American Express (AXP) Q2 2010 Earnings Call Transcript

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black card The Centurion Card, The Black Card: American Expresss Invite Only Credit Card

Operator

Ladies and gentlemen, thank you for standing by and welcome to the American Express Second Quarter 2010 Earnings Release. [Operator Instructions] I would now like to turn the conference over to our host, Mr. Ron Stovall. Please go ahead, sir.

Ron Stovall

Thank you, Greg. And welcome to everyone. We appreciate all of you joining us for today’s discussion.

As usual, it is my job to remind you of certain legal aspects around the call and tell you that this 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, 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, which was filed in an 8-K report, and in the company’s 2009 10-K report, already on file with the Securities and Exchange Commission, in the second quarter 2010 earnings release and earnings supplement on file with the SEC in an 8-K report, 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.

Dan Henry, Executive Vice President and Chief Financial Officer, will review some key points related to the quarter’s earnings through the series of slides included with the earnings documents and provide some brief summary comments. Once Dan completes his remarks, we will turn to the moderator who will announce your opportunity to get into the queue for the Q&A period, where Dan will be available to respond to your questions. Up until then, no one is actually registered to ask questions. While we will attempt to respond to as many of your questions as possible before we end the call, we do have a limited amount of time. Based on this, we ask that you limit yourself to one question at a time during the Q&A.

With that, let me turn the discussion over to Dan.

Daniel Henry

Thanks, Ron. And let’s start on Slide 2. See total earnings are up 13%, but the more appropriate line to look at is managed total revenues, which is down 1%. The reason for that is in ’09, revenues did not include interest related to those receivables that had been securitized. If you exclude the ICBC gain that was in ’09, revenues are actually up 2%. Income from continuing operations was $1.017 billion. ’09 included two one-time items. One was the ICBC gain of $211 million pretax, and we also had re-engineering costs of $182 million pretax. So those more or less offset each other. EPS was $0.84, and that compares to $0.09 in the prior period. But you’ll remember that in the second quarter of ’09, we had a charge that was about $0.18 related to our repayment of TARP. So the better comparison is $0.27 last year compared to $0.84 this year, up significantly. And ROE increased to 23%.

We go to Slide 3 and we look at Billed business. It increased 16%, or 15% on an FX-adjusted basis. It is now approaching the pre-crisis levels in Billed business that we had back in ’08. Cards-in-force are relatively flat with last year. GNS is up 7% and proprietary cards are down slightly. If we look at average Cardmember spending, it increased 20% on an FX-adjusted basis, but if you exclude the card cancellations of 2.7 million cards last year in the second quarter, average Cardmember spend would be up 16%, which is very much in line with the increase in Billed business.

Loans on a managed basis are down 9%, driven primarily by Cardmember behavior as well as our strategy which is changing the mix of receivables, as we are focused on premium lending in co-brand. Those customers tend to be more transactors and have higher pay-down rates. However, loans are down less than competitors and that’s because we are having higher growth in spending by our Cardmembers and we have lower write-off rates. Travel is benefiting from a growth in transactions, as well as higher prices in Airline.

If you look at Slide 4, there’s more detail on Billed business. The bars represent Billed business each month. The lines represent growth rates for both reported and FX-adjusted. On an FX-adjusted basis, April and May grew 15% and June grew 14%, for the average of 15% in the second quarter. July month-to-date growth is in the double digits and the growth rate is down slightly from June due to a tougher rollover in 2009.

If we move to Slide 5, this is information on network spending. And you can see that transactions are growing 8% and transaction size is higher by 6%. So they’re both contributing to spending growth.

If we move to Slide 6, this is growth by segment. And you can see that we had strong growth across all of our segments. The highest growth is in GNS and this is being driven by partners issuing additional cards. Promotional Card also had strong growth, and this is in part due to new signings, as well as higher level of spending from existing clients. International Consumer had growth of 9% on an FX-adjusted basis, and while it’s slightly lower than the other segments, this is due in part by the fact that it dropped less in 2009. So we have broad-based growth in spending. We’ll have to wait until all the statistics are in, but it would appear that we will gain share in the second quarter.

Moving to Slide 7. Now this is some new disclosure that we thought that you would be interested in. It’s spending by region. You can see that JAPA has the highest growth and this is in part driven by new GNS signings in Australia. We also expect that EMEA growth would be slightly below the average, but it’s still strong at 11% on an FX-adjusted basis.

