DBRS Comments on American Express’s 2Q11 Results, Senior at A (high), Stable Trend

DBRS Inc. (DBRS) has today commented that the ratings of American Express Company (Amex or the Company), including its subsidiaries, including its A (high) Issuer and Long-Term Debt ratings, are unaffected following the Company’s release of 2Q11 earnings. The trend on all ratings is Stable.

Amex’s results continue to evidence a strong balance sheet, the strong revenue generation capability of the franchise and continued industry best credit performance. Amex recorded its strongest second quarter in Company history. For the three months ended June 30, 2011, income from continuing operations was $1.3 billion, a 27% improvement on the year-ago quarter and 10% higher on a linked quarter basis. Results benefited from a solid 12% increase in total revenues net of interest expense as well as significantly lower loss provisions. Importantly, revenue growth was underpinned by an impressive 16% increase in discount revenue to $4.3 billion. This increase was driven by higher cardmember spending and increased transaction volumes, which DBRS views as demonstrating the strength of the Company’s “spend-centric” business model.

Importantly, the very solid results were achieved despite expenses which increased 21% year-on-year. The higher expenses were driven by a 35% increase in cardmember rewards and services expense due to the increase in cardmember spend, higher redemption rates, and a shift in redemption to options with higher costs. While there is a negative impact on the income statement, DBRS views increased cost of cardmember rewards as validating the value of this program to cardmembers. Moreover, this further illustrates the strength of customer engagement, which builds loyalty and drives additional cardmember spend.

In a difficult but slowly recovering economy, Amex reported impressive gains in both billed business, cards in force and average cardmember spend. On an FX adjusted basis, billed business increased 15% to $207.6 billion, while average cardmember spend increased 11% over 2Q10. Moreover and importantly, DBRS notes that the billed business in 2Q11 was the highest quarterly total in Company history, demonstrating the prominent presence of the card in the customer’s wallet.

Once again, Amex enjoyed positive underlying trends in all business segments and geographic regions, all of which reported solid growth in billed business during the quarter. Total cards in force increased 6%, 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, while the recovery in consumer and business spending remains uneven, as demonstrating the significant strength of the Amex franchise and cardmember loyalty to the brand.

Positive trends in credit performance were again evident in the charge-card and lending portfolios. Within the $19.2 billion U.S. Charge Card receivables portfolio net charge-offs declined 20 basis points (bps) from the prior quarter to a low 1.5%, while the 30-days past due rate remained a very low 1.7%. In the $58.7 billion world-wide total lending portfolio net write-offs declined 60 basis points from 1Q11 to 3.1%, a notable improvement from 6.0% a year ago. Moreover, loans 30-days past due declined 30 bps to a very low 1.6%, indicating continuing improvement in credit costs in the future. DBRS sees the continuing positive trajectory in credit performance and Amex’s ability to maintain credit metrics that are the best of the major industry participants in an uncertain operating environment as demonstrating Amex’s sound risk management culture and sound servicing capabilities. The improved credit performance led to lower provisions for losses, which totalled $357 million, a 45% reduction year-on-year after consideration of a $400 million reserve release related to the lending portfolio.

DBRS views Amex’s liquidity and funding profile as well managed. At June 30, 2011, cash and securities totaled $20.0 billion solidly in excess of the $16.9 billion of funding maturities for the next 12 months. Total U.S. deposits increased modestly during the quarter to $31.6 billion. Importantly, the Company continues to conservatively grow its deposit base by focusing on direct sourced deposits, while reducing third-party sourced deposits. Regarding capital, at the end of June 2011, the Tier 1 common ratio stood at 12.3% and tangible common equity to risk weighted assets (TCE/RWA ratio) was 11.9%. Given Amex’s solid earnings capacity, resilient performance through the most recent cycle and sound capital position, DBRS views Amex as well-placed for forthcoming changes in regulatory capital requirements.

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: Roger Lister
Initial Rating Date: 2 May 2008
Most Recent Rating Update: 17 June 2011