DBRS Comments on American Express’s 4Q10 Earnings, Ratings Unchanged–Senior at A(high), Stable Trend

DBRS Inc. (DBRS) has today commented that its ratings of American Express Company (Amex or the Company) and its related subsidiaries, including its Issuer & Long-Term Debt rating of A (high), remain unchanged following the Company’s announcement of 4Q10 results. The trend on all ratings is Stable.

Amex’s results continue to evidence good momentum across the franchise and credit performance. To this end, Amex’s income from continuing operations totalled $1.1 billion, which is a noteworthy 50% increase over the year-ago quarter while a slight decrease on a linked-quarter basis. During the quarter the Company booked a $113 million pre-tax restructuring and other reengineering charge related to the realignment and consolidation of the Company’s global servicing network. The improved year-on-year results were driven by a 4% increase, in total revenues, net of interest expense, on a managed FX basis. Importantly, revenue growth was underpinned by a 12% increase in discount revenue to $4.1 billion, which DBRS sees as demonstrating both the strength of the franchise and the significant earnings generated by the Company’s spend-centric business model, both of which are key considerations underpinning the rating. Further, the Company’s well-managed risk profile resulted in lower credit costs as Amex continues to benefit from positive trends in asset performance. Indeed, provisions for losses totalled $239 million, a 68% improvement on the comparable period a year ago, and 36% to 3Q10. DBRS considers Amex’s ability to increase revenues and report a sixth consecutive quarter of improved earnings as illustrating the power of the Company’s underlying earnings generation ability and its prudent management of balance sheet risk.

During the quarter, in the face of lingering headwinds for consumers, Amex reported impressive increases in both billed business and average cardmember spend. On an FX adjusted basis, card billed business increased 14% to $197.7 billion, the highest quarterly amount in Company history, while average cardmember spend increased 13% over 4Q09. Importantly, all business segments and geographic regions reported good growth in billed business during the quarter evidencing good momentum across the franchise. DBRS considers the notable growth in billed business and spend, at a time when consumer and business confidence is still less than robust, as demonstrating the broad strength of the Amex franchise and cardmember loyalty to the brand.

Credit quality continued the positive trajectory seen in the past five quarters. Within the U.S. Charge Card receivables portfolio net charge-offs declined modestly to 1.4%, while the 30-days past due rate remained a very low 1.5%. In the world-wide total lending portfolio, net write-offs, on a managed basis, decreased 80 basis points from the prior quarter to 4.3%, and now stands 300 basis points lower than a year ago. Moreover, loans 30-days past due declined to 2.1%, indicating further improvement in credit costs in the future. DBRS considers the improving credit performance and Amex’s ability to maintain credit metrics that are the best of the major industry participants as evidencing Amex’s risk management acumen and sound servicing capabilities. Reserve levels remain solid considering the positive credit trends. Reserve coverage of receivables 30-days past due was 66% in U.S. Charge Card at December 31, 2010, and 287% in worldwide total lending.

DBRS views Amex’s liquidity and funding as sound and well-managed. At year end, excess cash and securities totaled $20.0 billion, on level with funding maturities for the next 12 months. Total U.S. deposits increased 5% during the quarter to $29.0 billion. Importantly, the Company continues to conservatively grow its deposit base focusing on longer-term deposits and avoiding uneconomical pricing. To this end, at December 31, 2010, the weighted average remaining maturity of the certificates of deposits book was 19 months and average rate at issuance was 2.5%, both relatively stable to the prior quarter. Capital remains solid, but declined during the quarter owed to higher asset levels reflecting the seasonal increase in receivables and loans due to higher spending in the quarter. At December 31, 2010, Tier 1 common ratio stood at 11.1% and tangible common equity to risk weighted assets (TCE/RWA ratio) was 10.7%.

Note:
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.

The sources of information used for this rating include the company documents. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steven Picarillo
Initial Rating Date: 2 May 2008
Most Recent Rating Update: 26 January 2010

For additional information on this rating, please refer to the linking document below.