DBRS Confirms American Express Company – Senior at A (high), Changes Trend to Negative

DBRS has today confirmed all ratings of American Express Company (Amex or the Company) and its related subsidiaries, including its Issuer & Long-Term Debt of A (high). Concurrently, DBRS has changed the trend on all ratings to Negative from Stable. This rating action does not impact the ratings of the FDIC-guaranteed debt issued by American Express Bank, FSB, which remains at AAA with a Stable trend.

This rating action follows Amex’s fourth quarter 2008 earnings release, which indicated that the Company’s billed business declined 10% year-on-year reflecting reduced consumer and business spending. Although DBRS’s ratings provide for some weakening in billed business through the economic cycle, DBRS is concerned that the deteriorating economic environment will further reduce consumer spending and billed business, thereby pressuring revenues. Billed business is a major driver in overall revenue in Amex’s spend-centric business model. DBRS is concerned that continuing weakness in the U.S. economic environment could result in a further reduction in billed business, reducing revenues at a time that revenues are needed to offset higher cyclical credit costs. This concern is reflected in the Negative trend.

Furthermore, Amex’s earnings release indicated income from continuing operations for the quarter of $238 million, or a decline of 72% from a year ago. Earnings for the quarter were negatively impacted by a sizeable $273 million after-tax re-engineering charge and a $66 million charge related to an increase in the Company’s Membership Rewards balance sheet reserve in connection with the extension of its partnership with Delta Air Lines. Additionally, earnings were reduced by a $1.4 billion provision for loan losses reflecting the ongoing weakening in the economic environment in the United States. Although the Company’s earnings were lower than for the previous quarter, the Company remained profitable, which DBRS views as an illustration of the Company’s resiliency in a difficult operating environment. Moreover, removing one-time items, Amex’s underlying profitability remained acceptable, which in light of the operating environment, further illustrates the strength of the American Express franchise. DBRS’s current rating considers the expectation of a certain level of earnings volatility.

The ratings reflect Amex’s solid capital position, bolstered by Amex’s solid internal capital generation. Moreover, subsequent to the quarter, Amex bolstered its capital position by issuing $3.39 billion of perpetual preferred stock and related warrants to the U.S. Treasury as a participant in the Treasury’s Capital Purchase Program under the Troubled Assets Relief Program (TARP). Including the TARP capital, Amex reported preliminary pro forma capital ratios at December 31, 2008 of a Tier 1 leverage ratio of 10.1%, a Tier 1 risk-based capital ratio of 12.7% and a total risk-based capital ratio of 14.2%, respectively.

Amex’s overall sound liquidity profile is factored into the current rating. Importantly, Amex maintains a consolidated contingent liquidity plan that provides it with sufficient liquidity to operate for at least 12 months without access to the capital markets. Given the continued volatility in the global credit markets, DBRS considers the contingent liquidity plan as prudent. Additionally, during the fourth quarter, Amex further diversified its liquidity profile, adding $6.2 billion of retail brokered deposits and $3.0 billion of sweep account deposits, which DBRS considers a positive to the overall franchise.

The Negative trend reflects DBRS’s view that the U.S. and the global macroeconomic environment will continue to deteriorate in 2009, which, as discussed above, may add pressure to Amex’s near-term earnings as credit costs are expected to remain elevated, while consumer and business spending will likely remain depressed. In DBRS’s view, Amex’s sizeable exposure to the U.S. consumer adds to its vulnerability in this economic downturn, the depth and duration of which remain uncertain. DBRS would view negatively any sustained weakening of the Company’s underlying earnings generation ability, its liquidity or any perceived weakness in its franchise, as this may reduce Amex’s ability to navigate through the current challenging operating environment. Conversely, the rating trend could revert to stable should Amex illustrate its ability to generate solid revenues, sufficient enough to both absorb the credit losses inherent in this business cycle, while protecting its franchise.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodologies are Rating Finance Companies Operating in the United States, which can be found on the DBRS website under Methodologies

This is a Corporate (Financial Institutions) rating.