic conditions over a reasonable and supportable period (R&S Period) beyond the balance sheet date. Management makes various judgments combined with historical loss experience to calculate a reserve rate that is applied to the outstanding loan or receivable balance to produce a reserve for expected credit losses.
American Express uses a combination of statistically-based
models that incorporate current and future economic conditions throughout the R&S Period. The process of estimating expected credit losses is based on several key models: Probability of Default (PD), Exposure at Default (EAD), and future recoveries for each month of the R&S Period. Beyond the R&S Period, American Express estimates expected credit losses using its historical loss rates.
•PD models are used to estimate the likelihood an account will be written-off.
•EAD models are used to estimate the balance of an account at the time of write-off. This includes balances less expected repayments based on historical payment and revolve behavior, which vary by customer. Due to the nature of revolving loan portfolios, the EAD models are complex and involve assumptions regarding the relationship between future spend and payment
behaviors.
•Recovery models are used to estimate amounts that are expected to be received from Card Members after default occurs, typically as a result of collection efforts. Future recoveries are estimated taking into consideration the time of default, time elapsed since default and macroeconomic conditions.
American Express also considers the likelihood a previously written off account will be recovered. This calculation is dependent on how long ago the account was written off and future economic conditions, which estimate the likelihood and magnitude of recovery. American Express models are developed using historical loss experience covering the economic cycle and consider the impact of account characteristics on expected losses.
Future economic conditions include multiple macroeconomic scenarios provided to
American Express by an independent third party and reviewed by management. These macroeconomic scenarios contain certain geographic based variables that are influential to its modelling process, including unemployment rates and real gross domestic product. The process of estimating credit reserves incorporates the above factors over the R&S Period explicitly considering macroeconomic forward-looking information.
Additionally, management considers whether to adjust the quantitative reserves to address possible limitations within the models or factors not included within the models, such as external factors, portfolio trends or management risk actions.
Lifetime losses for most Card Member receivables and Card Member loans are evaluated at an appropriate level of granularity, including assessment on a pooled basis where financial assets share similar risk characteristics, such
as past spend and remittance behaviors, credit bureau scores where available, delinquency status, tenure of balance outstanding, amongst others. Credit losses on accrued interest are measured and presented as part of Reserves for credit losses on the Consolidated Balance Sheets and within the Provisions for credit losses in the Consolidated Statements of Income, rather than reversing interest income.
Card
Member receivables and Card Member loans balances are written off when management considers amounts to be uncollectible, which is generally determined by the number of days past due and is typically no later than 180 days past due for pay in full or revolving loans. Card Member receivables and Card Member loans in bankruptcy or owed by deceased individuals are generally written off upon notification.
Results for reporting periods beginning after January 1, 2020 are presented using the CECL methodology while comparative information continues to be reported in accordance with the incurred loss methodology in effect for prior periods.
Changes in Card Member Receivables Reserve for Credit Losses
Card Member receivables reserve for credit losses increased for the six months ended June
30, 2020, primarily driven by higher reserve builds reflecting the continued deterioration of the estimated global macroeconomic outlook, including higher rates of unemployment and Gross Domestic Product (GDP) contraction, partially offset by a decline in volume.
i
The following table presents changes in the Card Member receivables reserve for credit losses for the six months ended June 30:
(Millions)
2020
2019
Balance,
January 1 (a)
$
i15
$
i167
Provisions
(b)
i264
i108
Net
write-offs (c)
(i101)
(i111)
Other
adjustments (d)
i6
i8
Balance,
June 30
$
i184
$
i172
(a)Includes
a decrease of $i147 million as of January 1, 2020, related to the adoption of the CECL methodology.
(b)Provisions for credit losses includes reserve build (release) and replenishment for net write-offs.
(c)Net of recoveries of $i38
million and $i64 million for the six months ended June 30, 2020 and 2019, respectively.
/
(d)For June 30, 2020, primarily includes reserve adjustments related to
the removal of U.S. Consumer and Small Business Card Member receivables of $i7.2 billion from the Charge Trust and for June 30, 2019, primarily includes reserve balances related to new groups of, and participation interests in, Card Member receivables purchased from affiliates, totaling $i2.7
billion and participation interests in Card Member receivables sold to an affiliate totaled $i1.1 billion.