If we move to Slide 8, this is spending by product within the U.S. Consumer and Small Business Group. And it represents the spend decline or growth over the past five quarters. And you can see that in the current period, we are having strong growth in both charge and co-brand and this reflects the investment spending in these areas, consistent with our strategy. And we’ve had more modest growth in proprietary lending. So before I leave spending, let me make a few points. Spending on our network is growing faster than the industry in charge and credit. Spending growth is broad-based across segments and geography. Growth is concentrated in the areas of our strategic focus, charge and co-brand. And growth reflects our strategy of using improvements in credit to invest in the business.

Let me move to Slide 9, and this is Charge Card Billed business and receivable growth. And we see here that Charge Card receivables continue to move in tandem with the growth in Billed business. Charge Card Billed business was 15%, consistent with last quarter.

Moving to Slide 10. We’re looking at lending, Billed business and managed loan growth. And here, lending, Billed business and managed loan growth, at this moment, is not closely correlated. It’s in part because of actions that we’ve taken in terms of credit, as well as the change in our strategy to reduce acquisition and proprietary lending and focus more on premium and co-brand. It’s also in part by Cardmembers looking to delever.

You can see this if you look at our trust data and look at pay-down rates. Back in June of ’09, pay-down was 24.2%. And in June of 2010, it was 28.9%. So we expect the difference in growth rates and spending in loans to continue over the near term.

Let me move to Slide 11. So this is USCS net interest yield. And on the right, you can see that the yield was 9.3% in the second quarter of 2010, compared to 9.7% in the second quarter of ’09. This change reflects the implementation of the CARD Act, the pricing actions that we put in place over recent quarters, which were designed to mitigate the impact of the CARD Act, as well as changes in customer behavior.

As we’ve discussed in prior quarters, the impact from the CARD Act within yield is significant. However, we have worked to mitigate it through repricing activities over recent quarters. Our objective is to migrate back to the historical yield level of 9%. We believe our pricing is appropriate and reflects the necessary revenues for our business. But uncertainty does exist regarding the impact of the look-back or regulatory review required on a go-forward basis.

Staying with the CARD Act, we do not expect the revised late fee rules, which will be implemented in August, to have a material impact. We believe the CARD Act is more significant for us than financial reform due to the nature of our business model, which is not impacted by many aspects of the reform. With regard to financial reform legislation, we support the general principle of financial stability and consumer protection underlying the legislation. However, there clearly are costs associated with it. Many of the aspects will play out over time, giving us the ability to adopt to the changing marketplace.

While other industry participants have discussed details regarding debit pricing risk pursuant to the Durbin amendment, our Charge Card and credit cards are not directly impacted by the potential debit pricing adjustments. With regard to discounting, while merchants have long had the ability to provide discounts for payment of cash and check, the additional ability of merchants to discount price for payments with debit cards versus credit cards creates some additional uncertainty. However, based on our commitment to deliver high-quality customers and services to merchants, we are confident in our ability to adopt to the changing environment.

So let me get back to our second quarter results and move to Slide 12. This is a summary of our revenue performance. So discount revenue is driven by 16% growth in Billed business and is impacted by the higher growth in GNS and increased contra revenue related to co-brand partner investments. Net interest income for 2010 includes all the interest on all loans. 2009 does not include the interest related to those loans that were securitized. On an apples-to-apples basis, 2010 remains the same at $1.188 billion. 2009 would be $1.464 billion, so that would be down about 19% on a managed basis. And that’s a result of average loans being down 10% and the yield this year being at 9.3%, compared to 9.7% in ’09. Travel commissions and fees are benefiting from greater foreign currency revenues related to higher spending and partly offset by lower delinquency fees. Other revenues, if you were to back out the ICBC gain from last year, last year’s number would be 898 and we actually see an increase up to 982 this year. And that’s reflected in part by higher GNS partner-related revenues. One last point that I’d make about revenues is that we had 4% growth in revenues sequentially, compared to the first quarter.

