DBRS Comments on American Express’s 1Q11 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 and Long-Term Debt rating of A (high), remain unchanged following the Company’s announcement of 1Q11 results. The trend on all ratings is Stable.

Continuing the positive trend in financial performance of recent quarters, Amex’s 1Q11 results evidence of good momentum across the franchise and continue to show industry best credit performance. Amex reported its seventh consecutive quarter of improved earnings and its strongest first quarter in Company history. Amex’s net income totaled $1.2 billion, a 33% increase over the year-ago quarter, but largely unchanged on a linked-quarter basis. The improved year-on-year results were driven by a solid 7% increase in total revenues, net of interest expense. Importantly, revenue growth was underpinned by an impressive 14% increase in discount revenue to $3.9 billion on higher cardmember spending and increased transaction volumes, which DBRS sees as demonstrating the significant strength of the Company’s “spend-centric” business model. Expenses were up 19% year-on-year on higher cardmember rewards and services expense owed to the increase in billed business and an increase to the ultimate redemption rate estimate for the program. DBRS views the increased expense attributed to cardmember rewards positively, as it illustrates the strength of customer engagement and the value-added nature of the rewards programs. In addition, earnings benefited from lower provisions for losses, which totalled $97 million after consideration of a reserve release related to the lending portfolio. DBRS considers Amex’s ability to report increased revenues and income as illustrating the Company’s very solid underlying earnings generation ability.

Despite a tepid economic recovery, Amex reported impressive gains in both billed business, cards in force and average cardmember spend. On an FX adjusted basis, card billed business increased 15% to $187.9 billion, while average cardmember spend increased 13% over 1Q10. Importantly, demonstrating the broad strength of the franchise all business segments and geographic regions reported solid growth in billed business during the quarter. Moreover, total cards in force increased 5% illustrating the Company is realizing the benefits from the increased marketing spend over recent quarters. DBRS considers the notable growth in billed business, cards in force and spend, at a time when consumer and business confidence is still below pre-recession levels, as demonstrating the significant strength of the Amex franchise and cardmember loyalty to the brand.

Credit performance continued the positive trajectory. Within the U.S. Charge Card receivables portfolio net charge-offs increased modestly, but remained at a low 1.7%, while the 30-days past due rate remained a very low 1.8%. In the world-wide total lending portfolio, net write-offs, on a managed basis, declined 60 basis points from the prior quarter to 3.7%, a marked improvement from 7.0% a year ago. Moreover, loans 30-days past due declined to a very low 1.9%, indicating continuing improvement in credit costs in the future. DBRS considers the positive trends in credit performance and Amex’s ability to maintain credit metrics that are the best of the major industry participants as demonstrating Amex’s risk management acumen and sound servicing capabilities. Despite the reserve release, reserve coverage remains solid considering the positive credit trends. At March 31, 2011, reserve coverage of receivables 30-days past due was 263% in worldwide total lending.

DBRS views Amex’s financial profile as sound underpinned by a well-managed liquidity and funding profile and solid capital base. At March 31, 2011, excess cash and securities totaled $20.0 billion solidly in excess of the $17 billion of funding maturities for the next 12 months. Total U.S. deposits increased 7% during the quarter to $31.1 billion. Importantly, the Company continues to conservatively grow its deposit base by focusing on direct sourced deposits, while reducing broker sourced deposits. Capital is ample given Amex’s risk profile and the Company’s robust risk management culture. At the end of March 2011, the Tier 1 common ratio stood at 11.8% and tangible common equity to risk weighted assets (TCE/RWA ratio) was 11.7%.

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

The principal applicable methodology is Rating Finance Companies Operating in the United States. Other methodologies used include the Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments. Both 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
Approver: Alan G. Reid
Initial Rating Date: 2 May 2008
Most Recent Rating Update: 26 January 2010