DBRS Comments on American Express Company’s 4Q12 Results, Senior Rating 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 4Q12 earnings. The trend on all ratings is Stable.

Amex reported net income of $637 million in the quarter, a 47% reduction YoY primarily driven by $594 million of after-tax one-time charges taken by the Company. The charges include a $287 million restructuring charge related to actions taken to streamline Amex’s cost structure and improve efficiency, a $95 million charge for cardmember reimbursement, and a $212 million charge for an adjustment to the Company’s Membership Reward liability reflecting a refinement to the Company’s estimation process for its ultimate redemption rate. Excluding these charges, Amex’s adjusted income from continuing operations was $1.2 billion in 4Q12, largely unchanged from a year ago. Importantly, in an operating environment that remains difficult, Amex reported solid revenue growth underpinned by growth in billed business and average cardmember spend. DBRS views Amex’s underlying financial results and solid business metrics as demonstrating the strength of the global franchise and the sound earnings capacity, which is derived from that franchise.

For the quarter, on an FX adjusted basis, card billed business increased 7% to $235.5 billion, while average cardmember spend increased 4% over 4Q11. Billed business growth in the U.S. slowed to 7% YoY from 8% in the prior quarter, while growth in other regions was up slightly or stable. Growth in Europe was 5% up slightly from the prior quarter supported by higher growth in Germany and the U.K. Overall, given uncertainties as to the pace of growth in many regions around the world, DBRS considers the increase in billed business and spend, as illustrating strong cardmember loyalty to the brand.

Positively, Amex achieved solid growth in revenues despite the uneven economic environment and the impact of Hurricane Sandy. For the quarter, total revenues, net of interest expense, on an FX adjusted basis, were 5% higher YoY at $8.1 billion. Discount revenue grew 6% YoY to $4.6 billion on billed business growth partially offset by a slight decline in the discount rate, the impact of the cardmember reimbursement, and an increase in contra-revenue items such as cash rebate rewards. Net interest income was 7% higher at $1.2 billion on higher average cardmember loans and a 20 basis point increase in net interest yield to 9.1%.

For the quarter, total expenses were 18% higher YoY at $6.6 billion primarily driven by the aforementioned charges. Adjusting for those items and the Visa settlement payment received in 4Q11, total expenses grew 2% YoY, and evidencing good underlying cost control. Marketing and promotion expense was 2% lower YoY at $722 million, but remained healthy at 8.9% of managed revenues. Excluding the charges discussed above, cardmember rewards expense grew 2% YoY in 4Q12, slower than growth in billed business partly due to a lower weighted average cost per point. The aforementioned charges result in operating expenses increasing 19% YoY, but absent these charges and the Visa settlement payment, operating expenses grew 3%. DBRS notes that on an adjusted basis, Amex generated positive operating leverage of 7.5% in 4Q12 and 6.3% for full year 2012. DBRS sees Amex’s ability to control the pace of growth in costs while generating solid growth in billed business in an uncertain environment as reflecting sound operating flexibility and management’s continued focus on the cost structure.

Asset quality metrics were stable and remain at historically low levels. Moreover, Amex’s credit metrics remain best in the industry indicating the sound risk management capabilities of the Company. Within the U.S. Charge Card receivables portfolio, net charge-offs were slightly higher quarter-on-quarter at 1.8%, but were 10bps lower YoY. DBRS notes that 30-days past due rate remained unchanged QoQ at a very low 1.8%. While the world-wide total lending portfolio grew modestly at 4% year-on-year, asset quality remains quite favorable demonstrating Amex’s adherence to its well-defined risk appetite. Net write-offs in the world-wide total lending portfolio increased a modest 10 bps on linked quarter basis to 2.0%, but are 30 basis points lower than a year ago. Moreover, loans 30-days past were broadly stable at a low 1.2%. Although credit performance remained quite favorable, provisions for loan losses increased 56% year-on-year to $638 million. The increase reflects a small reserve build in the quarter as compared to a reserve release in the comparable period a year ago. Reserve coverage remains solid with coverage of 30-day past due receivables at 190% in U.S. Card Services and 182% in worldwide total lending.

Amex’s funding profile continues to be well-managed supported by a growing direct deposit franchise and diverse wholesale funding platform. Total U.S. deposits grew 7% in the quarter to $39.7 billion. Importantly, Amex continues to grow deposits while maintaining pricing discipline. At December 31, 2012 the average rate at issuance was 2.1%, unchanged from the prior quarter. Amex issued $1.3 billion of unsecured notes and $1.8 billion of asset-backed notes in the quarter demonstrating good access to capital markets. Further, during 4Q12, Amex completed a debt exchange which will lower the Company’s overall funding costs and support earnings. The Company exchanged $1.1 billion of its 8.125% notes maturing in May 2019 and $800 million of its 8.15% notes due in March 2038, for $1.3 billion of 10-year notes at a rate of 2.65% and $1.1 billion of 30-year notes with a coupon of 4.05% and cash.

Through share repurchases and dividends, Amex returned 98% of capital generated in 2012 to shareholders. DBRS notes that this was in line with the Company’s capital plan and its 2012 CCAR submission to the Federal Reserve. Nonetheless, capital levels remain sound with ample loss absorption capacity. At December 31, 2012, the Company reported a Tier 1 common ratio of 11.9% and tangible common equity to risk-weighted assets (TCE/RWA ratio) of 11.7%.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]