So let’s move to Slide 13, which is provision for losses. So the provision for Charge Card and lending both are improving dramatically, based on the improved credit performance that we’ve seen. ’09 provision does not include write-offs related to those loans that were securitized. If we included those, the provision would have increased to $2.420 billion, so that would mean a year-over-year improvement of $1.7 billion. Based on the improvement that we saw in credit performance, reserves declined $50 million in Charge Card and $450 million in lending, for a total reserve release of $500 million. As you will see in a few slides, our reserve coverage remains cautious.

Let’s move to Slide 14 and expense performance. So you can see that marketing and promotion is up significantly, up to $802 million, compared with $352 million last year. And I’d point out that last year was unusually low, as we were looking to stay profitable in ’09. But the $802 million is above historic levels. So this is very consistent with what we’ve said in the past; as credit improved, we would drop some to the bottom line and the balance we would invest to drive business growth, some of it to help the near term, but we’re also investing for the medium-to-long term. If we look at rewards, it is growing in line with the growth in Billed business. Salaries and benefits are lower by 4%. However, if we adjust for the re-engineering charge that we had in ’09, it’s up 8%, reflecting merit increases, resumption of the 401(k) match program and profit sharing, as well as higher incentive accruals, partly offset by lower levels of employees. The tax provision and tax rate are up, reflecting higher earnings and a $44 million charge related to valuation of certain deferred tax assets.

Moving to Slide 15. This is now our spending levels over the past three years by quarter. Other than the fourth quarter of ’07, when we received our initial Visa settlement payment, the second quarter of 2010 is the highest level on the chart; higher than the historic averages that we saw back in the second and third quarter of ’07. If we were to compare our spending in the second quarter of 2010 back to that ’07 period, within USCS, we see similar levels of spending on acquisition, but with a shift from proprietary lending to charge and co-brand. In ICS, International Consumer, we’re seeing generally higher levels of spend across several areas. And within GMS, we’re seeing a substantial increase in the investment and perception of coverage.

As discussed over the prior quarters, the high level of investment spending reflects the provision benefit as credit is improving. As you can see from the chart, we have the ability to adjust investment levels. As these provision benefits lessen over time, we have the flexibility to move investment spending back towards historic levels.

I’ll now move to Slide 16, which is information in terms of our operating expense. As we said to you, you should not look solely at marketing and promotion to judge our investment spending. Operating expense on average grew 8%. Within operating expense, you can see that support functions, which are organizations such as finance and other staff groups, and global services, are growing at a rate below the average. Collection expense is growing at a slower rate as credit improves. Above the dotted line, expense growth is growing faster than the average and there were some administrative costs, such as costs to comply with the new bank holding company and Basel II regulations, but the majority of the higher growth relates to expenses driving revenue growth such as sales force, network initiatives and partner investments.

Moving to Slide 17, this is the USCS Charge Card write-off and past-due rates. And you can see that these metrics are improving and really, the reason that provision is lower. And you can see that the write-off rate and 30 days past-due continued to improve here.

If we move to Slide 18, this is International Consumer and Global Commercial Card. And again, here, you can see the net loss rate in the 90 day past-due billing ratio continues to perform very well. I’ll remind you in the first quarter of 2010, that dark blue section in Q1 2010 was driven by a methodology change to do write-offs at 180 days, instead of the prior practice of 360.

Moving to Slide 19, Charge Card reserve coverage. As you can see from this slide, while credit improves, reserve coverage remains cautious across all segments. The International Consumer and Global Commercial Services 90 day past billings coverage increased in 2010 as we changed reserve methods to be based on a lost-to-bill business ratio. And that was discussed with you last quarter.

If we move to Slide 20, which is the managed lending net write-off rate, you can see that the write-off rate continues to improve in the U.S. and globally. Our metrics are performing substantially better than the industry and they’re benefiting from the fact that we moved earlier and more decisively. And it also reflects the high quality of our Cardmember base. Our write-off rate is now down to 6%, and while this is still above historic averages, it represents a significant improvement from the second quarter of 2009.

Next, we’re looking at the lending 30-day past due. And again, here we’re seeing good improvement both in the U.S. and globally. Delinquency dollars are at $1.6 billion this quarter, compared to $2.7 billion in the second quarter of ’09. Again, a significant improvement.

