American Express Company - Earnings Call - Q4 2011
January 19, 2012
Transcript
Speaker 4
Ladies and gentlemen, thank you for standing by and welcome to the American Express Fourth Quarter 2011 Earnings Release. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for your questions, and instructions will be given at that time. If you should require assistance during the call, please press star, then zero. As a reminder, this conference is being recorded. I'll now turn the conference over to your host, Rick Petrino. Please go ahead, sir.
Speaker 5
Thank you. Welcome, and thanks for joining us for today's discussion. The discussion today contains certain forward-looking statements about the company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today. The words believe, expect, anticipate, estimate, optimistic, intend, plan, aim, will, should, could, likely, and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements, including the company's financial and other goals, are set forth within today's earnings press release and earnings supplement, which were filed in an 8-K report and in the company's 2010 10-K report already on file with the Securities and Exchange Commission.
In the Fourth Quarter 2011 Earnings Release and Earnings Supplement, as well as the presentation slides, all of which are now posted on our website at ir.americanexpress.com, we have provided information that describes certain non-GAAP financial measures used by the company and the comparable GAAP financial information. We encourage you to review that information in conjunction with today's discussion. Today's discussion will begin with Daniel Henry, Executive Vice President and CFO, who will review some key points related to the quarter's earnings through the series of slides included with the earnings documents distributed and provide some brief summary comments. Once Dan completes his remarks, we will move to Q&A. With that, let me turn the discussion over to Dan.
Speaker 0
Okay. Thanks, Rick. We will start on slide two, the Fourth Quarter summary financial performance. Total revenues, net of interest expense, were $7.7 billion, 7% growth on both a reported and FX basis. That compares to the third quarter when we had 9% growth reported and 6% FX adjusted. Down 200 basis points on a reported basis, but up 100 basis points on an FX-adjusted basis. Net income is $1.2 billion. EPS is $1.01. That is up 15%. You might remember that during the fourth quarter of last year, we had a re-engineering charge, which was $74 million after tax. In the fourth quarter of this year, we also have re-engineering, and that's $32 million on an after-tax basis. If you were to back those out, EPS growth would be 11%. Return on equity was strong at 28%.
You can see that shares outstanding have decreased compared to last year, and that reflects our share buyback program. Moving to slide three. This is a full-year slide for 2011. Total revenues net of interest expense was $30 billion. That's up 7% on an FX-adjusted basis. That's very favorable compared to most of the other issuing competitors. EPS was $4.09, up 22%. That's strong performance well above our EPS target of 12% to 15% growth. Moving to slide four, which is back to the fourth quarter, and these are our metrics. Billed business was $219 billion. That's a record level of billed business for us. The growth was 11% both on a reported and FX basis. That compares to 16% reported growth and 13% FX growth in the third quarter. A slight decline in billed business growth from the third quarter, which is what we've seen across the industry.
Cards in force are at $97 million. GNS cards grew at 18%, and proprietary cards grew at 2%. In total, 7% growth. Average basic card member spending grew 8%. We continue to have a high level of customer engagement. Loan growth was 3%, generally better than the industry. Travel sales growing at 5% reflect growth in our corporate and consumer travel businesses. We move to slide five. Again, this is full-year metrics. We had billed business growth of $222 billion. That's growth of 13% on an FX-adjusted basis. This will result in us gaining share again in 2011. If you look at average card member spend for the year on an FX-adjusted basis, it was 11%. Again, a high level of card member engagement. If we move to slide six, this is billed business growth by region.
If you look at the yellow line, which is Latin America and Canada, growth was 13%, down 100 basis points from the third quarter. The dark blue line is the U.S., and the green line is Asia. They are both down about 200 basis points compared to the third quarter. These three regions held up reasonably well. If you look at the lowest line, which is the light blue line, that's Europe. There we had a decrease to 4% from the 8% growth we had in the third quarter. The U.K., Germany, and France all have growth in the mid-single digits. Italy actually had a slight decline. If we move to slide seven, this is billed business growth by segment. Total billed business growth is the purple line. You can see that on an FX-adjusted basis, it decreased from 13% in the third quarter to 11% in the fourth quarter.
GNS is the yellow line with circles, and that decreased from 23% growth to 17% growth. It's due in part to a decline in Europe, but it's primarily due to the U.S., where Macy's is now in the numbers for a full year. GCS, or Global Corporate Services, the green triangles, declined from 14% to 11% growth. The decline is slightly higher in Europe, but it's broad-based globally. USCS, which is the blue diamonds, is down only 100 basis points from 12% to 11%. ICS, International Consumer, the light blue squares, moved from 9% to 6% growth, primarily due to Asia and Europe. Next, we move to slide eight. This is comparing lending billed business compared to managed loan growth.
Loan balances continue to grow, up 3% compared to a year ago, but it grows at a much slower rate than the growth rate of spending on lending products, as you can see from the chart. This reflects that consumers continue to be cautious about taking on credit card loans and a change in our strategy to focus on premium lending. Transactors continue to be a larger percentage of our loan book. The lending trust paydown rate in December was 30%. Moving to slide nine, net interest yield. Historically, we have just shown the U.S. yield. Here, we're also showing the yield for international card. International loans represent 14% of loans as of December 31, 2011. Yields are in line with our previous guidance of yields being in the high 8% to 9% range. You can see that the U.S. yield is now reasonably stable.