Changes in Card Member Loans Reserve for Credit Losses
Card Member loans reserve for credit losses increased for the six months ended June 30, 2020, primarily driven by higher reserve builds reflecting the continued deterioration of the estimated global
macroeconomic outlook, including higher rates of unemployment and GDP contraction and changes in portfolio mix, partially offset by a decline in volume.
i
The following table presents changes in the Card Member loans reserve for credit losses for the six months ended June 30:
(Millions)
2020
2019
Balance,
January 1 (a)
$
i17
$
i5
Provisions
(b)
i12
i6
Net
write-offs (c)
(i6)
(i4)
Balance,
June 30
$
i23
$
i7
(a)Includes
an increase of $i7 million as of January 1, 2020, related to the adoption of the CECL methodology.
(b)Provisions for credit losses includes reserve build (release) and replenishment for net write-offs.
(c)Net of recoveries of $ii1.0/
million for both the six months ended June 30, 2020 and 2019.
iCredco uses derivative financial instruments to manage exposures to various market risks. These instruments derive their value from an underlying variable or multiple variables, including interest rates and foreign exchange rates, and are carried at fair value on the Consolidated Balance Sheets. These instruments enable end users to increase, reduce or alter exposure to various market risks and, for that reason, are an integral component of Credco’s market risk management. Credco does not transact in derivatives for trading purposes.
In
relation to Credco’s credit risk, certain of Credco’s bilateral derivative agreements include provisions that allow Credco or the counterparty to terminate the agreement and settle the fair value of existing positions in the event of a downgrade of one’s party credit rating below investment grade. As of June 30, 2020, these derivatives were not in a significant net liability position. Based on Credco’s assessment of the credit risk of its derivative counterparties and its own credit risk as of June 30, 2020 and December 31, 2019, no credit risk adjustment to the derivative portfolio was required.
A majority of Credco’s derivative assets and liabilities as of June 30, 2020 and December 31,
2019 are subject to master netting agreements with its derivative counterparties. Credco has iiiino///
derivative amounts subject to enforceable master netting arrangements that are not offset on the Consolidated Balance Sheets.
i
The following table summarizes the total fair value, excluding interest accruals, of derivative assets and liabilities as of June 30, 2020 and December 31, 2019:
Derivative
asset and derivative liability netting (c)
(i92)
(i27)
(i92)
(i27)
Total
derivatives, net
$
i64
$
i16
$
i78
$
i199
(a)For
Credco’s centrally cleared derivatives, variation margin payments are legally characterized as settlement payments as opposed to collateral.
(b)Credco posted $i26 million and $i20
million as of June 30, 2020 and December 31, 2019, respectively, as initial margin on its centrally cleared interest rate swaps; such amounts are recorded within Other assets on Credco’s Consolidated Balance Sheets and are not netted against the derivative balances.
(c)Represents the amount of netting of derivative assets and derivative liabilities executed with the same counterparties under an enforceable master netting arrangement.
/
Fair Value Hedges
Credco is exposed to interest rate risk associated with its fixed-rate debt
obligations. At the time of issuance, certain fixed-rate long-term debt obligations are designated in fair value hedging relationships, using interest rate swaps, to economically convert the fixed interest rate to a floating interest rate. Credco has $i5.0 billion and $i8.8
billion of its fixed-rate debt obligations designated in fair value hedging relationships as of June 30, 2020 and December 31, 2019, respectively.
The
following table presents the gains and losses recognized in Interest expense on the Consolidated Statements of Income associated with the fair value hedges of Credco’s fixed-rate long-term debt for the three and six months ended June 30:
Gains (losses)
Three
Months Ended June 30,
Six Months Ended June 30,
(Millions)
2020
2019
2020
2019
Fixed-rate long-term debt
$
i—
$
(i88)
$
(i66)
$
(i155)
Derivatives
designated as hedging instruments
(i7)
i92
i72
i157
Total
$
(i7)
$
i4
$
i6
$
i2
/
The
carrying values of the hedged liabilities, recorded within Long-term debt on the Consolidated Balance Sheets, were $i5.1 billion and $i8.7 billion as of June 30,
2020 and December 31, 2019, respectively, including the cumulative amount of fair value hedging adjustments of $i64 million and $(i2)
million for the respective periods.
Credco recognized a net decrease of $i14 million and a net increase of $i28
million in Interest expense on long-term debt for the three months ended June 30, 2020 and 2019, respectively, and a net decrease of $i12 million and a net increase of $i60 million
for the six months ended June 30, 2020 and 2019, respectively, primarily related to the net settlements (interest accruals) on Credco’s interest rate derivatives designated as fair value hedges.
