DBRS Comments on American Express’s 3Q 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 3Q10 earnings results. The trend on all ratings is Stable.

Amex recorded another quarter of solid net income, evidencing both the strength of the franchise and the strong earnings generated from the Company’s spend-centric business model, both of which are key considerations underpinning the rating. For the quarter, Amex’s income from continuing operations totalled $1.1 billion, which is an impressive 70% increase over the year-ago quarter and a 7.5% increase from the linked quarter. The results were driven by a 5% year-over-year increase in total revenues, net of interest expense, on a managed basis. Further, the Company’s well-managed risk profile led to lower credit costs as Amex continues to benefit from very solid asset performance. Indeed, provisions for loans losses totalled $373 million, a 68% improvement on the comparable period a year ago, and 43% lower than the prior quarter. DBRS considers Amex’s ability to remain profitable throughout the current cycle and report a fifth consecutive quarter of improved earnings as demonstrating the power of the Company’s underlying earnings generation ability and its sound credit management acumen.

Despite less than robust consumer spending and still low consumer sentiment, during the quarter, Amex reported noteworthy increases in both billed business and average cardmember spend. Card billed business increased 14% to $179.3 billion, the highest quarterly amount in Company history, while average cardmember spend increased 15% over 3Q09, on a FX adjusted basis. Importantly, all business segments and geographic regions reported solid growth in billed business during the quarter. DBRS views the solid growth in billed business and spend, at a time when consumer and business confidence is less than robust, as testimony to the broad strength of the Amex franchise and cardmember loyalty to the brand.

The results show improved credit quality despite a still uncertain macroeconomic environment. Net charge-offs in the U.S. Charge Card receivables portfolio were stable at 1.6%, while the 30-days past due rate remained a very low 1.7%. In the world-wide total lending portfolio, net write-offs, on a managed basis, decreased 90 basis points from the prior quarter to 5.1%, and loans 30-days past due declined to 2.5%. Indeed, credit metrics continue to be the best of the major industry participants. DBRS views the fourth consecutive quarter of improving credit performance, in the current unsettled environment, as demonstrating the impact of actions taken by Amex early in the downturn to remove risk from the balance sheet and Amex’s risk management acumen.

Amex’s liquidity and funding remain well-managed. At quarter end, excess cash and securities totaled $27.0 billion, exceeding the $18.1 billion of funding maturities for the next 12 months. Although total U.S. deposits remain unchanged from the prior quarter at $27.7 billion, Amex continues to improve the quality of the deposits by deemphasizing lower quality brokered deposits. At September 30, 2010, higher-quality retail savings accounts comprised 50% of total deposits, up from 46% at the end of 2Q10. Amex continues to generate good levels of organic capital. Capital increased during the quarter with Tier 1 common ratio standing at 11.7% and tangible common equity to risk-weighted assets (TCE/RWA ratio) of 11.5%.

While DBRS sees Amex as well-placed to manage the challenges inherent in the current environment, risks remain given the uneven recovery, stubbornly high unemployment, and the rapidly evolving regulatory environment.

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