In international, we're seeing the impact of our premium lending strategy, as we see a decline in revolve rates, more transactors, and a change in bucket mix due to improved credit. Going forward, yields will continue to be influenced by credit quality, the percentage of the portfolio that is revolving, and cost of funds. Moving to slide 10, revenue performance. Discount revenue reflects 11% growth in billed business, a slightly lower discount rate, one basis point lower than last year. The impact of the GNS billed business and higher contra revenues, including partner payments. This brings the growth for discount revenue to 8%. Card fees grew in line with the growth in proprietary cards in force, 2%. Travel commissions and fees are up 9%, reflecting higher travel sales and higher supplier revenues.
Other commissions and fees include revenues from Loyalty Partner, which was purchased in March of 2011, offset by an accrual for late fees the company expects to refund to certain charge card accounts. Other revenues increased 20%, reflecting higher GNS partner loyalty revenues and a contractual payment from a GNS partner. Net interest income is lower by 1%. In the U.S., it was up 2%, with loan growth of 4% up to $53.7 billion, with yield declining 20 basis points compared to last year. International was down 10%. Loans decreased $400 million to $8.9 billion, and yields declined 140 basis points for the reasons I described a minute ago. All in, we had revenue growth of 7% in the fourth quarter compared to 6% FX-adjusted growth in the third quarter. Not at our 8% target, but given the environment, good performance. Moving to slide 11, provision for loans.
Charge card provision was $237 million compared to $183 million last year. The write-off rate is up slightly, as expected, as we grow the charge card business. As a result, accounts receivables aren't up accordingly. Here, credit metrics continue to be at historic lows. The loan provision was $149 million compared to $37 million last year. The reserve release this quarter was $300 million. That's $400 million less than last year. That change would push up provision, increase it. However, the write-off rate this quarter was 2.3% compared to a write-off rate of 4.3% in the fourth quarter last year. The write-off dollars in this quarter were $400 million, $300 million less than last year. The lower reserve release pushed it up by $400, lower write-off dollars pushed it down $300. A net increase of about $100 million. Again, here, the credit metrics continue to be at historic lows.
Next is slide 12, which is charge card credit performance. The write-off rates in the charge card portfolio have increased slightly, both sequentially and compared to last year, but remain at historical lows. The slight increase in charge card metrics aligns with the company's charge card strategic objectives for growing and expanding the business. Slide 13, lending write-off rate. Lending write-off rates continue to improve. These are also at historic lows. These are the best write-off rates in the industry, and they reflect our high-quality risk capabilities, our affluent customer base, and our focus on premium lending. Moving to slide 14, this is lending 30 days past due. In the U.S., you can see that the past-due percentages are stabilizing, which is what you'd expect at some point. International continues to improve, and these are industry-leading metrics.
If we move to slide 15, this chart is helpful as we look forward. On the right side, we see bankruptcies continue to be lower than last year. I would remind you that about two-thirds of the bankruptcies are already written off when we're notified. The upper left-hand green triangles are the accounts that are rolling from current to 30 days past due. The green triangles represent May, June, and July, and they would write off five months later if they continue to be delinquent, or they'd write off in the fourth quarter of 2011. Looking at that upper left-hand chart, if you look at the next three blue triangles, they are slightly higher than the green triangles. If the 30-day past-due to write-off rate, which is the bottom chart, remained constant, then you'd expect the first quarter of 2012 write-off rate would be either flat or up a tick.
I'll also remind you that bankruptcies and recoveries affect the write-off rate. You can see the U.S. delinquencies are stabilizing. As I've mentioned in prior quarters, our objective is not to manage our business in order to minimize write-offs. Going forward, we will continue to balance our risk profile with the company's strategic growth objectives. Over time, we do not expect the loss rate to stay at these historic low levels. Moving to slide 16, you can see on the chart across the top are the lending reserve releases by quarter. The light blue bars are the write-off dollar amounts in each quarter. The dark bar is the provision. Basically, the write-off dollars less the reserve releases. You can see the write-off dollar, the light blue bars, are decreasing as write-offs have come down. Also, reserve releases are decreasing as the past-due rate rate of improvement slows.
The reserve release, these reserve releases should diminish as we go forward. Slide 17 is our lending reserve coverage. You can see that the credit metrics continue to improve. Reserves as a percentage of loans and reserves as a percentage of past dues have come down both in the U.S. and worldwide. Although we released $300 million of reserves in the quarter, coverage remains at appropriate levels. Moving to slide 18, this is expense performance. Total expenses increased 1% or decreased 2% if you adjust for the MasterCard settlement payment that we received in 2010, but not in the fourth quarter of 2011. That compares to 10% FX-adjusted growth in the third quarter. Looking at marketing and promotion, this decreased 12% from the high levels of spending that we had in the fourth quarter of 2010.
