Reserves for Credit Losses

3 Months Ended

Mar. 31, 2020

Reserves for Credit Losses [Abstract]

Reserve for Credit Losses

Reserves for Credit Losses

Reserves for credit losses represent management’s best estimate of the expected credit losses in its outstanding portfolio of Card Member receivables and Card Member loans, as of the balance sheet date. The CECL methodology, which became effective January 1, 2020, requires management to estimate lifetime expected credit losses by incorporating historical loss experience, as well as current and future economic conditions over a reasonable and supportable period (R&S Period) beyond the balance sheet date. Management makes various judgments combined with historical loss experience to calculate a reserve rate that is applied to the outstanding loan or receivable balance to produce a reserve for expected credit losses.

American Express has in place an enterprise-wide credit risk management process and manages the overall credit risk exposure associated with the Card Member receivables and loans, including those purchased by Credco. American Express uses a combination of statistically-based models that incorporate current and future economic conditions throughout the R&S Period. The process of estimating expected credit losses is based on several key parameters: Probability of Default (PD), Exposure at Default (EAD), and future recoveries for each month of the R&S Period. Beyond the R&S Period, American Express estimates expected credit losses using its historical loss rates.

•PD models are used to estimate the likelihood an account will be written-off.

•EAD models are used to estimate the balance of an account at the time of write-off. This includes balances less expected repayments based on historical payment and revolve behavior, which vary by customer. Due to the nature of revolving loan portfolios, the EAD models are complex and involve assumptions regarding the relationship between future spend and payment behaviors.

•Future recoveries are the amounts received from Card Members after default occurs, typically as a result of collection efforts. Future recoveries are estimated taking into consideration the time of default, time elapsed since default and macroeconomic conditions.

These three parameters calculate the quantitative future expected credit losses. American Express also considers the likelihood a previously written off account will be recovered. This calculation is dependent on how long ago the account was written off and future economic conditions, which estimate the likelihood and magnitude of recovery. American

Express models are developed using historical loss experience covering the economic cycle and consider the impact of account characteristics on expected losses.

Future economic conditions include multiple macroeconomic scenarios provided to us by an independent third party and reviewed by management. These macroeconomic scenarios contain certain geographic based variables that are influential to its modelling process, including unemployment rates and real gross domestic product. The process of estimating credit reserves incorporates the above factors over the R&S Period explicitly considering macroeconomic forward-looking information.

Additionally, management considers whether to adjust the quantitative reserves to address possible limitations within the models or factors not included within the models, such as external factors, portfolio trends or management risk actions.

Lifetime losses for most Card Member receivables and Card Member loans are evaluated collectively based on similar risk characteristics, including past spend and remittance behaviors, credit bureau scores where available, delinquency status, tenure of balance outstanding, amongst others. Credco reports losses on accrued interest within provision for credit losses, rather than reversing interest income.

Card Member receivables and Card Member loans balances are written off when management considers amounts to be uncollectible, which is generally determined by the number of days past due and is typically no later than 180 days past due for pay in full or revolving loans. Card Member receivables and Card Member loans in bankruptcy or owed by deceased individuals are generally written off upon notification.

Results for reporting periods beginning after January 1, 2020 are presented using the CECL methodology while comparative information continues to be reported in accordance with the incurred loss methodology in effect for prior periods.

Changes in Card Member Receivables Reserve for Credit Losses

The following table presents changes in the Card Member receivables reserve for credit losses for the three months ended March 31:

(Millions)	2020		2019
Balance, January 1 (a)	$	15	$	167
Provisions	100		60
Net write-offs (b)	(50)		(61)
Other adjustments (c)	4		9
Balance, March 31	$	69	$	175

(a)Includes a decrease of $147 million related to the adoption of the CECL methodology.

(b)Net of recoveries of $24 million and $31 million for the three months ended March 31, 2020 and 2019, respectively.

(c)For March 31, 2020, primarily includes reserve adjustments related to the removal of U.S. Consumer and Small Business Card Member receivables of $7.2 billion from the Charge Trust and for March 31, 2019, primarily includes reserve balances related to new groups of, and participation interests in, Card Member receivables purchased from affiliates, totaling $1.6 billion.

Card Member receivables reserve for credit losses increased for the three months ended March 31, 2020, primarily driven by a significant reserve build, which reflects the deterioration of the estimated global macroeconomic outlook including unemployment and GDP as a result of COVID-19 impacts.

Changes in Card Member Loans Reserve for Credit Losses

The following table presents changes in the Card Member loans reserve for credit losses for the three months ended March 31:

(Millions)	2020		2019
Balance, January 1 (a)	$	17	$	5
Provisions	3		3
Net write-offs (b)	(2)		(2)
Balance, March 31	$	18	$	6

(a)Includes an increase of $7 million related to the adoption of the CECL methodology.

(b)Net of recoveries of $0.5 million and $0.3 million for the three months ended March 31, 2020 and 2019, respectively.