If we look at Slide 22, here we’re looking at roll rate information, which provides insight into why our write-off rates are improving and what might happen in the future. The write-off rate in the current month are a function of the current-to-30 day past-due roll rates five months prior. So the write-off rate in the second quarter relates to the green triangles in the upper left-hand chart. That’s the chart on the current-to-30-day past-due. And they were lower than the prior three triangles. Therefore, second quarter write-offs were lower than the first quarter, and this is also dependent on the 30-day past-due-to-write-off rate, bankruptcies and recoveries remaining constant.

You can see that the next three triangles after the green triangles are down slightly. I remind you that we are in uncertain economic times and that the third quarter write-off rate will also depend on the 30-day past-due-to-write-off percentage, bankruptcies and recoveries.

Now the increase we saw sequentially in bankruptcies, the right-hand chart, in the second quarter is in line with the growth in bankruptcies in the industry.

Moving to Slide 23. So this is reserve activity in the second quarter of last year and this year. The left side of ’09 doesn’t include reserve activity for those receivables that were securitized in ’09. In ’09, we billed $200 million of credit reserves, based on the fact that credit metrics were deteriorating. And we released $500 million of lending reserves in the second quarter of 2010, as credit continues to improve. The blue box in the top right provides information with respect to the write-off split between securitized and non-securitized loans. So if you were to compare the $1.1 billion of write-offs in the second quarter of ’09, it would compare to the $600 million in the second quarter of ’10. So while we released reserves, we believe we have an appropriate level of reserve coverage.

Now we can see that on the next slide, Slide 24. So we’ve seen credit metrics are improving and we’ve reduced lending reserves by $450 million in the quarter, based on the inherent risk in the portfolio. But we continue to be cautious in setting credit reserves, as the economic environment remains uneven, housing is stalled and unemployment remains stubbornly high. Our reserve coverage reflects the uncertainty that we see in the environment.

Moving to Slide 25, our capital ratios remain above well-capitalized. Our Tier 1 common ratio of 10.7% is strong relative to other U.S. financial institutions. Now as we know, new rules will be written in the near future regarding capital and capital requirements, will be higher than they have been historically. But as you can see from the slide, our capital position today appears to provide a good foundation for those future requirements.

Moving to Slide 26, this is our liquidity. We continue to hold excess cash and readily-marketable securities to meet the next 12 months of funding maturities. So we’re holding $25 billion and maturities are $20 billion.

Moving to Slide 27, you can see retail deposits increased by $300 million in the second quarter. We didn’t need to grow deposits in the quarter to meet funding needs. We did reduce brokered CDs [Certificate of Deposit] by about $1 billion and continue to grow Personal Savings; both CDs and High-Yield Savings balances.

So with that, let me conclude with a few final comments. Results for the quarter reflect both general improvement in the economic environment versus last year, and our shift to a more offensive investment posture. Spending growth was relatively strong across our business segments due to both higher absolute spending levels and the weak volumes last year amidst a global economic slowdown. In fact, on an FX-adjusted basis, this was the strongest second quarter in terms of dollars spent.

We also continue to see a sharp divergence between customer spending and borrowing levels. Some of it is due to our strategies and risk-related actions, and some reflects changes in consumer behavior. The net effect of these trends is a lower risk profile for the company, as charge and co-brand spending are a key driver of our volumes and receivable trends.

While these offsetting influences, strong billings growth and lower loan balances challenge overall revenue growth, improving credit trends and well-controlled operating expense have provided the ability to invest in the business at a significant level, while also generating strong earnings. Some of these investments are intended to drive metrics in the near term, but others are allocated towards investments focused on the medium-to-long term success of the company.

Challenges clearly remain as global economic indicators have weakened somewhat, and sentiment seems to show less strength than most would’ve expected a few months ago. In the U.S. and many other key markets, job creation remains weak, consumer confidence is volatile, consumer behavior is uncertain and regulatory and legislative initiatives will change aspects of the business going forward. While these factors have us approaching investment and expense commitments with caution, our strong competitive position is yielding high quality results. Spending on our network has been increasing well above the industry average and our credit performance was the best among major card issuers. This indicates to us our decisive and effective credit actions are achieving improved credit performance without stifling spending by credit-worthy Cardmembers. This gives us confidence that our investments and differentiated business model are appropriately positioned to manage through our challenges, capitalize on opportunities in front of us and continue to win in the marketplace. Thanks for listening and we are now ready to take questions.