Marketing is still 7% of revenues, which are the historic levels that we have been at and reflect an appropriate level of investment to drive business growth. Rewards increased 10% in line with spending on rewards products. There was a slight increase in membership rewards ultimate redemption rate estimate in both the fourth quarter of this year and the fourth quarter of 2010. It had no effect on the growth rate of rewards expense in the fourth quarter of this year. Unlike the second and third quarter, when higher ultimate redemption rate growth caused high growth rates on the rewards line. Operating expense had a zero growth. It actually decreased by 4% if you adjust for the MasterCard settlement. This compares with 9% FX-adjusted growth in the third quarter. We provided guidance that we would slow growth in operating expense as we exited 2011, and we have.
This demonstrates our ability to control operating expenses. Let me give you a little bit more detail on operating expenses on slide 19. Salaries and benefits are down 2%. I remind you, in the fourth quarter of 2010, we had severance costs related to re-engineering initiatives of $113 million, compared to severance costs in the fourth quarter of this year of $26 million. If we excluded both these items, we'd have a growth rate of 4%, approximately what you'd expect. Professional services is 6% lower, reflecting lower consulting fees and lower technology expenses, the type of items that we can flex up and down. Occupancy increased 9% and includes costs associated with Loyalty Partner, as well as lease termination costs associated with the company's re-engineering. Adjusted other net is adjusted to exclude Visa MasterCard. Now, here, our interest rate hedges are functioning exactly as intended.
However, accounting rules require us to mark the hedges. There is no economics here, and over the life of the hedge, the marks will equal zero. In this period, we had a benefit compared to last year. We had a litigation-related reserve release. These two items really create the variance compared to the fourth quarter of 2010. If we move to slide 20, this is year-over-year operating expense. This is a view of operating expense over the past eight quarters. You can see the increase in operating expense in the fourth quarter of 2010, which is in the middle of the chart, at $3.2 billion. This was driven by some one-time costs, including the severance-related re-engineering initiatives and some higher incentive compensation. It also included increases in our ongoing investments. You can see that the quarters in 2011 have been in the $3 billion to $3.1 billion range.
This reflects higher levels of investments than we had in 2010, including investments in internal sales force, initiatives related to the digitization of our business, greater third-party merchant sales force, costs related to Loyalty Partner, new business initiatives including SERVE, and technology development expenditures, all designed to drive business growth. We are at an investment level that enables us to drive business growth. At the same time, we are continuing to implement our plan to contain operating expenses as we head into 2012. When you think about 2012, you should also be mindful that the first quarter of 2011 was the low point for operating expenses in 2011, as you can see on the chart. Now I'll move to slide 21. This is expenses and the flexibility over time. Adjusted expenses are all expenses excluding provision, as well as the Visa and MasterCard settlement payments.
We recognize that we are currently at elevated levels. Over time, we expect this ratio to migrate back toward historical levels in two ways. First, through revenue growth and our plan to contain operating expenses as we head into 2012. You can see that we have started to make progress in the fourth quarter of this year. Slide 22 are capital ratios. You can see that Tier 1 common capital ratio remains at 12.3%. We generated approximately $700 million of capital net through net income plus employee plans, less our dividend and our share repurchases, while the risk-weighted assets have increased due to seasonal growth in loans and accounts receivable. I would point out that year-over-year, the Tier 1 common ratio has increased from 11.1% at the end of last year to 12.3% at the end of 2011. We continue to have strong capital ratios.
Looking at slide 23, this chart provides history on share repurchases. For the full year of 2011, we returned 56% of capital generated to shareholders. We only repurchased $350 million in the fourth quarter as the request we made in our CCAR filing with the Fed last January was a total repurchase for 2011 of $2.3 billion. Since acquisitions in 2011 were less than we planned and repurchases were capped at $2.3 billion, our Tier 1 common ratio increased from 11.1% last year to 12.3% at the end of 2011. We were mindful of this when we made our CCAR submission this year on January 9th and endeavored to create more flexibility. Moving to slide 24, this is our liquidity snapshot. We continue to hold excess cash and marketable securities to meet the 12 months of funding maturities over the next 12 months.
We hold $18 billion in excess cash and securities. The next 12 months of maturities is $14 billion. Slide 25, this is retail deposits. We raised $4.8 billion in deposits in the quarter, in part to fund seasonal needs and in part to replace maturing long-term debt. Direct deposits increased by $1.4 billion in the quarter. Over the course of 2011, we raised $6.7 billion in direct deposits. As we've discussed, deposits provide greater degrees of funding diversity for us. Page 26 is some history on our ABS and unsecured debt issuances over the past three years and an estimate of the range of potential issuances in 2012. We plan to continue to access the ABS and unsecured debt markets in addition to raising deposits as part of having a broad funding diversity. With that, let me conclude with a few final comments.
Results in the quarter reflect the continuation of the positive business trends evident during the last several quarters, as well as the realization of a planned slowdown in the growth of operating expenses. Spending growth remains strong, and we continue to grow well above the average rate of our large issuing competitors, despite difficult prior-year comparisons and a challenging global economic environment. Certain regions internationally did show slowing growth, especially in Europe, where growth slowed to 4%. Though all regions continued to grow, and overall billings held up well in reaching our new record high. We also saw average loans continue to grow modestly year-over-year. Lending loss rates continue to improve. Loss rates in both the U.S. and international lending portfolios have reached all-time lows. Despite the continued improvement, provision expense did increase as reserve releases were lower this year than the prior year.
