DBRS Confirms American Express Company at A (high), Revises Trend to Stable Following Q4 ‘09 Results

DBRS has today confirmed the ratings of American Express Company (Amex or the Company) and its related subsidiaries, including its Issuer & Long-Term Debt rating of A (high), following the Company’s Q4 2009 earnings results. Concurrently, DBRS has revised the trend on all ratings to Stable from Negative.

Today’s action follows Amex’s recently released Q4 2009 results evidencing continued improvement in overall financial metrics, improved trends in credit performance, and still solid capitalization and liquidity. In DBRS’s view, the improved results demonstrate Amex’s success in weathering the current financial crisis and economic downturn while protecting its overall strong franchise.

In revising the trend to Stable, DBRS recognizes the progress Amex has achieved in reducing risks in the balance sheet while protecting and enhancing the overall franchise. Since the start of the global financial crisis, Amex has prudently increased the size of its liquidity portfolio, taking certain and measured actions to reduce risk inherent in the charge-card and lending portfolios, and made significant progress in transforming the funding profile to be less reliant on short-term funding. Indeed, as of December 31, 2009, commercial paper outstanding has declined to $1.0 billion from $10.5 billion at December 31, 2007. Short-term funding as a percentage of total funding has declined to 2.5% as of Q4 2009 from 24.3% at year end 2007, and ended 2009 at a low 1.8% on a managed basis. In sum, DBRS views Amex as better placed today than it was last year, when the trend was revised to Negative.

Amex’s results indicated the resiliency of the franchise which is illustrated by the good momentum in billed business, increasing some 8% year-on-year and 10.2% on a quarter-linked basis. A 10.7% increase in average basic cardmember spending from Q3 2009 and a year-over-year increase in the number of transactions and average transaction size drove the increase in billed business. Moreover, DBRS views the growth in revenues and transaction metrics as further illustrating the strength of the franchise and the considerable underlying earnings power of the Company’s spend-centric model, both of which are key considerations in the current rating. 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.

Revenues at $6.5 billion remained stable during the quarter, while net income increased to $716 million. Amex benefited from stable margins and lower funding costs. Discount revenue increased 8% over Q3 2009, to $3.6 billion, driven by improved customer spend. Importantly, lower provision expense helped drive the improved net income. Provision expense declined to $748 million this quarter, as Q4 2009 become the first quarter since 2006 in which the dollar amount of provisioning was less than the dollar amount of write-offs.

Asset quality measures improved, despite ongoing stress in the U.S. labor market. Net charge-offs in the U.S. Charge Card receivables portfolio declined to a low 1.9% from 3.2% in Q3 2009, while the 30-days past due rate improved to 1.8% from 2.2%. In the world-wide managed lending portfolio, net write-offs declined to 7.3% from 8.6% in the prior quarter and loans 30-days past due rate declined to 3.6% from 4.0%. DBRS sees these encouraging trends in asset quality measures as an early indication of improved future credit performance.

Capital remains solid and will remain so post implementation of FAS 166 and 167. At year end 2009, Amex’s Tier 1 common was 9.8% and Tangible common equity to risk-weighted assets (TCE/RWA) was 9.7%. Post-implementation of FAS 166 and 167, the Company estimates the capital ratios on a pro-forma basis at December 31, 2009 would be Tier 1 common of 8.6% and TCW/RWA of 8.4%, respectively.

Amex continues to enjoy access to both the secured and unsecured credit markets. Funding and liquidity remain well-managed and solid. At the end of December 2009, the Company maintained $26 billion of excess cash and readily marketable securities, while funding maturities in 2010 are manageable at $20 billion. U.S. Deposits continue to increase, totaling $25.6 billion at the end of December 2009.

Notwithstanding the change in trend, certain risks remain. These include a return to negative economic growth in the U.S., the impact of the CARD Act, and other regulatory issues, it is DBRS’s view that Amex is well positioned to manage through these challenges. In DBRS’s opinion, the past 18 months have evidenced the flexibility in the Company’s business model, which allows the Company to mitigate the impact of higher credit costs, elevated funding costs and lower customer spend volume.

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.