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American Express (AXP) Q2 2010 Earnings Call Transcript

by Latest Pakistani Fashion Dresses | Posted on

black card The Centurion Card, The Black Card: American Expresss Invite Only Credit Card

Operator

Ladies and gentlemen, thank you for standing by and welcome to the American Express Second Quarter 2010 Earnings Release. [Operator Instructions] I would now like to turn the conference over to our host, Mr. Ron Stovall. Please go ahead, sir.

Ron Stovall

Thank you, Greg. And welcome to everyone. We appreciate all of you joining us for today’s discussion.

As usual, it is my job to remind you of certain legal aspects around the call and tell you that this 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, 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, which was filed in an 8-K report, and in the company’s 2009 10-K report, already on file with the Securities and Exchange Commission, in the second quarter 2010 earnings release and earnings supplement on file with the SEC in an 8-K report, 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.

Dan Henry, Executive Vice President and Chief Financial Officer, will review some key points related to the quarter’s earnings through the series of slides included with the earnings documents and provide some brief summary comments. Once Dan completes his remarks, we will turn to the moderator who will announce your opportunity to get into the queue for the Q&A period, where Dan will be available to respond to your questions. Up until then, no one is actually registered to ask questions. While we will attempt to respond to as many of your questions as possible before we end the call, we do have a limited amount of time. Based on this, we ask that you limit yourself to one question at a time during the Q&A.

With that, let me turn the discussion over to Dan.

Daniel Henry

Thanks, Ron. And let’s start on Slide 2. See total earnings are up 13%, but the more appropriate line to look at is managed total revenues, which is down 1%. The reason for that is in ’09, revenues did not include interest related to those receivables that had been securitized. If you exclude the ICBC gain that was in ’09, revenues are actually up 2%. Income from continuing operations was $1.017 billion. ’09 included two one-time items. One was the ICBC gain of $211 million pretax, and we also had re-engineering costs of $182 million pretax. So those more or less offset each other. EPS was $0.84, and that compares to $0.09 in the prior period. But you’ll remember that in the second quarter of ’09, we had a charge that was about $0.18 related to our repayment of TARP. So the better comparison is $0.27 last year compared to $0.84 this year, up significantly. And ROE increased to 23%.

We go to Slide 3 and we look at Billed business. It increased 16%, or 15% on an FX-adjusted basis. It is now approaching the pre-crisis levels in Billed business that we had back in ’08. Cards-in-force are relatively flat with last year. GNS is up 7% and proprietary cards are down slightly. If we look at average Cardmember spending, it increased 20% on an FX-adjusted basis, but if you exclude the card cancellations of 2.7 million cards last year in the second quarter, average Cardmember spend would be up 16%, which is very much in line with the increase in Billed business.

Loans on a managed basis are down 9%, driven primarily by Cardmember behavior as well as our strategy which is changing the mix of receivables, as we are focused on premium lending in co-brand. Those customers tend to be more transactors and have higher pay-down rates. However, loans are down less than competitors and that’s because we are having higher growth in spending by our Cardmembers and we have lower write-off rates. Travel is benefiting from a growth in transactions, as well as higher prices in Airline.

If you look at Slide 4, there’s more detail on Billed business. The bars represent Billed business each month. The lines represent growth rates for both reported and FX-adjusted. On an FX-adjusted basis, April and May grew 15% and June grew 14%, for the average of 15% in the second quarter. July month-to-date growth is in the double digits and the growth rate is down slightly from June due to a tougher rollover in 2009.

If we move to Slide 5, this is information on network spending. And you can see that transactions are growing 8% and transaction size is higher by 6%. So they’re both contributing to spending growth.

If we move to Slide 6, this is growth by segment. And you can see that we had strong growth across all of our segments. The highest growth is in GNS and this is being driven by partners issuing additional cards. Promotional Card also had strong growth, and this is in part due to new signings, as well as higher level of spending from existing clients. International Consumer had growth of 9% on an FX-adjusted basis, and while it’s slightly lower than the other segments, this is due in part by the fact that it dropped less in 2009. So we have broad-based growth in spending. We’ll have to wait until all the statistics are in, but it would appear that we will gain share in the second quarter.