Our strong billings growth, coupled with higher other non-interest revenues, drove solid revenue growth. Our revenue growth, which reflects the benefits of our spend-centric model, stands in contrast to many other issuers who are still facing year-over-year revenue declines. In the fourth quarter, strong revenue growth was paired with significant reductions in the total expense growth rate to generate strong earnings. Despite the improvement in expense growth, we are still investing in the business, and these investments are driving higher average spend and growth in the card base, while enabling us to build capabilities for the future. We feel very good about the recent performance, but acknowledge that the global economic environment remains uncertain. Looking ahead, we recognize that the year-over-year comparisons will be more difficult and that we will not have the benefit of the Visa MasterCard settlement proceeds and significant credit reserve releases.
We continue to believe that our business model is well-positioned for the challenges ahead. We are continuing to implement our plan to contain operating expenses as we head into 2012. In the fourth quarter, we saw clear evidence of our ability to do that. Going forward, we will continue to monitor spend trends around the world, but we are very pleased with our results. 2011 was a great year for American Express as we achieved record billing levels and record earnings, while facing the highly competitive environment and challenging economic backdrop. Thanks for listening, and we're now ready for questions.
Speaker 4
Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star then one on your touch-tone phone. You'll hear a tone indicating you've been placed in queue. You may remove yourself from the queue at any time by pressing the pound key. Our first question will come from the line of Rick Shane with JPMorgan. Go ahead, please.
Speaker 1
Thanks, guys, for taking my question. Obviously, a lot of what's going on in terms of spend is just a function of tougher and tougher year-over-year comps. Dan, historically, one of the data points that you provided periodically was a stratification of spending trends by what you called wallet size or annual spend. Is there anything there that you can point to right now in terms of what's going on? Is there any difference between the high end and the low end at this point?
Speaker 0
That's usually the type of information we provide at one of our semi-annual conferences and don't provide it on a recurring basis. I guess what I would say is what we saw in the quarter, where our growth is generally higher than most of the other competitors, is a reflection of our business model and really reaping the benefits of the investments that we've made over the past couple of years. While the growth rate did decline from the third quarter, I think we've seen that really across the industry. The decline really was pretty spread out across the globe and really across most of our businesses. That's kind of what we're seeing. I think it's really a reflection of what's taking place in the economy. At this point, we don't have other information to share in terms of changes that may be taking by different wallet size.
As you know, when we had the steep decrease or recession, we saw the steepest reduction in people who had the highest spend because they had the greatest amount of discretionary spending. We've seen those customers bounce back very nicely over the last two years, and they continue to have very high levels of engagement, as you can see by the increases in the average spend of our card members.
Speaker 1
Great. Thanks. I'll cross my fingers that you guys put that out at Investor Day, and we look forward to seeing you.
Speaker 0
Okay.
Speaker 4
Our next question will come from Sanjay Sakhrani with KBW.
Speaker 2
Hey, this is actually Stephen Parks filling in for Sanjay. Just to touch additionally on the spend trends, just wondering, what was the trend that was seen during the quarter? Was it weaker throughout the quarter, or did it get weaker during the quarter? If there's any updates on the first couple of weeks in January.
Speaker 0
I would say it was pretty even over the course of the quarter, kind of month by month. It wasn't a situation where December was notably different than the spending growth rate for the quarter.
Speaker 2
Sure. Any updates on what we've seen month to date in January?
Speaker 0
Not at this point.
Speaker 2
I guess another question is with regards to your longer-term targets, and what are your thoughts about that for 2012 in an environment where it continues to remain slow growth economic environment? Thanks.
Speaker 0
What we'll see actually next year, as you indicated in your question, will be dependent on where the economy goes. We fully recognize that we have had very strong growth over the last two years. The comparables will be more difficult, and there are some benefits that are not going to reoccur. As we think about this, we want to make good, smart investment decisions that are going to drive the growth of the business over the long term. As we think about all of our targets, we think about them as on average and over time targets. We've always kind of addressed it that way, and we'll continue to do the same as we go forward.
Speaker 2
Sure. Final question. On the international yield side, do you think that the yields will remain kind of at the fourth quarter levels, or will it continue to decline from here?
Speaker 0
I think the change in yields that we've seen internationally are part of the focus on premium lending that we put in place. That's what's really driving the yields down. To us, whether the yields in international stay exactly where they are or modulate from there, the important thing is what are the overall economics of the product, focusing both on the spend that they have, the loan balances they have, as well as the yield. In the U.S., we've kind of given guidance that we expect it to be kind of in this high 8% to 9% range. You can see that we've stabilized in the U.S. at that level.
Speaker 2
Sure. Thanks for taking my questions.
Speaker 0
Okay.
Speaker 4
We will go next to Craig Maurer with CLFA. Go ahead, please.
