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

DBRS, Inc. (DBRS) has today confirmed the ratings of American Express Company (Amex or the Company), including its subsidiaries, including it’s A (high) Issuer and Long-Term Debt ratings. The trend on all ratings is Stable. Today’s rating action follows Amex’s announcement of 1Q12 results and DBRS’s annual review of the Company.

The rating confirmation reflects the Company’s strong business franchise, substantial earnings capacity, and well-managed liquidity profile. Importantly to the ratings, Amex’s franchise continues to demonstrate strong momentum across all segments despite the still uncertain operating environment and concerns regarding the strength of the U.S. economic recovery. Furthermore, the ratings consider the notable risk management acumen, which is demonstrated by asset quality that continues to outperform industry peers. While DBRS recognizes the evolving funding profile of Amex, the ratings are constrained by the tendency towards wholesale funding, as well as the Company’s weighted exposure to the U.S. economy as some 70% of revenues are generated in the U.S. Moreover, although the strong credit card franchise is a key consideration in the ratings, DBRS views the “monoline” nature of the business as an additional constraint on ratings.

The ratings consider the sound earnings ability underpinned by the strong franchise. Amex generates substantial income before provisions and taxes (IBPT) which afforded the Company the ability to absorb the elevated credit costs associated with the most recent cycle and remain solidly profitable every quarter. Further, this solid earnings power allowed the Company to continue to invest in the business during the 2008/2009 financial downturn, the benefits of which were clearly illustrated by the solid and stronger-than-industry recovery from the recession in billed business, revenues and profitability. Moreover, the rating confirmation considers the earnings momentum. To this end, during 1Q12, the Company reported net income of $1.3 billion, the best first quarter in Company history on record with revenues of $7.6 billion. DBRS considers the Company’s ability to remain profitable in each quarter since the onset of the most recent financial crisis as substantiation that the Company’s “spend-centric” business model, which underpins the resilient earnings power. In DBRS’s view, however, maintaining the positive earnings growth may be a challenge, should the ongoing sovereign concerns in the Euro zone, and uncertainties regarding the sustainability of the global economic recovery impact spending in the U.S. or overseas.

The rating confirmation considers the momentum in transaction volumes. To this end transaction volumes recorded double digit year-on-year growth for nine consecutive quarters through 1Q12. Indeed, during 1Q12, billed business increased 13%, to $211.2 billion, while average cardmember spending increased 10% over 1Q11, both on a foreign currency (FX) adjusted. DBRS views these solid increases, at a time consumer and business confidence is still below pre-recession levels and consumers continue to deleverage, as demonstrating the depth and breadth of the Amex franchise and evidences cardmember loyalty to the brand.

Amex’s low-risk lending discipline, its focus on premium customers, and sound risk management rigor are additional factors that underpin the ratings. These attributes have supported strong asset quality measures through various economic cycles. To this end, while credit performance weakened during the height of the recession, Amex consistently outperformed the industry with lower credit metrics and was the first to show signs of stabilization and subsequent improvement. For the quarter ending March 31, 2012, Amex’s U.S. Card Services (USCS) charge-card net write-off rate was 2.3%, 40 basis points higher than the prior quarter, but still low by historic standards. In the $60.1 billion worldwide total lending portfolio, net write-offs were at all-time lows for Amex, with net write-offs at 2.3%. DBRS sees the strong credit performance and Amex’s ability to maintain best in class credit metrics as illustrating the strength of the Company’s risk management policies and procedures. Given the outlook for an uneven and tepid economic recovery, DBRS sees managing credit costs as an ongoing challenge for any financial institution with significant consumer and small business exposure.

From DBRS’s perspective, Amex’s evolving funding and liquidity profile is considered well-managed and offsets the tendency towards wholesale funding. This transformation is demonstrated by the increased presence of deposits in the funding stack. Indeed, at March 31, 2012, deposits account for 39% of total funding compared to 13.8% at year-end 2008. DBRS expects further rebalancing of the funding profile, moving more towards reliable retail funding and deposits; however, this represents a medium-term task. Further evidencing the well-managed liquidity profile, the Company prudently maintains a liquidity portfolio, which at quarter end totaled $20.3 billion, exceeding the $12.5 billion of funding maturities for the next 12 months.

DBRS considers Amex’s capital position as sound, given the Company’s risk profile, robust risk management culture and capital generation ability. At March 31, 2012, the Tier 1 common ratio stood at 13.4%, up from 12.3% at year-end 2011, and 11.8% a year ago. The strengthening in capital reflects solid earnings retention, employee benefit plans and a modest decline in risk-weighted assets partially offset by $233 million of share repurchases. Further demonstrating the strength and flexibility of Amex’s business model and balance sheet, the Company’s minimum Tier 1 common equity ratio was the third highest under the Federal Reserve’s stress tests completed this spring. DBRS notes that as a result, Amex received “approval” from the Federal Reserve to repurchase up to $4.0 billion of shares in 2012 and up to $1.0 billion of shares in 1Q13, and increase the quarterly dividend from $0.18 a share to $0.20 a share.

The Stable trend reflects DBRS’s expectations that Amex will continue to enjoy solid momentum across the business, despite concerns regarding the sustainability of the uneven global economic recovery. The Stable trend assumes that Amex will continue to advance the rebalancing of its funding profile to be more retail deposit oriented while continuing to hold a solid liquidity and capital position.

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 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: 17 June 2011

For additional information on this rating, please refer to the linking document under Related Research.