Moving to Slide 7. Now this is some new disclosure that we thought that you would be interested in. It’s spending by region. You can see that JAPA has the highest growth and this is in part driven by new GNS signings in Australia. We also expect that EMEA growth would be slightly below the average, but it’s still strong at 11% on an FX-adjusted basis.

If we move to Slide 8, this is spending by product within the U.S. Consumer and Small Business Group. And it represents the spend decline or growth over the past five quarters. And you can see that in the current period, we are having strong growth in both charge and co-brand and this reflects the investment spending in these areas, consistent with our strategy. And we’ve had more modest growth in proprietary lending. So before I leave spending, let me make a few points. Spending on our network is growing faster than the industry in charge and credit. Spending growth is broad-based across segments and geography. Growth is concentrated in the areas of our strategic focus, charge and co-brand. And growth reflects our strategy of using improvements in credit to invest in the business.

Let me move to Slide 9, and this is Charge Card Billed business and receivable growth. And we see here that Charge Card receivables continue to move in tandem with the growth in Billed business. Charge Card Billed business was 15%, consistent with last quarter.

Moving to Slide 10. We’re looking at lending, Billed business and managed loan growth. And here, lending, Billed business and managed loan growth, at this moment, is not closely correlated. It’s in part because of actions that we’ve taken in terms of credit, as well as the change in our strategy to reduce acquisition and proprietary lending and focus more on premium and co-brand. It’s also in part by Cardmembers looking to delever.

You can see this if you look at our trust data and look at pay-down rates. Back in June of ’09, pay-down was 24.2%. And in June of 2010, it was 28.9%. So we expect the difference in growth rates and spending in loans to continue over the near term.

Let me move to Slide 11. So this is USCS net interest yield. And on the right, you can see that the yield was 9.3% in the second quarter of 2010, compared to 9.7% in the second quarter of ’09. This change reflects the implementation of the CARD Act, the pricing actions that we put in place over recent quarters, which were designed to mitigate the impact of the CARD Act, as well as changes in customer behavior.

As we’ve discussed in prior quarters, the impact from the CARD Act within yield is significant. However, we have worked to mitigate it through repricing activities over recent quarters. Our objective is to migrate back to the historical yield level of 9%. We believe our pricing is appropriate and reflects the necessary revenues for our business. But uncertainty does exist regarding the impact of the look-back or regulatory review required on a go-forward basis.

Staying with the CARD Act, we do not expect the revised late fee rules, which will be implemented in August, to have a material impact. We believe the CARD Act is more significant for us than financial reform due to the nature of our business model, which is not impacted by many aspects of the reform. With regard to financial reform legislation, we support the general principle of financial stability and consumer protection underlying the legislation. However, there clearly are costs associated with it. Many of the aspects will play out over time, giving us the ability to adopt to the changing marketplace.

While other industry participants have discussed details regarding debit pricing risk pursuant to the Durbin amendment, our Charge Card and credit cards are not directly impacted by the potential debit pricing adjustments. With regard to discounting, while merchants have long had the ability to provide discounts for payment of cash and check, the additional ability of merchants to discount price for payments with debit cards versus credit cards creates some additional uncertainty. However, based on our commitment to deliver high-quality customers and services to merchants, we are confident in our ability to adopt to the changing environment.

So let me get back to our second quarter results and move to Slide 12. This is a summary of our revenue performance. So discount revenue is driven by 16% growth in Billed business and is impacted by the higher growth in GNS and increased contra revenue related to co-brand partner investments. Net interest income for 2010 includes all the interest on all loans. 2009 does not include the interest related to those loans that were securitized. On an apples-to-apples basis, 2010 remains the same at $1.188 billion. 2009 would be $1.464 billion, so that would be down about 19% on a managed basis. And that’s a result of average loans being down 10% and the yield this year being at 9.3%, compared to 9.7% in ’09. Travel commissions and fees are benefiting from greater foreign currency revenues related to higher spending and partly offset by lower delinquency fees. Other revenues, if you were to back out the ICBC gain from last year, last year’s number would be 898 and we actually see an increase up to 982 this year. And that’s reflected in part by higher GNS partner-related revenues. One last point that I’d make about revenues is that we had 4% growth in revenues sequentially, compared to the first quarter.

