DBRS Comments on American Express Company’s Q1 2009 Results – Senior at A (high), Trend Negative

DBRS has today commented that the ratings of American Express Company (Amex or the Company) and its related subsidiaries, including its Issuer & Long-Term Debt of A (high) are unaffected by the Company’s first quarter 2009 earnings results. The trend on all non-FDIC guaranteed debt ratings remains Negative.

Today’s comment follows Amex’s first quarter 2009 earnings release, which reported that the Company generated income from continuing operations of $443 million. Amex’s income from continuing operations, which were up from $306 million in the previous quarter, were down 58% compared to the first quarter of 2008, as loan loss provisioning increased while consumer and business spend decreased causing lower revenue. During the quarter, Amex was successful in driving a 26% reduction in total expenses to $3.6 billion from the prior quarter, reflecting the impact of previously announced reengineering initiatives and a decline in Cardmember Rewards expense. Although the Amex’s earnings were lower than for the year-ago quarter, importantly, the Company remained profitable, which DBRS views as an illustration of Amex’s resiliency in a challenging operating environment. During negative economic and business cycles, DBRS looks to a financial institutions ability to generate sufficient income before provisions and taxes to absorb increased credit costs. In DBRS’s opinion the first quarter results demonstrates the strength and flexibility of Amex’s business model.

The franchise remains strong. Despite the global recession, the total number of transactions for the quarter held up well, only declining 3% from last year. DBRS views the modest decline in overall transactions as an illustration of Amex cardmember loyalty to the brand. Billed business, however declined by 12.0%, on a foreign currency (FX) adjusted basis, from the first quarter of 2008, as consumers reduced their discretionary spending and businesses reduced overall travel and entertainment spending. Billed business is a major driver in overall revenue for Amex, as it drives the Company’s discount revenue. Accordingly discount revenue declined to $3.1 billion or 18% compared to the first quarter of 2008.

The continuing weakening in the U.S. economy and increasing unemployment resulted in increasing net write-off rates. For the quarter ending March 31, 2009, Amex’s U.S. Card Services (USCS) charge-card net write-off rate was 4.9% compared to 3.5% a quarter ago, while the managed worldwide card lending portfolio experienced net write-offs of 8.2%. For the quarter, provision for loan losses was $1.8 billion, resulting in loan loss reserves of $3.0 billion as of March 31, 2008. Reserves as a percentage of loans increased appropriately to 8.2% at quarter end from 6.1% at year end 2008. Despite the challenging economic environment the Company’s early-stage delinquency rates on its U.S. charge and lending portfolios indicated a level of stability. DBRS views the stability in the 30-day past due rates in the USCS portfolios, albeit at elevated levels, as a positive and an indication that the Company’s recently implemented collection actions are having an affect. However, DBRS is also mindful that there is a seasonality component to the stabilization, as borrowers utilize tax refunds and other measures to reduce debt levels. DBRS would view a continuation of this trend positively, as DBRS believes early stage delinquencies are a leading indicator of future credit performance. Nonetheless, given its outlook for a prolonged recession in the U.S., DBRS anticipates that Amex’s asset quality measures are likely to weaken further in 2009 sustaining negative pressure on earnings.

DBRS considers Amex’s capital base as strong and enhanced by the Company’s solid internal capital generation ability. At the end of the first quarter Tier 1 leverage and Tier 1 risk-based capital were 11.4% and 14.8%, respectively, up from 8.5% and 9.7% at December 31, 2008. In addition, tangible common equity-to-risk-weighted asset ratio was 10.1%, which compares favorably to its peers.

Amex’s liquidity profile is viewed by DBRS as sound and well-managed. Importantly, Amex maintains a consolidated contingent liquidity plan that provides it with sufficient liquidity to operate for more than 12 months without access to the capital markets. At March 31, 2009 Amex maintained excess cash and readily marketable securities of $25 billion, which DBRS considers prudent given the distress in global credit markets. Additionally, during the quarter, Amex further bolstered its liquidity profile, adding $4.1 billion of retail brokered deposits, which DBRS considers a positive to the overall franchise.

The Negative trend reflects DBRS’s perspective that credit costs will remain elevated through 2009 as global recessionary environment persists. DBRS remains 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. 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. That said, DBRS’s ratings allow for an expectation of a certain level of earnings volatility. 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.