American Express (AXP) Q2 2023: Net Card Fee Revenue Climbs 22% as Premiumization Drives Resilience

July 21, 2023 | By EarningsIQ Research

American Express’s Q2 results underscore the power of its premium membership model, with net card fee revenue up 22% and continued consumer strength offsetting commercial softness. The firm reaffirmed full-year growth guidance, highlighting robust demand from Millennials and Gen Z, and announced a 10-year Hilton partnership extension. Strategic investments in premium products and network partnerships are supporting sustained revenue momentum despite a low-growth macro backdrop.

Summary

• Premium Product Focus: Net card fee revenue growth outpaces overall top-line, reinforcing subscription-like revenue durability.
• Millennial and Gen Z Momentum: Younger cohorts now drive over 60% of new global accounts, fueling future growth.
• Commercial Slowdown Offset: International and consumer segments counterbalance ongoing U.S. SME softness.

Business Overview

American Express (AXP) is a global payments and financial services company operating a spend-centric model, generating revenue primarily from card fees, discount revenue (merchant fees), and lending. The business is anchored in premium, fee-based products, with major segments in U.S. Consumer, International Card Services, and Commercial Services (SME and Corporate). Its model emphasizes building long-term customer relationships and leveraging a trusted global brand.

Performance Analysis

AXP delivered its sixth consecutive quarter of record revenue and earnings per share, driven by strong consumer and international spend. Total network volumes and billed business rose 9% and 8% year-over-year (FX-adjusted), led by double-digit growth in travel and entertainment (T&E) spending and continued momentum in premium card acquisition. U.S. consumer billings grew 10%, while international consumer spend surged 16% and international SME/large corporate spend climbed 19%, highlighting the global recovery and the company’s diversified growth base.

Net card fee revenue jumped 22% year-over-year, reflecting the company’s success in attracting high-value, fee-paying customers, particularly Millennials and Gen Z, who accounted for 60% of new global accounts. Net interest income grew 32% as revolving balances increased, though lending remains a modest contributor compared to spend-driven revenues. Commercial growth decelerated, with U.S. SME and large corporate billings up just 2%, but this was offset by robust consumer and international performance. Credit metrics remain best-in-class, with delinquencies flat and write-offs still below pre-pandemic levels.

• Fee Revenue Outpaces Spend: Subscription-like net card fees now drive a larger share of growth, providing revenue stability.
• International Reacceleration: Non-U.S. spend is the fastest-growing segment, restoring its pre-pandemic leadership in growth.
• Expense Leverage Emerges: Operating expense growth lags revenue, supporting margin leverage and future profitability.

Capital returns remain robust, with $1.6 billion returned to shareholders through buybacks and dividends. The company’s CET1 ratio of 10.6% sits comfortably above regulatory minimums, supporting ongoing capital flexibility.

Executive Commentary

Strategic Positioning

1. Premiumization and Membership Model

Fee-based premium products, which function as subscription revenue streams, are central to AXP’s differentiation. Over 70% of new accounts acquired are on fee-based products, and the company continues to invest in value propositions and product refreshes to sustain high retention and acquisition rates.

2. Generational Shift and Customer Quality

Millennials and Gen Z now account for over 60% of new global accounts, and their spending is growing 21% YoY in the U.S. This demographic shift is increasing the lifetime value of the customer base and positioning AXP for future growth, while maintaining best-in-class credit quality (only 8% of U.S. loans/receivables are from FICO <660).

3. International Expansion and Network Partnerships

International card services have resumed their role as AXP’s fastest-growing segment, with spend growth outpacing the U.S. The company’s Global Network Services (GNS) model, which enables third-party issuers and partners, is gaining traction—exemplified by the new Square partnership and a 10-year Hilton extension, both broadening acceptance and card issuance globally.

4. Commercial Segment Discipline

U.S. SME and large corporate spend growth slowed to 2%, reflecting industry-wide small business deceleration and a slow return to travel for large corporates. AXP is focusing on customer acquisition, deposit products, and lending for SMEs, positioning for recovery when business spend rebounds.

5. Operating Leverage and Capital Allocation

Expense control is yielding operating leverage, with OpEx growth lagging revenue. The company is committed to returning excess capital to shareholders, maintaining a 20–25% dividend payout ratio and targeting a CET1 ratio between 10–11%, well above regulatory minimums even as Basel III rules evolve.

Key Considerations

This quarter reinforced the resilience of AXP’s model, but also surfaced key strategic and operational questions for investors tracking the next phase of growth.

Key Considerations:

• Subscription Revenue Durability: Rapid net card fee growth highlights the value of AXP’s membership model, but sustaining this pace will require ongoing investment in customer value and retention.
• Commercial Segment Headwinds: SME and corporate spend is lagging consumer and international, and a broader economic recovery may be needed to reignite growth in these areas.
• Generational Customer Mix: The shift toward younger, tech-savvy cardholders is a double-edged sword—driving growth, but requiring continuous innovation and digital engagement.
• Expense Leverage: Slower operating expense growth offers margin upside, but must be balanced against the need for marketing and product investment in a competitive landscape.
• Capital Flexibility: Regulatory changes (Basel III) are not expected to materially impact capital returns, but remain a watchpoint for future capital allocation decisions.

Risks

AXP faces risk from persistent commercial segment softness, particularly if small business recovery lags or corporate travel remains subdued. Macroeconomic uncertainty could pressure spend volumes and credit metrics, though the premium customer base and best-in-class risk management provide a buffer. Regulatory and competitive dynamics, including potential changes from Basel III, could impact capital flexibility, but management expresses confidence in its current positioning.

Forward Outlook

For Q3 2023, American Express guided to:

• Continued double-digit growth in travel and entertainment spend.
• Stable spend volumes supporting full-year revenue targets.

For full-year 2023, management reaffirmed guidance:

• Revenue growth of 15% to 17%.
• EPS of $11.00 to $11.40.

Management highlighted several factors that support the outlook:

• “Billings around where we are today to make that revenue guidance because of the three tiers of revenue that we have.”
• “We continue to expect delinquency and write-off rates to increase over time, but they are likely to remain below pre-pandemic levels in 2023.”

Takeaways

AXP’s premium, fee-driven model is delivering durable growth, even as commercial spend lags. The company’s strategic investments in product, partnerships, and generational engagement are paying off, with strong international and consumer momentum. Investors should watch for:

• Commercial Segment Recovery: Monitoring SME and corporate spend for signs of rebound is key, as this remains the primary drag on consolidated growth.
• Retention and Value Proposition: Sustaining high net card fee growth will require ongoing product refreshes and value additions to keep premium customers engaged.
• Expense and Capital Discipline: Continued operating leverage and stable capital returns support the investment case, but regulatory developments and macro shifts remain watchpoints.

Conclusion

American Express’s Q2 results affirm the resilience of its premium, membership-based model, with strong consumer and international growth offsetting commercial softness. The company’s focus on high-quality customer acquisition and disciplined expense management positions it well for continued outperformance, even in a low-growth environment.

Industry Read-Through

AXP’s results highlight a structural shift toward premiumization and subscription-like revenue in payments, with younger demographics driving growth and international markets rebounding. The continued strength in travel and entertainment spend signals robust consumer demand, while commercial segment softness may reflect broader small business caution across financial services. Competitors reliant on transaction or lending volume alone may face greater volatility, while those able to build durable, fee-based customer relationships are better positioned for macro uncertainty. The evolving regulatory landscape (Basel III) is a sector-wide watchpoint, but AXP’s capital flexibility sets a high bar for peers.

AXP Financials Payments Membership Premiumization Fee Revenue International SME