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

DBRS, Inc. (DBRS) has today confirmed the ratings of American Express Company (Amex or the Company) and its subsidiaries, including its A (high) Issuer and Long-Term Debt ratings. The trend on all ratings is Stable. Today’s rating action follows a detailed review of the Company’s operating performance, financial fundamentals, and future prospects.

The ratings consider Amex’s strong business franchise that is underpinned by its closed loop network and “spend-centric” model. The ratings are also supported by the substantial earnings capacity generated by the franchise, sound risk management that contributes to above-peer asset quality performance, and its well-managed liquidity profile. While a leader in the global payments industry, constraining the ratings are the Company’s high, albeit improving reliance on wholesale funding, as well as, the “monoline” nature of its business.

DBRS views Amex’s closed loop network as providing a substantial competitive advantage. Amex’s position in the full value chain within the global payments industry allows the Company to leverage the economic, structural and informational advantages it gains from this position to bring value to cardmembers as well as merchants, which builds brand loyalty and allows Amex to maintain premium pricing. This premium pricing combined with the Company’s “spend-centric” business model is the foundation of the Company’s substantial earnings generation power.

Amex generates significant and recurrent income before provisions and taxes (IBPT) which allowed the Company to navigate the 2008/2009 financial crisis and absorb the elevated credit costs associated with the downturn while remaining profitable every quarter. The Company’s largest component of revenue, discount revenue, is driven by overall volume of transactions, while industry peers are primarily reliant on cardholder balances incurring finance and fee related charges.

Despite slow economic growth, Amex grew revenues 5% on a foreign-currency (FX) adjusted basis in 1Q13 to $7.9 billion, the highest first quarter in Company history. Revenue growth was driven by a 7% year-over-year (YoY) increase in billed business to $224.5 billion, while average cardmember spending increased 4% over 1Q12, both on an FX adjusted basis. DBRS views these solid increases, at a time when consumer and business confidence is still fragile as demonstrating both the depth and breadth of the Amex franchise and cardmember brand loyalty. In DBRS’s view, however, sustaining positive earnings growth may be a challenge, if consumer and business confidence remains weak limiting spending in the U.S. or overseas. Indeed, DBRS would view additional prudent international revenue diversification positively with approximately 70% of revenues currently generated in the U.S.

Amex has made good progress towards controlling costs and strengthening operating leverage. In 2012, Amex set a three year target of less than 3% annual growth in operating expenses and the return of its efficiency ratio (adjusted expenses-to-managed revenues) to its pre-financial crisis level of 67%. For 2012, operating expenses, excluding the restructuring charge, grew 3%, while the efficiency ratio improved to 71% from 75% in the prior year. DBRS notes that these favorable trends continued in 1Q13. DBRS sees the Company as continuing to demonstrate solid cost control as it leverages its global scale, digital and virtual capabilities to streamline processes while reducing headcount and physical locations.

Credit performance remains strong and best in the industry, which DBRS views as illustrating the strength of the Company’s risk management policies and procedures. For the quarter ending March 31, 2013, Amex’s U.S. Card Services (USCS) charge-card net write-off rate was 2.0%, 20 basis points higher than the prior quarter, but still low by historic standards. In worldwide lending net write-offs were a very low 1.9%. Moreover, credit losses in Global Merchant Services and Global Corporate Services continue to be minimal despite the challenging environment. While there have been indications that the economic recovery is strengthening, given the still fragile nature of the recovery, DBRS sees managing credit costs as an ongoing challenge for any financial institution with significant consumer and small business exposure.

DBRS considers Amex’s financial risk profile as sound supported by a well-managed funding and liquidity profile. Although Amex’s funding profile is still predominately wholesale funded, which is a limiting factor in the ratings, the Company continues to shift its funding profile to a more deposit-oriented model. To this end, deposits accounted for 41% of total funding at the end of March 2013, compared to 30% at December 31, 2010. Importantly, the quality of deposits is improving with stable retail deposits becoming the predominant source of deposits. At March 31, 2013, direct retail deposits were 53% of total deposits, up from 30% at year-end 2010. Further evidencing the well-managed liquidity profile, the Company prudently maintains a liquidity portfolio, which at quarter end totaled $20.9 billion, well exceeding the $17.0 billion of funding maturities for the next 12 months.

Amex’s capital position remains sound. At March 31, 2013, the Tier 1 common ratio stood at 12.6% and a tangible common equity ratio of 12.4%. Given the Company’s sound capital generation ability, modest risk profile and high quality capital base, DBRS sees Amex as well-placed to meet forthcoming regulatory capital requirements. Based on Amex’s current interpretation of Basel III, the Company estimates that its Tier 1 common ratio under the proposed rules would have been 20 basis points lower at March 31, 2013.

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

The applicable methodology is Rating Finance Companies Operating in the United States. Other applicable methodologies include Global Methodology for Rating Banks and Banking Organisations and DBRS Criteria: Intrinsic and Support Assessments. These can be found at: http://www.dbrs.com/about/methodologies

[Amended on June 17, 2014, to reflect actual methodologies used.]

The sources of information used for this rating include the company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: William Schwartz
Rating Committee Chair: Roger Lister
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.