Speaker 3
Hi. A question on membership rewards costs. We saw that actually grow a bit slower than the U.S. billed business growth rate. Just some thoughts there and how we should expect that to trend as I'm modeling that to grow at a similar rate to the U.S. billed business growth. Secondly, when we think about your payout ratio, what's the company's or what's your thought process on dividend versus buyback at this point? Thanks.
Speaker 0
Okay. In MR, we had growth on the expense line of 10%, which is generally in line with the growth that we see in spending. Most of our products have a reward component related to it. In any given quarter, it's also impacted by what the weighted average cost per point is and a number of other factors. To the extent rewards is a couple % growth above or below, I would consider that to be in line with spending growth. In the absence of an acceleration in redemptions, which lead to higher growth in the ultimate redemption rate, we would expect that rewards expense would grow generally in line with spending. Now, as it relates to dividends payout, we think about dividends as trying to, over time, maintain the yield or the payout ratio of dividends compared to earnings that we've historically had.
I would expect as earnings go up, we would try to keep that same type of payout ratio going forward, not radically change dividends either up or down. To the extent we then generate capital that is not either dividended out or used to support growth in our balance sheet to maintain our capital ratios or to support acquisitions, we would use that in terms of share buybacks. We've said dimensionally, we would expect about 50% to be retained in the business of earnings and 50% to be returned to shareholders. That's very dependent on the number of acquisitions that are out there that we think are economical and will help us drive our business strategy. To the extent we saw more acquisitions we thought worthwhile, the payout could be a little lower than that.
To the extent we don't see acquisitions that we decide to make, the payout ratio in a given year would be higher than that. No change really in the policy that we've articulated over the past year.
Speaker 2
Okay, thank you.
Speaker 4
Our next question comes from Bob Napoli with William Blair.
Speaker 1
Thank you. Good afternoon, Dan. As we think about 2012 earnings and your on average over time, the earnings forecast and our estimate are relatively flat with 2011. I think at one point you had said or American Express had said that maybe 2010 was a reasonable period to think about as a kind of a base year for the 12% to 15% target earnings growth. Is that still true? The expectations currently are for relatively little earnings growth as you don't have the reserve releases, you don't have the MasterCard Visa payments, and you manage your expenses in a relatively slower growth in a global environment.
Speaker 0
Right. As you expect, I'm not going to forecast next year's EPS. You're absolutely right. What we have said is 2010 is a good base year. Off of that, on average and over time, we would look to achieve the financial targets that we have out there in terms of 8% revenue growth and 12% to 15% EPS growth. 2010 is the base year, and we haven't modified our targets at all. Obviously, we had 22% growth in this year. It's an example of when we are above that range.
Speaker 1
Thanks. Tax rate for 2012, any thoughts on tax rate?
Speaker 0
Our tax rates generally are 30% to 32%. In the absence of benefits, either from planning or from the resolution of audits, I would expect it to be in that same range.
Speaker 1
Last question, just on some of your initiatives, like the prepaid with Target, the SERVE. I saw an interesting investment you made yesterday. Can you give any update on how's the prepaid Target, how's that product looking? Loyalty Partner is something you guys certainly are pushing pretty hard. I'd love some update on some of these products.
Speaker 0
Those are three different topics. Prepaid, you know, we think is an expanding market. We are investing in prepaid. We think it has very good growth rates over time and attractive economics for us. That is an area that we are focused as a growth area. Target is just one example of some of the new products that we have out there. We're focused both in the U.S. and really globally for prepaid. We're very pleased with how the prepaid business is growing. In terms of the announcement we made just today, basically, we've entered into an operating agreement with a company in China named Lianlian. Basically, we are going to license our SERVE platform, which will be really what drives a digital wallet that they want to develop. As we all know, China is a very large market. It provides an opportunity for us to participate there.
We also made an equity investment in Lianlian Pay, Inc., of $125 million. It's very much in line with our strategy, and we're pleased with that agreement and that investment. In terms of Loyalty Partner, which is the acquisition that we closed in March of 2011, we think it continues to have good growth prospects, which is the reason that we acquired it. We're in the process of doing the work necessary to execute against our strategy. I think each of those are moving in line with the plans that we've set out for each of the respective businesses.
Speaker 1
Thank you.
Speaker 4
We have a question from Mark DeVries with Barclays Capital.
Speaker 0
Yeah. Thanks. I wanted to ask about the rewards expense in a slightly different way. By our calculation, rewards as a percentage of proprietary billed business was down pretty significantly Q over Q to about 78 basis points from 88 basis points last quarter. I think you also indicated there was at least a slight increase in the ultimate redemption rate in the quarter. Presumably, that included at least a little bit of a reserve adjustment. Is that 78 basis point level, assuming no material change in the redemption rates from here, a reasonable run rate going forward? You could kind of look at it on a basis points to billings basis. We have invested in making Membership Rewards a highly attractive program, which we think it is.
