DBRS Comments on American Express’s 2Q12 Earnings, Ratings Unchanged 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 2Q12 earnings. The trend on all ratings is Stable.

From DBRS’s perspective, Amex’s solid financial results illustrate the Company’s sound and resilient earnings generation ability, solid risk management acumen and well-managed liquidity and funding profile. Despite concerns regarding the strength of the U.S. economy and heightened uncertainties regarding the sovereign debt crisis in the Eurozone, Amex reported income from continuing operations of $1.3 billion in 2Q12, a 3% increase year-on-year. Amex’s results reflect solid revenue growth on record volumes and good cost containment. Total revenues, net of interest expense (on an FX adjusted basis) were 7% higher year-on-year in the quarter at $8.0 billion. Discount revenue increased by 5% to $4.5 billion, which in DBRS’s view illustrates the earnings generation power of the very strong franchise, a key consideration underpinning the rating.

During the quarter, Amex returned to more normalized levels of expense growth, with the completion of the benefits from the MasterCard and Visa settlement and diminishing reserve releases. As a result, total expenses were up 2% year-on-year at $5.6 billion, but excluding settlement proceeds, were 2% lower year-on-year. Cardmember rewards expense was 9% lower year-on-year, primarily due to the non-recurrence of a charge incurred in 2Q11 related to an increase in redemption patterns by U.S. cardmembers and higher weighted average cost per reward point. Excluding this charge, cardmember rewards and services expense in 2Q12 grew in line with the growth in billed business. Marketing and promotion expense was 3% lower compared to 2Q11, but remains within the Company’s historical range as a percentage of revenue reflecting continued investment in the franchise for future growth. DBRS considers Amex’s ability to adjust costs while delivering solid growth in billed business as illustrating good operating flexibility while also highlighting the continued focus of management on the expense base.

For the quarter, Amex reported growth in both billed business and average cardmember spend. On an FX adjusted basis, card billed business increased 9% year-on-year to $221.6 billion, the highest quarterly amount in Company history, while average cardmember spend increased 6% over 2Q11. As expected, while still recording positive growth, the Company experienced broad based slowing in the pace of year-on-year growth in billed business across all regions reflecting moderating economic growth and activity. Nevertheless, DBRS notes that the Japan/Asia and Latin America regions still recorded double-digit year-on-year growth while the U.S. reported solid growth of 9%. DBRS is mindful of the challenging environment in Europe, and therefore expected a reduction in the region’s growth rate, which at 4% in 2Q12 was still respectable. DBRS will continue to closely watch Amex’s ability to navigate through the downturn in Europe. Overall however, DBRS views the growth in billed business and spend, at a time when consumer and business confidence continues to be weak, as illustrating the depth and breadth of the Amex franchise and illustrative of cardmember brand loyalty.

Amex’s card industry-leading credit performance continued to trend positively. Within the U.S. Charge Card receivables portfolio, net charge-offs declined 30 basis points from the prior quarter to 2.0%. Importantly, given its leading indicator status, DBRS notes that 30-days past due rate remained a very low 1.7% and 20 basis points lower than the prior quarter. While the world-wide total lending portfolio grew modestly at 4% year-on-year, asset quality remains quite favorable. Indeed, in the world-wide total lending portfolio, net write-offs declined slightly quarter-on-quarter to 2.2%, and stood some 90 basis points lower than a year ago. Moreover, loans 30-days past were slightly lower at 1.3%. Although credit metrics are at all-time lows, provisions for loan losses increased 29% year-on-year to $461 million, but remain low by historical standards. The loan loss provision increase reflected 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 214% in U.S. Charge Card at June 30, 2012, and 202% in worldwide total lending.

In DBRS’s view, Amex’s well-managed liquidity and funding profile and solid capitalization are the foundations of the Company’s sound financial profile. At June 30, 2012, excess cash and securities totaled $16.3 billion, exceeding funding maturities for the next 12 months. Total U.S. Retail deposits were 4.5% lower quarter-on-quarter at $35.8 billion, but 13% higher than a year ago. Limited cash needs and debt issuances completed in the quarter resulted in Amex allowing the deposit base to decrease. Over the long-term, DBRS expects Amex to continue to grow the deposit base and does not view the quarterly reduction in deposits as an indication of any weakness in the franchise. Amex issued $2.5 billion of wholesale funding in 2Q12 including $2.0 billion of senior unsecured debt. Regarding capital, Amex maintains a solid cushion and has ample loss absorption capacity. At March 31, 2012, the Company reported a Tier 1 common ratio of 12.8% and tangible common equity to risk-weighted assets (TCE/RWA ratio) of 12.6%.

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: William Schwartz
Approver: Alan G. Reid
Initial Rating Date: 2 May 2008
Most Recent Rating Update: 4 May 2012

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