DBRS Confirms American Express Senior Ratings at A (high), Stable Trend

DBRS Inc. (DBRS) has today confirmed the ratings of American Express Company (Amex or the Company), and its subsidiaries, including its A (high) Issuer and Long-Term Debt ratings. The trend on all ratings is stable. The rating confirmation reflects the Company’s strong business franchise, significant earnings generation ability, and well-managed liquidity profile. Importantly from a ratings perspective, Amex’s franchise continues to demonstrate strong momentum despite the still uncertain environment. Furthermore, the ratings consider the notable risk management acumen, which can be clearly illustrated by the best industry credit metrics.

DBRS views Amex’s strong franchise as a significant consideration underpinning the ratings. The franchise generates significant income before provisions and taxes (IBPT) which has allowed the Company the ability to absorb the elevated credit costs associated with the downturn and still remain solidly profitable. Furthermore, the ratings take in account the solid earnings momentum. To this end, during 1Q11, the Company reported net income of $1.2 billion, a respectable increase over the $1.1 billion recorded for the prior quarter, and importantly, a strong improvement over the $885 million recorded a year ago. DBRS views the Company’s ability to remain profitable in each quarter since the onset of the financial crisis as substantiation that the Company’s “spend-centric” business model, which underpins the resilient earnings power, is well-designed and flexible, allowing the Company to successfully navigate downturns in the economic cycle. DBRS expects earnings to continue their positive trend as the economic recovery advances, albeit at a tepid pace as the recovery is still less than certain. In DBRS’s view, maintaining this solid momentum may be a challenge given ongoing sovereign concerns in the Eurozone, recent turmoil in the Middle East and Africa and uncertainties regarding the sustainability of the global economic recovery.

The franchise has remained steadfast throughout the cycle. Transaction volumes have been resilient, declining only during the peak of the recession. Of note, transaction volumes have recorded double digit year-on-year growth for five consecutive quarters through 1Q11. Indeed, during the 1Q11, billed business increased 15%, on a foreign currency (FX) adjusted basis, to $187.9 billion, while average cardmember spending increased 13% over 1Q10, on an FX adjusted basis. The year-on-year increase in spending volume and average transaction size evidences noteworthy cardmember loyalty to the Amex brand, supporting the franchise and thereby the rating.

Of note, DBRS positively views Amex’s ability to increase volumes at a time when consumers continue to face headwinds from elevated unemployment, high gasoline prices, and still declining home prices. Billed business is a major driver in Amex’s “spend-centric” business model as it drives the Company’s discount revenue, the largest component of revenue. Accordingly, discount revenue increased to $3.9 billion or 14% compared to 1Q10.

The ratings consider Amex’s low-risk balance sheet lending discipline, its focus on prime customers, and risk management rigor. These key drivers have supported strong asset quality measures through the cycle. While credit performance weakened during the recession, Amex led the industry in showing signs of stabilization and subsequent improvement. Amex’s credit performance is the best in the industry. For the quarter ending March 31, 2011, Amex’s U.S. Card Services (USCS) charge-card net write-off rate was a low 1.7% unchanged from a year ago, while the 30-day past due rate remained at a very low 1.8%. In the worldwide total lending portfolio, net write-offs declined a noteworthy 330 basis points (bps) year-on-year to 3.7% and loans 30-days past due decreased to 1.9%, a 140 basis point improvement from a year ago. The overall improved credit performance in both the charge card and lending books led to a 90% reduction in provision expense, which was $97 million for 1Q11. DBRS sees the positive trajectory in credit performance and Amex’s ability to sustain best-in-class credit metrics as illustrating the strength of risk management. Moreover, DBRS views the positive performance as evidence that the proactive actions taken at the onset of the downturn to remove risk from the balance sheet have been effective. Given the outlook for an uneven economic recovery, DBRS sees managing credit costs as an ongoing challenge for Amex, similar to other financial institutions with significant consumer exposure.

Amex’s well-managed and evolving funding and liquidity profile offsets the tendency towards wholesale funding. This transformation is most clearly illustrated by the increase in deposits, which now, represent 33% of the funding stack. Moreover, the Company prudently maintains a sizeable liquidity portfolio, which, at quarter-end totaled $20.0 billion, exceeding the $17.3 billion of funding maturities for the next 12 months. Further, Amex has made significant progress in reducing its reliance on short-term funding. Indeed, short-term funding as a percentage of total funding has declined to a mere 3.5% from 16.0% at December 31, 2007. DBRS expects continued rebalancing of the funding profile, moving more towards reliable retail funding and deposits; however, given the heightened competition for deposits, this represents a medium-term task.

Amex’s capital position remains sound given Amex’s risk profile and robust risk management culture. At March 31, 2011, Tier 1 Capital remained solid at 11.8%, as the Company benefited from the high level of earnings retention. The quality of capital is high, as common equity comprises 100% of Tier 1 capital.

The Stable trend reflects DBRS’s view that despite the risks associated with the uneven and less than certain global economic recovery and ongoing regulatory uncertainties, DBRS considers Amex as well-positioned to manage these risks. Moreover, DBRS sees Amex as solidly-placed to continue in 2011 the positive momentum across the franchise established in 2010.

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 issuer and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steven Picarillo
Rating Committee Chair: Alan G. Reid
Initial Rating Date: 2 May 2008
Most Recent Rating Update: 26 January 2010