We think it's terrific if customers increase the amount of redemptions they make because there's a clear link between card members who do redemptions and growth in their spending as we go forward. Improving the program and increasing engagement, which is reflected in redemptions, that ultimately impacts our estimate of the ultimate redemption rate, we think is a good thing for the franchise. In this quarter, it so happened that the increase, which was a slight increase, was similar to the fourth quarter of last year. If, in fact, as we go forward, that ticks up the ultimate redemption rate, we would actually view that as a positive thing long-term for the franchise. As we saw in the second and third quarter, if it moves up quite a bit compared to the prior year, then you get high growth rates on this slide.
However, if the ultimate redemption rate stayed at the current level with modest increases, which are similar year to year, then I think you'd have this relationship of rewards to billings continue into the future. Okay. Thanks. Understanding that you're not going to rigidly manage to that 8% long-term revenue growth target, at least from year to year. That said, in an environment where organic growth may be challenged because of the economy, does that create any greater sense of urgency for you to deploy some of those retained earnings and investments that may generate more immediate revenue benefits than benefits that are further out? I think there's a tremendous focus on revenue growth in our industry. Certainly, what happens with the economy, which is uncertain, will have a bearing on whether we achieve the 8%.
I think it's important to remember that our business model is very different than many of our issuing competitors. They're very dependent on loan growth, which is particularly challenged. Net interest only represents about 15% or only represented about 15% of our revenues in this period. To the extent we're successful with our business strategies and drive spending, I think we're going to be in a better position than many of our competitors in terms of achieving revenue growth as we go forward. In terms of how we allocate our investments, certainly, as we've said in the past, we look to allocate investments to things that will give us short-term benefits, some for the medium term, and some for the long term. Certainly, in periods where things are more robust, you may tend to allocate more to the long term.
If it's a more challenging environment, you may do more focus on the piece that has short-term benefits. We would never skew completely away from investing in the medium to long term because we really do look at achieving results on average and over time. We're in the midst of investing in some new businesses that we think have a lot of potential to them. We would not detract from continuing to invest in those new businesses as we go forward. Certainly, we can modulate in terms of the amount we allocate into the short, medium, and long-term buckets. Okay. Thanks. That's helpful.
Speaker 4
We'll go next to Ryan Nash with Goldman Sachs.
Speaker 1
Hey, thanks. Just a question, a follow-up from earlier on the capital front. You're clearly still well above the targets that you had laid out several quarters back. I think you returned 56% of capital this year, which is above the 50%. Should we not see any acquisitions materialize in the near term, could there be the expectation that you could go above the 50% or the 50% to 60% in the near term in terms of capital returns?
Speaker 0
If you think about the amount of capital that we generate, which is substantial, we have a fair amount of capital that we have discretion in terms of how we actually use it. We generated earnings in the year of nearly $5 billion. To the extent we're allocating 50% to really build the business, because consumers are cautious about taking on additional loans, the growth in the balance sheet hasn't been that significant. The amount of capital that's actually required to support that is $500 or $600 million last year. It leaves a lot of capacity for acquisitions. If we find good acquisitions that can help us achieve our business strategies, we're going to go and make those as long as the price and the economics are reasonable. If we found more than $1.9 billion, we go higher.
On the other hand, if we don't see good acquisitions, we would be inclined actually to return that capital to shareholders if we're not going to use it in the very near term. That's always been our philosophy and would continue to be our philosophy. If we see good acquisitions, we will seize on them. If not, we'll return the capital to shareholders.
Speaker 1
Okay. It's a relatively smaller part of the billed business. Can you just give us maybe a little bit more of a sense of what you're actually seeing out of your customer base in Europe? I think you referenced something like you saw growth in the UK, Germany, and France, and that there were declines in Italy. Any further clarity you could give just on what you're seeing or what your expectations are for that?
Speaker 0
Okay. Let me just add one or two more sentences to my prior answer as it related to capital. What I just described is the capital philosophy that we have. Obviously, what we actually do will be dependent on the Fed approving the plan that we submitted to them on January 9. I would just put that as a modifier to the comments I made a minute ago. As it relates to Europe, we saw 8% growth in the third quarter, 4% growth this quarter. The countries, certainly the UK and Germany and France, the countries that are stronger, there we've seen declines from previous quarters in terms of growth rate. Still, we're seeing growth in the mid-single digits, which is pretty good. As you'd expect, in the countries that are more impacted, we're seeing less growth or actually a slight decline, which is what we saw in Italy.
Beyond that, I don't have any other additional color to add, but I think that would give you a sense. What you'd expect is exactly what we're seeing, more impact on the countries that are under greater economic stress in terms of their funding.
Speaker 1
All right. Thanks.
Speaker 4
We will move on to Mark DeVries with Barclays.
Speaker 2
Hi, just wanted to ask, can you hear me?
Speaker 0
Yeah, I can hear you.
Speaker 2
I just wanted to see, kind of following up on Ryan's question, are you able to break out the % that Europe represented in billed business, either for 4Q or for 2011?
Speaker 0
In terms of what % of billed business, in 2010, it was 12%. As you look across the year, based on the information that we provided to you, Europe has actually grown at a slower rate than the rest of the world. It could be still 12% or slightly less than that, but I would say in that neighborhood, probably a little less than what we had last year when it represented 12% of billings.
Speaker 2
Okay. Great. Domestically, are you noticing that card members are trading down still?