So let’s move to Slide 13, which is provision for losses. So the provision for Charge Card and lending both are improving dramatically, based on the improved credit performance that we’ve seen. ’09 provision does not include write-offs related to those loans that were securitized. If we included those, the provision would have increased to $2.420 billion, so that would mean a year-over-year improvement of $1.7 billion. Based on the improvement that we saw in credit performance, reserves declined $50 million in Charge Card and $450 million in lending, for a total reserve release of $500 million. As you will see in a few slides, our reserve coverage remains cautious.

Let’s move to Slide 14 and expense performance. So you can see that marketing and promotion is up significantly, up to $802 million, compared with $352 million last year. And I’d point out that last year was unusually low, as we were looking to stay profitable in ’09. But the $802 million is above historic levels. So this is very consistent with what we’ve said in the past; as credit improved, we would drop some to the bottom line and the balance we would invest to drive business growth, some of it to help the near term, but we’re also investing for the medium-to-long term. If we look at rewards, it is growing in line with the growth in Billed business. Salaries and benefits are lower by 4%. However, if we adjust for the re-engineering charge that we had in ’09, it’s up 8%, reflecting merit increases, resumption of the 401(k) match program and profit sharing, as well as higher incentive accruals, partly offset by lower levels of employees. The tax provision and tax rate are up, reflecting higher earnings and a $44 million charge related to valuation of certain deferred tax assets.

Moving to Slide 15. This is now our spending levels over the past three years by quarter. Other than the fourth quarter of ’07, when we received our initial Visa settlement payment, the second quarter of 2010 is the highest level on the chart; higher than the historic averages that we saw back in the second and third quarter of ’07. If we were to compare our spending in the second quarter of 2010 back to that ’07 period, within USCS, we see similar levels of spending on acquisition, but with a shift from proprietary lending to charge and co-brand. In ICS, International Consumer, we’re seeing generally higher levels of spend across several areas. And within GMS, we’re seeing a substantial increase in the investment and perception of coverage.

As discussed over the prior quarters, the high level of investment spending reflects the provision benefit as credit is improving. As you can see from the chart, we have the ability to adjust investment levels. As these provision benefits lessen over time, we have the flexibility to move investment spending back towards historic levels.

I’ll now move to Slide 16, which is information in terms of our operating expense. As we said to you, you should not look solely at marketing and promotion to judge our investment spending. Operating expense on average grew 8%. Within operating expense, you can see that support functions, which are organizations such as finance and other staff groups, and global services, are growing at a rate below the average. Collection expense is growing at a slower rate as credit improves. Above the dotted line, expense growth is growing faster than the average and there were some administrative costs, such as costs to comply with the new bank holding company and Basel II regulations, but the majority of the higher growth relates to expenses driving revenue growth such as sales force, network initiatives and partner investments.

Moving to Slide 17, this is the USCS Charge Card write-off and past-due rates. And you can see that these metrics are improving and really, the reason that provision is lower. And you can see that the write-off rate and 30 days past-due continued to improve here.

If we move to Slide 18, this is International Consumer and Global Commercial Card. And again, here, you can see the net loss rate in the 90 day past-due billing ratio continues to perform very well. I’ll remind you in the first quarter of 2010, that dark blue section in Q1 2010 was driven by a methodology change to do write-offs at 180 days, instead of the prior practice of 360.

Moving to Slide 19, Charge Card reserve coverage. As you can see from this slide, while credit improves, reserve coverage remains cautious across all segments. The International Consumer and Global Commercial Services 90 day past billings coverage increased in 2010 as we changed reserve methods to be based on a lost-to-bill business ratio. And that was discussed with you last quarter.

If we move to Slide 20, which is the managed lending net write-off rate, you can see that the write-off rate continues to improve in the U.S. and globally. Our metrics are performing substantially better than the industry and they’re benefiting from the fact that we moved earlier and more decisively. And it also reflects the high quality of our Cardmember base. Our write-off rate is now down to 6%, and while this is still above historic averages, it represents a significant improvement from the second quarter of 2009.

Next, we’re looking at the lending 30-day past due. And again, here we’re seeing good improvement both in the U.S. and globally. Delinquency dollars are at $1.6 billion this quarter, compared to $2.7 billion in the second quarter of ’09. Again, a significant improvement.

