DBRS Ratings on American Express Unchanged after 3Q11 Results; Senior at A (high), Stable Trend

DBRS Inc. (DBRS) commented today that its ratings of American Express Company (Amex or the Company), including its A (high) Issuer and Long-Term Debt rating, are unchanged following the Company’s release of 3Q11 results. The trend on all ratings is Stable.

DBRS views Amex’s very solid results in a period of heightened uncertainty and weak consumer sentiment as evidence of the strength of the brand and validation of the Company’s “spend-centric” business model. For the three months ended September 30, 2011, net income was $1.2 billion, a 13% improvement on the year-ago quarter, but down slightly from the prior quarter. DBRS notes that the improved year on year performance was achieved despite the non-recurrence of the MasterCard settlement which added $150 million of quarterly pre-tax income over the last twelve quarters. Results benefited from a 9% increase in total revenues net of interest expense as well as notably lower loss provisions. Revenue growth was underpinned by a 12% increase in discount revenue to $4.2 billion, driven by higher cardmember spending and increased transaction volumes.

The Company’s improved financial performance was achieved despite higher expenses. Excluding the MasterCard settlement proceeds, expenses were 10% higher year-on-year. During this period, cardmember rewards and services expense increased 25% from 3Q10 attributed to growth in cardmember spending and a small increase in the assumed ultimate redemption rate (URR) reflecting higher engagement and higher redemption levels. While DBRS recognizes the negative income statement impact of the aforementioned, DBRS considers the increased cost of cardmember rewards as validating the value of this program to cardmembers, which leads to increased customer loyalty and a more prominent position in the consumer’s wallet. Ultimately, in DBRS’s view, the negative earnings impact of the rewards program is outweighed by the positives.

Despite ongoing concerns regarding the global economy, Amex reported impressive gains in billed business, cards in force and average cardmember spend. On an FX adjusted basis, billed business increased 13% year-on-year to $207.7 billion, but was largely unchanged quarter-on-quarter. Further, average cardmember spend increased 10% over 3Q10, also broadly unchanged from 2Q11. Amex continues to enjoy 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 8%, evidencing that the Company continues to capture the benefits of elevated marketing spend over recent quarters.

Amex’s best in industry credit performance continued in 3Q11. While net write-offs (NCOs) within the $39.8 billion U.S. Charge Card receivables portfolio increased 30 basis points (bps) from the prior quarter, NCOs remain a very low 1.8%. Meanwhile, the 30-days past due rate remained low at 2.0%. Given that NCOs in U.S. Charge Card have been lower than Amex’s historical levels, DBRS has a level of tolerance for an increase in credit costs as Amex adjusts its risk appetite to reflect the ever-changing environment. In the $58.2 billion world-wide total lending portfolio, NCOs declined for the ninth consecutive quarter to 2.6%, 50 basis points lower on a linked quarter basis, and a notable improvement from 5.1% a year ago. Moreover, the positive trend in delinquencies continued with loans 30-days past due declining 10 bps to a very low 1.5%. DBRS sees Amex’s ability to maintain credit metrics in an uncertain operating environment as demonstrating the sound risk management culture and sound servicing capabilities. The sound credit performance led to lower provisions for losses, which totalled $249 million, a 33% reduction year-on-year after consideration of a $400 million reserve release related to the lending portfolio.

Amex’s funding and liquidity profile remains sound and well-managed. At September 30, 2011, cash and securities totaled $21.6 billion, solidly in excess of the $19.1 billion of funding maturities for the next 12 months. Total U.S. deposits increased modestly during the quarter to $32.5 billion. Regarding capital, despite deploying $1.2 billion of capital for share repurchases, Amex’s capital ratios were largely unchanged at the end of September 2011. To this end, Amex’s Tier 1 common ratio stood at 12.3% and tangible common equity to risk weighted assets (TCE/RWA ratio) was 12.0%. 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 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: 17 June 2011