DBRS Comments on American Express Company’s 3Q13 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 3Q13 results. The trend on all ratings is Stable.

Amex reported net income of $1.4 billion for 3Q13, a 9% improvement YoY. The solid results were underpinned by good revenue generation driven by healthy card member spend volumes, disciplined cost control and industry-leading credit performance. In a quarter which saw consumer and business confidence wane, DBRS sees the results as demonstrating the strength of Amex’s spend-centric business model and the substantial card member loyalty fostered by its investments in the brand including its leading Card Member Rewards program.

Total revenues, net of interest expense, increased 7%, on an FX adjusted basis, to $8.3 billion. Discount revenue, which comprises more than half of Amex’s total revenue, grew 5% YoY to $4.7 billion reflecting billed business growth partially offset by a slight decline in the discount rate and Global Network Services (GNS) billings growth which outpaced overall Company billings growth. Moreover, revenue generation benefited from solid net interest income expansion. Growth in average Card Member loans and lower funding costs drove a 9% increase in net interest income to $1.3 billion. Net card fees were up 4% primarily due to growth in proprietary cards in-force and higher card fees in International Card Services (ICS).

Cost control continues to be a key focus of management. For the quarter, operating expenses totalled $3.2 billion, a 4% increase YoY. While the quarter’s growth in operating expense is outside of the less than 3% growth for 2013 and 2014 target set by management; DBRS notes that for the nine months ending September 30, 2013, operating expenses were flat year-on-year, and well inside of the Company’s target. Further, operating expenses were impacted by higher professional services fees which were above their normal run rate due technology investments, regulatory and compliance costs and costs related to two transactions announced in the quarter. Amex continues to invest in the franchise to position the business for both the short-term and long-term. Marketing and promotion expense was 8% higher as the Company took advantage of opportunities to acquire new customers and drive spending on its products. Meanwhile, Card Member Rewards expense grew 8% YoY to $1.6 billion, in line with billed business growth.

Credit performance continues to be historically strong. Within worldwide lending, net write-offs at 1.7% were 20 bps lower YoY and 30 bps lower sequentially. Moreover, loans 30-days past due were stable QoQ at a very low 1.1%. DBRS sees the credit performance of the lending book as demonstrating the benefits of Amex’s focus on lending to prime affluent customers as well as Amex’s robust servicing capabilities and modest risk appetite. In U.S. Charge-card, net write-offs improved by 50 bps QoQ and 20 bps YoY to a cyclical low of 1.4%. Provisions for loan losses were 3% higher YoY at $492 million reflecting a smaller reserve release compared to 3Q12 partially offset by the benefit of lower write-offs. Worldwide Lending portfolio reserve coverage was broadly stable at 13.4x of monthly average write-offs which DBRS considers as solid and appropriate for the risk embedded in the portfolio.

Importantly in an uncertain economy, Amex’s business metrics continue to demonstrate the strength of the global franchise and substantial card member loyalty to the brand. On a FX adjusted basis, total billed business grew 9% YoY to $236.2 billion. DBRS notes that the YoY growth rate in billed business volumes accelerated across all business lines as well as geographies on a sequential basis. However, DBRS comments that given the uneven economic recovery that it is too early to know if the positive trajectory in growth rates is sustainable. Worldwide Lending loan portfolio grew 2% YoY reflecting higher card member spend volumes. DBRS notes that 3Q13 represents the tenth consecutive quarter of YoY Amex card member lending growth. In the U.S. lending portfolio, Amex grew loans by 3% at a time when most of its peers remain challenged to achieve loan portfolio growth.

Amex’s financial risk profile continues to be sound and well-managed. Liquidity is strong with excess cash exceeding the next 12 months of funding maturities. Total deposits increased 5% QoQ to $42.5 billion, and now constitute 43% of total funding compared to 30% at year-end 2010. The quality of deposits has improved with direct deposits comprising 57% of deposits. Regulatory capital is sound with a Basel I Tier 1 common ratio of 12.8%. Moreover, DBRS sees Amex as well-positioned for forthcoming regulatory requirements. On a fully phased in basis, the Company estimates its Basel III Tier 1 common ratio would have been approximately 30 bps lower at September 30, 2013 or 12.5%.

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

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