DBRS Comments on American Express Company’s Q3 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 Q3 2009 earnings results. The trend on all non-FDIC guaranteed debt ratings remains Negative.

Today’s comment follows Amex’s Q3 2009 earnings release in which the Company reported income from continuing operations of $642 million. While Amex’s income from continuing operations was down 25% from the comparable period a year ago, income from continued operations increased an impressive 88% on a linked quarter basis. Importantly, the results evidenced improvements in asset quality measures and solid revenue generation ability. Discount revenue increased slightly to $3.4 billion from the prior quarter as total billed business increased 3% to $156.6 billion and the average discount rate remained essentially flat at 2.54%. DBRS views this as an illustration of a degree of stabilization in the operating environment. Moreover and very importantly, DBRS considers the still-solid average customer-spend and stable transaction volumes as indications of the strength of the Amex franchise, which underpins the ratings. The resiliency of the Amex franchise is also illustrated by the Company’s continued ability to generate solid income before provisions and taxes (IBPT); which is more than sufficient to absorb credit costs and generate internal capital.

Asset quality improved during the quarter despite continuing elevation in the U.S. unemployment rate. Net charge-offs in the U.S. Charge Card receivables portfolio declined to 3.2% from 5.2% in Q2 2009, while the 30-days past due rate improved to 2.2% from 2.6%. In the World-Wide managed lending portfolio, net write-offs declined to 8.6% from 9.7% in the prior quarter and loans 30-days past due rate declined to 4.0% from 4.3%. In prudent fashion, despite the improving asset quality trends, Amex continued to build loan loss provisions. Total provisions for Q3 2009 were $1.2 billion. On an owned basis, world wide card member lending reserves totaled $3.4 billion at the end of Q3 2009, increasing coverage on an owned basis to 12.2% in U.S. card services and 10.7% in worldwide lending.

While DBRS acknowledges early indications of stabilization in the Company’s asset quality measures and the overall improved financial performance trends, DBRS maintains the Negative trend on the ratings. The Negative trend reflects DBRS’s cautious view of the state of the U.S. consumer at this point in the credit cycle, and also reflects DBRS’s concern that U.S. consumer spending will likely remain suppressed well into 2010. Accordingly, DBRS believes that Amex’s improved financial performance remains at risk should unemployment continue to increase beyond current forecasts, which could ultimately result in further weakened asset quality measures and pressured earnings. Further, the Negative trend considers DBRS’s view that the Company remains exposed to the potential recurrence of financial turmoil that could again lead to disrupted market activities and diminished investor confidence, which could particularly affect the Company, as a largely wholesale funded institution. That said, should the economic recovery in the U.S. hold and Amex continue to show improved asset quality metrics and solid financial performance, DBRS could revise the trend to Stable. DBRS will look for sustained improvement in quarterly performance to substantiate its views on the progress the Company is making.

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

The applicable methodologies are Rating Finance Companies Operating in the United States and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments, which can be found on the DBRS website under Methodologies

This is a Corporate (Financial Institutions) rating.