Reserves for Credit Losses

12 Months Ended

Dec. 31, 2020

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 Card Member loans, including those purchased by Credco. Reserves for credit losses represent Credco’s best estimate of the expected credit losses in Credco’s 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 Credco’s 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), which is approximately three years, beyond the balance sheet date. American Express makes various judgments combined with historical loss experience to determine a reserve rate that is applied to the outstanding loan or receivable balance to produce a reserve for expected credit losses.

American Express uses a combination of statistically-based models that incorporate current and future economic conditions throughout the R&S Period. The process of estimating expected credit losses is based on several key models:

Probability of Default (PD), Exposure at Default (EAD), and future recoveries for each month of the R&S Period. Beyond the R&S Period, American Express estimates expected credit losses by immediately reverting to long-term average loss rates.

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

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

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

American Express also estimates the likelihood and magnitude of recovery of previously written off accounts considering how long ago the account was written off and future economic conditions. 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 that are incorporated over the R&S Period include multiple macroeconomic scenarios provided to American Express by an independent third party. American Express reviews these economic scenarios and applies judgment to weight them in order to reflect the uncertainty surrounding these scenarios. These macroeconomic scenarios contain certain variables, including unemployment rates and real Gross Domestic Product (GDP), that are significant to American Express’ models.

American Express also evaluates whether to include qualitative reserves to cover losses that are expected but, in its assessment, may not be adequately represented in the quantitative methods or the economic assumptions. American Express considers whether to adjust the quantitative reserves (higher or lower) to address possible limitations within the models or factors not included within the models, such as external conditions, emerging portfolio trends, the nature and size of the portfolio, portfolio concentrations, the volume and severity of past due accounts, or American Express’ risk actions.

Lifetime losses for most of Card Member receivables and Card Member loans are evaluated at an appropriate level of granularity, including assessment on a pooled basis where financial assets share similar risk characteristics, such as past spend and remittance behaviors, credit bureau scores where available, delinquency status, tenure of balance outstanding, amongst others. Credit losses on accrued interest are measured and presented as part of Reserves for credit losses on the Consolidated Balance Sheets and within the Provisions for credit losses in the Consolidated Statements of Income, rather than reversing interest income.

Card Member receivable and Card Member loan balances are written off when American Express 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 on or 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 years. Reserves for credit losses under the incurred loss methodology were primarily based upon statistical and analytical models that analyzed portfolio performance and reflected American Express’ judgments regarding the quantitative components of the reserve. The models considered several factors, including delinquency-based loss migration rates, loss emergence periods and average losses and recoveries over an appropriate historical period. Similar to the CECL methodology, American Express considered whether to adjust the quantitative reserves for certain external and internal qualitative factors, which may increase or decrease the reserves for credit losses.

Changes in Card Member Receivables Reserve for Credit Losses

Card Member receivables reserve for credit losses increased for the year ended December 31, 2020, primarily driven by deterioration of the global macroeconomic outlook, including unemployment and GDP, partially offset by a decline in outstanding balances.

The following table presents changes in the Card Member receivables reserve for credit losses for the years ended December 31:


(Millions)	2020		2019		2018
Balance, January 1(a)	$	15	$	167	$	145
Provisions(b)	224		216		243
Net write-offs(c)	(177)		(229)		(238)
Other adjustments(d)	8		8		17
Balance, December 31	$	70	$	162	$	167

(a)For the year ended December 31, 2020, beginning balance includes a decrease of $147 million as of January 1, 2020, related to the adoption of the CECL methodology.

(b)Provisions for credit losses includes reserve build (release) and replenishment for net write-offs.

(c)Net of recoveries of $82 million, $125 million, and $119 million for the years ended December 31, 2020, 2019 and 2018, respectively.

(d)For the year ended December 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. For the years ended December 31, 2019 and 2018, primarily includes reserve balances related to new groups of, and participation interests in, Card Member receivables purchased from affiliates, totaling $2.7 billion and $9.8 billion, respectively, and participation interests in Card Member receivables sold to an affiliate totaling $1.1 billion and $6.2 billion, respectively. For all the years presented, also includes foreign currency translation adjustments.

Changes in Card Member Loans Reserve for Credit Losses

Card Member loans reserve for credit losses increased for the year ended December 31, 2020, primarily driven by deterioration of the global macroeconomic outlook, including unemployment and GDP, partially offset by a decline in outstanding balances.

The following table presents changes in the Card Member loans reserve for credit losses for the years ended December 31:


(Millions)	2020		2019		2018
Balance, January 1(a)	$	17	$	5	$	5
Provisions(b)	18		14		6
Net write-offs(c)	(15)		(9)		(6)
Balance, December 31	$	20	$	10	$	5

(a)For the year ended December 31, 2020, beginning balance includes an increase of $7 million as of January 1, 2020, related to the adoption of the CECL methodology.

(b)Provisions for credit losses includes reserve build (release) and replenishment for net write-offs.

(c)Net of recoveries of $2.0 million, $1.6 million, and $1.8 million for the year ended December 31, 2020, 2019 and 2018, respectively.