If we look at Slide 22, here we’re looking at roll rate information, which provides insight into why our write-off rates are improving and what might happen in the future. The write-off rate in the current month are a function of the current-to-30 day past-due roll rates five months prior. So the write-off rate in the second quarter relates to the green triangles in the upper left-hand chart. That’s the chart on the current-to-30-day past-due. And they were lower than the prior three triangles. Therefore, second quarter write-offs were lower than the first quarter, and this is also dependent on the 30-day past-due-to-write-off rate, bankruptcies and recoveries remaining constant.

You can see that the next three triangles after the green triangles are down slightly. I remind you that we are in uncertain economic times and that the third quarter write-off rate will also depend on the 30-day past-due-to-write-off percentage, bankruptcies and recoveries.

Now the increase we saw sequentially in bankruptcies, the right-hand chart, in the second quarter is in line with the growth in bankruptcies in the industry.

Moving to Slide 23. So this is reserve activity in the second quarter of last year and this year. The left side of ’09 doesn’t include reserve activity for those receivables that were securitized in ’09. In ’09, we billed $200 million of credit reserves, based on the fact that credit metrics were deteriorating. And we released $500 million of lending reserves in the second quarter of 2010, as credit continues to improve. The blue box in the top right provides information with respect to the write-off split between securitized and non-securitized loans. So if you were to compare the $1.1 billion of write-offs in the second quarter of ’09, it would compare to the $600 million in the second quarter of ’10. So while we released reserves, we believe we have an appropriate level of reserve coverage.

Now we can see that on the next slide, Slide 24. So we’ve seen credit metrics are improving and we’ve reduced lending reserves by $450 million in the quarter, based on the inherent risk in the portfolio. But we continue to be cautious in setting credit reserves, as the economic environment remains uneven, housing is stalled and unemployment remains stubbornly high. Our reserve coverage reflects the uncertainty that we see in the environment.

Moving to Slide 25, our capital ratios remain above well-capitalized. Our Tier 1 common ratio of 10.7% is strong relative to other U.S. financial institutions. Now as we know, new rules will be written in the near future regarding capital and capital requirements, will be higher than they have been historically. But as you can see from the slide, our capital position today appears to provide a good foundation for those future requirements.

Moving to Slide 26, this is our liquidity. We continue to hold excess cash and readily-marketable securities to meet the next 12 months of funding maturities. So we’re holding $25 billion and maturities are $20 billion.

Moving to Slide 27, you can see retail deposits increased by $300 million in the second quarter. We didn’t need to grow deposits in the quarter to meet funding needs. We did reduce brokered CDs [Certificate of Deposit] by about $1 billion and continue to grow Personal Savings; both CDs and High-Yield Savings balances.

So with that, let me conclude with a few final comments. Results for the quarter reflect both general improvement in the economic environment versus last year, and our shift to a more offensive investment posture. Spending growth was relatively strong across our business segments due to both higher absolute spending levels and the weak volumes last year amidst a global economic slowdown. In fact, on an FX-adjusted basis, this was the strongest second quarter in terms of dollars spent.

We also continue to see a sharp divergence between customer spending and borrowing levels. Some of it is due to our strategies and risk-related actions, and some reflects changes in consumer behavior. The net effect of these trends is a lower risk profile for the company, as charge and co-brand spending are a key driver of our volumes and receivable trends.

While these offsetting influences, strong billings growth and lower loan balances challenge overall revenue growth, improving credit trends and well-controlled operating expense have provided the ability to invest in the business at a significant level, while also generating strong earnings. Some of these investments are intended to drive metrics in the near term, but others are allocated towards investments focused on the medium-to-long term success of the company.

Challenges clearly remain as global economic indicators have weakened somewhat, and sentiment seems to show less strength than most would’ve expected a few months ago. In the U.S. and many other key markets, job creation remains weak, consumer confidence is volatile, consumer behavior is uncertain and regulatory and legislative initiatives will change aspects of the business going forward. While these factors have us approaching investment and expense commitments with caution, our strong competitive position is yielding high quality results. Spending on our network has been increasing well above the industry average and our credit performance was the best among major card issuers. This indicates to us our decisive and effective credit actions are achieving improved credit performance without stifling spending by credit-worthy Cardmembers. This gives us confidence that our investments and differentiated business model are appropriately positioned to manage through our challenges, capitalize on opportunities in front of us and continue to win in the marketplace. Thanks for listening and we are now ready to take questions.

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