DBRS Comments on American Express’s 1Q Earnings, Ratings unchanged–Senior at A (high), Stable Trend

DBRS has today commented that its ratings of American Express Company (Amex or the Company) and its related subsidiaries, including its Issuer and Long-Term Debt rating of A (high), remain unchanged following the Company’s 1Q10 earnings results. The trend on all ratings is Stable.

American Express reported net income of $885 million for the quarter ending March 31, 2010. Net income increased 103% from last year’s results, while total revenues, net of interest expense, remained stable when adjusted for the impact of FAS 166/167 at $6.6 billion. The overall very solid results were largely the result of higher customer spending, lower loss provisions, and reduced cost of funding.

DBRS view the quarter’s much improved results as validation of the strength of American Express’s franchise and its spend-centric model, both of which are key considerations underpinning the rating. During the quarter, Card billed business increased 12%, on a FX adjusted basis, to $161.0 billion while average cardmember spending increased 20% over 1Q09, also on a FX adjusted basis. DBRS sees the year-on-year increase in spend and average transaction size as further evidence of cardmember loyalty to the Amex brand. DBRS positively views Amex’s ability to generate strong volumes at a time when consumers are de-leveraging.

Asset quality metrics have also continued the improvement that began in the in 2H09. Net charge-offs in the U.S. Charge Card receivables portfolio declined to a low 1.7%, while the 30-days past due rate increased slightly, but remained a very low 1.9%. In the world-wide total lending portfolio, net write-offs fell to 7.0% and loans 30-days past due declined to 3.3%, both metrics improved by 30 basis points compared to the prior quarter. The overall improved credit performance in both the charge card and lending books led to a 48% reduction in provision expense, which was $943 million for the quarter. DBRS views the ongoing improvement in the asset quality metrics, given the still unsettled operating environment, as evidence of the strength in Amex’s risk management, and a demonstration that the proactive measures to remove risk from the balance sheet are solidly taking hold.

Importantly, American Express reported ongoing improvement in its funding and liquidity profile. At quarter end, excess cash and securities totaled $27 billion exceeding the $19.6 billion of funding maturities for the next 12 months. Deposits, which provide a low-cost source of funding, increased $1.8 billion and ended the quarter at $28.1 billion. Despite the impact of FAS 166/167, Tier 1 Capital remains solid at 9.8%, as the Company benefited from last year’s capital raising efforts and the high level of earnings retention.

The trend on all ratings is Stable. Although DBRS sees the risks associated with the still elevated unemployment situation and the ongoing regulatory uncertainties, DBRS views Amex as well positioned to manage these risks, while being solidly placed to continue to achieve solid performance as the environment improves.

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.