Net Investment Hedges
Credco had notional amounts of approximately $i2.8 billion and $i3.0
billion of foreign currency derivatives designated as net investment hedges as of June 30, 2020 and December 31, 2019, respectively. The gain or loss on net investment hedges, net of taxes, recorded in AOCI as part of the cumulative translation adjustment, was a loss of $i216 million and a gain of $i36
million for the three months ended June 30, 2020 and 2019, respectively, and a gain of $i130 million and a loss of $i21
million for the six months ended June 30, 2020 and 2019, respectively.
Derivatives Not Designated as Hedges
iThe changes in the fair value of derivatives that are not designated as hedges are intended to offset the related foreign exchange gains or losses of the underlying foreign currency exposures. The changes in the fair value of the derivatives and the related underlying foreign currency exposures resulted in net gains of $i5
million and $i26 million for the three months ended June 30, 2020 and 2019, respectively, and $i16
million and $i49 million for the six months ended June 30, 2020 and 2019, respectively, that are recognized in Other, net expenses on the Consolidated Statements of Income.
5. iFair
Values
Financial Assets and Financial Liabilities Carried at Fair Value
i
The following table summarizes Credco’s financial assets and financial liabilities measured at fair value on a recurring basis, categorized by GAAP’s fair value hierarchy as Level 2, as of June 30, 2020 and December 31, 2019:
(Millions)
2020
2019
Assets:
Derivatives,
gross (a)
$
i156
$
i43
Total
Assets
i156
i43
Liabilities:
Derivatives,
gross (a)
i170
i226
Total
Liabilities
$
i170
$
i226
(a)Refer
to Note 4 for the fair values of derivative assets and liabilities, on a further disaggregated basis.
Financial Assets and Financial Liabilities Carried at Other Than Fair Value
i
The
following table summarizes the estimated fair values of Credco’s financial assets and financial liabilities that are measured at amortized cost, and not required to be carried at fair value on a recurring basis, as of June 30, 2020 and December 31, 2019. The fair values of these financial instruments are estimates based upon the market conditions and perceived risks as of June 30, 2020 and December 31, 2019, and require management’s judgment. These figures may not be indicative of future fair values, nor can the fair value of Credco be estimated by aggregating the amounts presented.
Carrying Value
Corresponding
Fair Value Amount
2020 (Billions)
Total
Level 1
Level 2
Level 3
Financial Assets:
Financial
assets for which carrying values
equal or approximate fair value
Cash and cash equivalents (a)
$
i2.3
$
i2.3
$
i2.3
$
i—
$
i—
Other
financial assets (b)
i10.0
i10.0
i0.1
i9.9
i—
Financial
assets carried at other than fair value
Card Member loans, less reserves for credit losses
i0.5
i0.5
i—
i—
i0.5
Loans
to affiliates and other
i12.1
i12.2
i—
i7.2
i5.0
Financial
Liabilities:
Financial liabilities for which carrying values equal
or
approximate fair value
i11.6
i11.6
i—
i11.6
i—
Financial
liabilities carried at other than fair value
Long-term debt
i8.9
i9.3
i—
i9.3
i—
Long-term
debt to affiliates
$
i1.0
$
i1.0
$
i—
$
i1.0
$
i—
Carrying Value
Corresponding
Fair Value Amount
2019 (Billions)
Total
Level 1
Level 2
Level 3
Financial Assets:
Financial
assets for which carrying values
equal or approximate fair value
Cash and cash equivalents (a)
$
i—
$
i—
$
i—
$
i—
$
i—
Other
financial assets (b)
i26.3
i26.3
i0.1
i26.2
i—
Financial
assets carried at other than fair value
Card Member loans, less reserves for credit losses
i0.7
i0.7
i—
i—
i0.7
Loans
to affiliates and other
i10.3
i10.4
i—
i2.8
i7.6
Financial
Liabilities:
Financial liabilities for which carrying values equal
or approximate fair value
i11.2
i11.2
i—
i11.2
i—
Financial
liabilities carried at other than fair value
Long-term debt
i13.5
i13.7
i—
i13.7
i—
Long-term
debt to affiliates
$
i9.3
$
i9.4
$
i—
$
i9.4
$
i—
(a)Amounts
reflect interest-bearing deposits. Refer to Note 1 for additional information.