Speaker 0
Trading down in terms of the average ticket price?
Speaker 2
Correct.
Speaker 0
I don't think we, you know, I'm not aware that there's been any notable change in average ticket price. The positive is, you know, in the U.S., billings have really held up well. Growth is at 11% compared to 12% last quarter. It's pretty broad-based both in consumer, small business, and corporate spending. As I said before, the average spend of our customers continues to grow very nicely, showing high levels of engagement on their part.
Speaker 2
Great. Thanks.
Speaker 4
Our next question is from Chris Brenner with Stifel Nicolaus.
Speaker 2
Hi. Thanks. Good afternoon. I don't know if you had addressed this because I have been multitasking here. Can you tell me at all an update on the Department of Justice case? I believe at the time in October 2010, you'd said around a two-year window for some movement on that case. Is there any timeline we should be aware of there? Secondarily, is there any thoughts you could give us relative to your rules on surcharging and whether or not Visa and MasterCard rolling back their rules on surcharging and being allowed to point it down in the U.S. could impact your business model? Thanks.
Speaker 0
Okay. There's no real update on the DOJ case. The first time that we'll have anything new would be there's a schedule to complete discovery, I think, in the first quarter of 2013. Right now, discovery is taking place, and that'll take place over the course of the next year. No real update in those terms. In terms of surcharging, I think there's nothing new on our part in terms of any changes to our policies in that regard. The place we've seen surcharging to the greatest degree, which is a little bit of an old story now, is Australia. Certainly, it had an impact on us initially when it took place a couple of years ago. We continue to evolve our business strategy there and have had very healthy growth rates in the market and are doing well. Nothing really to update that's new as it relates to surcharging.
Speaker 2
Is there any relationship between the two? The DOJ, kind of seen from my perspective, seemed to be okay with surcharging. It was more about allowing discounting. Is it possible you could lose the DOJ case and still retain the ability to not allow merchants to surcharge in the U.S.?
Speaker 0
I think that case is primarily whether merchants could steer from one credit card company to another credit card company. I think it's the basis of the primary point in the suit. As we've said before, we have an advantage on a discount rate basis compared to Visa and MasterCard. There's only a certain limited amount of economics there. There'd be a real question in my mind of whether there's enough economics to actually cause somebody to switch from one credit card product to another credit card product, given the potential costs that could be involved in that. It's really a case focused on whether merchants can steer from one credit card to another. Basically, within Durban, they're allowed to steer from credit cards to debit. That case is about credit card to credit card.
Merchants have always had the ability and the right to give discounts based on payments for cash.
Speaker 2
Thanks for Dan.
Speaker 0
Okay.
Speaker 4
Our next question comes from Brad Ball with Evercore.
Speaker 1
Hey, Dan. Your net interest income as a proportion of total revenues has been coming down, 15% this quarter. I think it was, you know, historically in the sort of 20% range. Should we expect that trend to continue, the decline in net interest income as loan growth is less of a focus and you continue to look at higher-end transactors?
Speaker 0
Yeah. I think it's going to be totally dependent on the behaviors of our customers. You know, if you look at the paydown rates in the lending trust last month or even a year ago, they are kind of all in that 30% range, up a little bit, down a little bit. We had gone through a period where it was increasing quite a bit, but it seems to have stabilized here some. It depends on whether that continues. You know, we're focused on premium lending, but that certainly doesn't mean that our customers aren't going to revolve periodically. Certainly, they're picking a lending product because they want the ability and opportunity to revolve periodically. As we've talked about, we have some more transactors than we had historically in the portfolio. I think lending will continue to be an important revenue stream at 15%.
It really depends on, you know, how consumers think about debt and how far they want to leverage. I don't think anybody knows whether that's complete yet or whether, you know, they'll start to be more willing to take on some more revolving debt periodically. You're going to have to wait and see how customer behavior plays out. It's hard to pinpoint it since it's really a new space from where they were historically. For us, the important thing is to put products in the marketplace that meet our customers' needs, and then, you know, they can use the product in a way that really meets their needs. We'll continue to be focused on that. Certainly, you know, if there's the ability to put products out there in customers' hands and they were to choose to revolve more, that's fine with us as long as the credit is ripe.
If they choose to revolve a little less, you know, that's fine with us as well. We'll have to see how it evolves. It's really dependent on customer behavior going forward.
Speaker 1
Okay, what proportion of your lending book is at introductory rates now?
Speaker 0
I don't know what it is, but it's very small. You can certainly see from public data that we are not using balance transfer the way some competitors are. Even in our acquisition, it's not a huge tool. I would say the amount at introductory rates is relatively small within the scheme of the whole portfolio.
Speaker 1
Less than 10%?
Speaker 0
I don't know.
Speaker 1
Okay. Your net interest yield, you know, it's declined. You've guided to, I think, in the U.S. Consumer Services business, 8% to 9%. Is any portion of the decline this last quarter or any of the guidance driven by CARD Act-related lookbacks?
