DBRS Comments on American Express’s 4Q11 Earnings, Senior at A (high), Trend Stable

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 4Q11 earnings. The trend on all ratings is Stable.

DBRS views Amex’s solid financial results as evidencing the Company’s sound earnings capacity which is underpinned by its powerful global franchise, as well as the well-managed balance sheet. To this end, despite heightened uncertainties regarding the strength of the global economy, Amex reported net income of $1.2 billion in 4Q11, a 12% increase year-on-year, but a slight decrease on a linked quarter basis. Importantly, for the full year, Amex reported record net income of $4.9 billion. The strong quarterly results reflect solid revenue growth on record volumes and good cost control. Total revenues, net of interest expense, on an FX adjusted basis, were 7% higher year-on-year in the quarter at $7.7 billion. Discount revenue increased by 8% to $4.3 billion, which in DBRS’s view illustrates the earnings generation power of the very strong franchise. Both of which are key considerations underpinning the rating.

During the quarter, Amex returned to more normalized levels of expense growth, as the benefits of the MasterCard and Visa settlement proceeds came to an end with the receipt of the final settlement payment from Visa and reserve releases diminished. As a result, total expenses were broadly flat year-on-year at $5.6 million, and excluding settlement proceeds, were slightly lower year-on-year. Importantly, the pace of growth in cardmember rewards and services expense slowed from prior quarters and was in line with the growth in billed business. Marketing and promotion expense was 12% lower compared to 4Q10, but remains within the Company’s historical range as a percentage of revenue reflecting continued investment in the franchise for future growth. DBRS sees Amex’s ability to adjust costs while delivering solid growth in billed business as illustrating good operating flexibility and the continued focus of management on cost control.

For the quarter, Amex reported growth in both billed business and average cardmember spend. On an FX adjusted basis, card billed business increased 11% to $219.0 billion, the highest quarterly amount in Company history, while average cardmember spend increased 9% over 4Q10. As expected, while still recording positive growth, the Company’s European segment experienced a slowdown in the pace of year-on-year growth in billed business, while all other regions recorded double-digit year-on-year growth. DBRS is mindful of the disruption in the European markets, and as such expected a reduction in the region’s growth rate. DBRS will continue to closely watch Amex’s ability to navigate through this downturn in Europe. Overall however, DBRS considers the increase in billed business and spend, at a time when consumer and business confidence is still below pre-recession levels, as demonstrating the depth and breadth of the Amex franchise and evidences cardmember loyalty to the brand.

Credit performance continues to demonstrate Amex’s sound risk management acumen and solid servicing capabilities. Within the U.S. Charge Card receivables portfolio net charge-offs increased slightly from the prior quarter, but at 1.9% are at historically low levels and well within DBRS’s tolerance level. Importantly, given its leading indicator status, DBRS notes that 30-days past due rate remained a very low 1.9% and marginally lower than the prior quarter. While the world-wide total lending portfolio grew modestly at 3% year-on-year, asset quality remains quite favorable. Indeed, in the world-wide total lending portfolio, net write-offs declined 30 basis points from the prior quarter to 2.3%, and now stand 210 basis points lower than a year ago. Moreover, loans 30-days past due were broadly stable at a low 1.5%. Despite the sound credit performance, provisions for loan losses increased 71% year-on-year to $409 million, but remain low by historical standards. The increase reflects reduced reserve release, the growth in the cardmember lending portfolio and the Company’s modest increase in risk appetite within the charge card portfolio. From DBRS’s perspective, reserve coverage remains solid considering the asset quality metrics. Reserve coverage of receivables 30-days past due was 213% in U.S. Charge Card at December 31, 2011, and 206% in worldwide total lending.

DBRS considers Amex’s financial profile as sound underpinned by a well-managed liquidity and funding profile and a solid capital base. At year-end, excess cash and securities totaled $18.2 billion, exceeding funding maturities for the next 12 months. Total U.S. deposits increased 15% during the quarter to $37.3 billion as the Company raised deposits to meet seasonal funding needs and replace maturing long-term debt. 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, 2011, the weighted average remaining maturity of the deposit book was lengthened to 22 months from 19 months in the prior quarter and the average rate at issuance was 30 basis points lower at 2.2%. With regards to capital, Amex maintains a solid cushion and has ample loss absorption capacity. At December 31, 2011, the Company reported a Tier 1 common ratio of 12.3% and tangible common equity to risk-weighted assets (TCE/RWA ratio) of 11.9%.

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

The principal applicable methodology is Rating Finance Companies Operating in the United States, which 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: Steve Picarillo
Approver: Roger Lister
Initial Rating Date: May 2, 2008
Most Recent Rating Update: June 17, 2011