(b)Level 1 amounts reflect interest-bearing restricted cash and Level 2 amounts primarily reflect Card Member receivables.
During the six months ended June 30, 2020 and the year ended December 31, 2019, Credco did iino/t
have any assets that were measured at fair value due to impairment on a nonrecurring basis.
6. iChanges In Accumulated Other Comprehensive Income
AOCI is comprised of items that have not been recognized in earnings but may be recognized in earnings in the future when certain events occur. iChanges
in Foreign Currency Translation Adjustments for the three and six months ended June 30, 2020 and 2019 were as follows:
Three Months Ended June 30, 2020 (Millions), net of tax
The following table shows the tax impact for the three and six months ended June 30 for the changes in Foreign Currency Translation Adjustments presented above:
Tax
expense (benefit)
Three Months Ended June 30,
Six Months Ended June 30,
(Millions)
2020
2019
2020
2019
Net
translation on investments in foreign operations
$
i—
$
i—
$
i20
$
i3
Net
hedges of investments in foreign operations
(i68)
i12
i41
(i6)
Total
tax impact
$
(i68)
$
i12
$
i61
$
(i3)
/
iiiiNo///
amounts were reclassified out of AOCI into the Consolidated Statements of Income associated with the sale or liquidation of a business for the three and six months ended June 30, 2020 and 2019.
7. iIncome Taxes
The results of operations of
Credco are included in the consolidated U.S. federal income tax returns of American Express. Under an agreement with American Express, the provision for income taxes is recognized on a separate company basis. If benefits for net operating losses, future tax deductions and foreign tax credits cannot be recognized on a separate company basis, such benefits are then recognized based upon a share, derived by formula, of those deductions and credits that are recognizable on an American Express consolidated reporting basis.
The effective tax rate was i28.1
percent and i13.8 percent for the three months ended June 30, 2020 and 2019, respectively, and i33.3
percent and i13.7 percent for the six months ended June 30, 2020 and 2019, respectively. The tax rates for the three and six month periods ended June 30, 2020 included discrete tax charges of $i14
million and $i32 million, respectively, related to the attribution of income to jurisdictions outside the U.S.
The tax rate in each of the periods reflects the favorable impact of foreign earnings taxed at lower rates due to Credco’s ongoing funding activities outside the United States. Credco’s provision for income taxes for interim financial periods is not based on an estimated annual effective rate due to volatility in certain components of revenues and expenses that prevents Credco from projecting a reliable estimate of
full year pretax income. A discrete calculation of the provision for income taxes is recorded for each interim period.
Credco is under continuous examination by the Internal Revenue Service (IRS) and tax authorities in other countries and states in which it has significant business operations. The tax years under examination and open for examination vary by jurisdiction. Tax years from i2016 onwards are open for examination by the IRS. In the current period, the IRS commenced its review of the i2017
and i2018 tax years.
Credco believes it is reasonably possible that its unrecognized tax benefits could decrease by an immaterial amount within the next 12 months, principally as a result of potential resolutions of prior years’ tax items with various taxing authorities. The prior years’ tax items include unrecognized tax benefits relating to the attribution of taxable income to a particular jurisdiction or jurisdictions. The resolution of such items would not have a material impact on Credco’s effective tax rate.
Credco’s management, with the participation of Credco’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of Credco’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, Credco’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, Credco’s disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in Credco’s reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods specified in the applicable rules and forms, and that it
is accumulated and communicated to Credco’s management, including Credco’s Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have not been any changes in Credco’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during Credco’s fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, Credco’s internal control over financial reporting.
For a discussion of Credco's risk factors, see Part I, Item 1A. “Risk Factors” of Credco’s Annual Report on Form 10-K for the year ended December 31, 2019 (the 2019 Form 10-K) and Part II, Item 1A. “Risk Factors” of its Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 (the First Quarter Form 10-Q). The information included in the “Risk Factors” section of the First Quarter Form
10-Q is incorporated by reference herein. However, the risks and uncertainties that Credco faces are not limited to those set forth in the 2019 Form 10-K, as supplemented and updated in the First Quarter Form 10-Q. Additional risks and uncertainties not presently known to Credco or that it currently believes to be immaterial may also adversely affect its business, particularly in light of the fast-changing nature of the COVID-19 pandemic, containment measures, the potential for future waves of outbreaks and the related impacts to economic and operating conditions.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
