DBRS Comments on American Express Company’s 1Q13 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 announcement of the Company’s 1Q13 earnings. The trend on all ratings is Stable. For the quarter, Amex reported net income of $1.3 billion, a 2% improvement year-on-year (YoY).

Despite the slow economic growth globally, Amex reported billed business growth that was higher YoY across all businesses and geographies. Further, billed business growth outpaced the industry demonstrating the strength of the Company’s spend-centric model. For the quarter, on a foreign exchange (FX) adjusted basis, card billed business increased 7% to $224.5 billion, while average cardmember spending increased 4% YoY. Amex continues to make good progress in expanding its presence outside the U.S. Billed business outside the U.S. expanded 7%, on an FX adjusted basis, while cards in-force outside the U.S. grew 7% YoY.

Total revenues, net of interest expense, increased 5%, on an FX adjusted basis, to $7.9 billion, supported by strong cardmember spending as well as expansion of net interest income and cardmember fees. Discount revenue grew 4% YoY to $4.4 billion underpinned by billed business growth and higher average cardmember spend partially offset by a slight decline in the discount rate. Higher cardmember loans and a 30 basis point improvement in net interest yield to 9.5% drove a 10% increase in net interest income to $1.2 billion. Net card fee was up 7%, reflecting higher average fees per card largely due to a greater mix of premium products as well as increased pricing on certain products.

Amex continues to demonstrate good cost control with operating expense growth within the Company’s target of 3% annual growth. Indeed, for 1Q13, operating expenses were up 1% to $3.1 billion. While marketing and promotion expense was 2% lower YoY at $621 million, the Company continues to invest in the franchise with increased spending on member acquisition offset by a lower investment in support of the brand. Marketing and promotion expense remain healthy at 7.9% of managed revenues. Cardmember rewards expense grew in line with billed business at 4% to $1.5 billion, following the 4Q12 (true-up) adjustment of $212 million, after tax. DBRS considers Amex’s ability to control costs while generating solid growth that outpaces its industry peers in an uneven economy as reflecting the operating flexibility of the Company’s business model and management’s continued focus on the cost base.

Credit performance continues to be favorable with asset quality metrics at historical lows and the best in the industry. Within the U.S. Charge Card receivables portfolio, net charge-offs were up slightly quarter-on-quarter (QoQ) at a low 2.0%, but were 30 basis points (bps) lower YoY. Delinquencies (30-days past due) in U.S. Charge Card were broadly stable QoQ at a very low 1.9%. Credit metrics in world-wide total lending were broadly stable despite 4% portfolio growth. DBRS sees this as demonstrating Amex’s focus on lending to affluent customers and its adherence to its well-defined and controlled risk appetite. Net write-offs in the world-wide total lending portfolio declined slightly QoQ, but were 40 bps lower YoY at 1.9%. Moreover, loans 30-days past were essentially unchanged at 1.3%. While credit performance remains at historical lows, the provision for loan losses was 21% higher YoY at $497 million. The increase reflects a smaller reserve release compared to the comparable period a year ago. Reserve coverage remains solid with coverage of 30-day past due receivables at 180% in U.S. Card Services and 170% in worldwide total lending.

From DBRS’s perspective, the balance sheet remains strong and well-managed. Capital remains sound with a Tier 1 common ratio of 12.6%, while liquidity is sound with excess cash and marketable securities representing 123% of upcoming funding maturities.

In March 2013, the Federal Reserve announced its results for the Comprehensive Capital Analysis and Review (CCAR). Under the severely adverse scenario, Amex’s Tier 1 common and leverage ratios were 6.42% and 5.15%, respectively at their minimums and the Fed did not object to its planned capital actions. The Company subsequently announced an increase in its common dividend to $0.23 per share starting in 2Q13 subject to board approval and share repurchases of up to $4.2 billion through 1Q14.

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

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