Speaker 0
The answer to that is no. Before we started, before the CARD Act was passed, we were kind of in this high 8%, 9% range. When we put in pricing changes, we said our objective was to get back to where we were after the impact of the CARD Act. We've been successful at doing that. 20 basis points on a year-over-year basis is pretty minor, but it's not due to look back. Certainly, in the future, regulators will come and take a look at that. We feel pretty comfortable with our position. Until you actually have somebody come in and look at it, you don't know if they concur completely with the steps that we've taken. From our perspective, we're in an appropriate spot. To specifically answer your question, though, it wasn't due to look back.
Speaker 1
Got it. Okay. One unrelated real quick. What proportion of total billed business is GNS right now?
Speaker 0
I don't know exactly. Are people supposed to?
Speaker 2
Yeah.
Speaker 0
Yeah, I think it's about 15% in that range. Could be 14%, could be 16%. We'll take a look, and before we get off the phone, answer that question.
Speaker 2
Yeah.
Speaker 0
I think it's 15%.
Speaker 1
This was, I think, the first time in a while you've seen billed business growth below 20% in GNS. Is there anything to be cautioned on in that area?
Speaker 0
I think we were getting a lift over the last couple of quarters as a result of the Macy's agreement that we put in place. If you go back, we have many, many quarters where GNS business was growing at more than 20%. 17% growth, which I think we've had this quarter, is pretty darn good. I think GNS continues to be a very good line of business for us, and we think it has good prospects as we go forward.
Speaker 1
Okay, thanks very much.
Speaker 4
Our next question will come from Scott Valentine with FBR Capital Markets.
Speaker 1
Good evening. Thanks for taking my questions. Dan, I believe earlier you referenced the uptick in U.S. card services or charge card services, the charge-off increase. You mentioned that, you know, obviously, your business is not to limit charge-offs, but to drive revenue at an economic return. Can you talk about maybe how you've widened the credit scope maybe for the charge card customer? I don't know if you can give FICO or maybe tiering ranges, but it sounds like you're going a little deeper in terms of credit.
Speaker 0
We basically keep our credit standards pretty constant, both in the past and now. Certainly, when the recession hit, we tightened up some. I think, you know, now our view in terms of the type of credit worthiness that we want is not dissimilar to what we've looked for historically. Certainly, we've built into our models all those earnings that we've had over the past couple of years. The good growth. We've
Speaker 4
That is really based on the fact that our strategy is to grow ChargeCard and that we've allocated investments to acquiring ChargeCard customers, which is what's really driving the growth in that business as opposed to having credit standards that are not as tight as we've historically had. We'll do it by designing products that customers want to have and by having both acquisition investments and loyalty investments that drive higher levels of spending.
Speaker 5
Okay. Thank you. Regarding marketing promotion, you pointed out that your expense containment, you guys are executing on your strategy, and one of the key areas of reduction in expenses has been marketing. It seems like some of your peers are ramping up marketing spend now. We're just curious, how would you respond to that? Do you watch market share? I mean, I guess, is it possible to maintain low marketing spend in the face of an industry that seems to be increasing marketing spend?
Speaker 4
We certainly do focus on market share. I mean, one of our objectives is to continue to gain market share. If you look back over the last 10 years, other than in periods when there's a slowdown, we've gained market share. I think if you went back to 2002 or something, our market share in the U.S. for credit was 19.9%, and today it stands at about 26.4%. We've made steady progress there, and we want to continue to make steady progress. You referred to low levels of investments. I would say we're in actually the opposite position. In terms of marketing, in 2010, we took marketing expense to very high levels, notably above where we'd ever been before. We think about marketing, if you look historically, as being about 9% of revenues. In this quarter, we're at 9% of revenues.
We think those are levels of investment that can drive the business. It's always nice to have even higher levels, but at this level, we think we can be successful at driving business in a way that helps us meet our financial targets. The level of investments that we're making in some of our other businesses that run through the operating expenses line, as we talked about before, we have increased those, and we think we have levels of spending and investment that can, again, continue to grow our business. I don't think about investments being at a low level. They're at very healthy levels as we go forward.
Speaker 5
Okay. One final question. As people have pointed out earlier in the call, revenue seems to be a challenge for you. Revenue growth seems to be a challenge for the industry. Just wondering, you know, we're starting to see receivables, loans pick up a little bit. They're finally, you know, 3% growth. Is that a potential lever going forward, maybe emphasize loan growth a little bit more and collect more interest income to offset maybe slowing billed business growth elsewhere?
Speaker 4
Yeah. I think it'll really be driven a little bit by what I talked about before. We're going to look to continue to have products in the marketplace that meet our customers' needs. I would say, you know, if we see loan balances decline, it would be because the customer is deciding to be more cautious. If we see loan growth pick up some, it'll be because the customer wants to utilize the revolving feature on the products in terms of how they live their lives. I think it's going to be more driven by consumers' behavior than us changing our focus on whether we want to just put on more loan balances. We, as a company, have never had a target in terms of what loans should be or what loan growth should be.
Where loans go is simply an outcome of how our customers decide to use the products that we put in their hands.
Speaker 5
Okay, thanks very much.
Speaker 0
We have no one else in queue.
Speaker 4
Okay. Very good. All right. Thank you, everyone, for participating on the call. Have a good evening.
Speaker 0
Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.