DBRS: Amex 4Q13 Earnings Underpinned by Good Expansion in Billed Business and Solid Cost Control

Summary:

• 4Q13 Earnings of $1.3 billion up YoY on good growth in billed business, solid cost control and the non-recurrence of one-time charges from 4Q12.
• Operating expenses (adjusted for one-time items), were flat YoY at $3.3 billion, beating the Company’s target for annual expense growth
• DBRS rates American Express Issuer and Senior Debt at A (high) with a Stable trend.

DBRS, Inc. (DBRS) considers American Express Company’s (Amex or the Company) 4Q13 financial results as demonstrating the strength of the Company’s spend-centric business model and overall brand. For the quarter, on an FX adjusted basis, billed business grew 9% YoY to $254 billion. Reflecting a global economy that is gradually strengthening, growth in billed business was reported across all regions with the JAPA region leading the way illustrating the success of the GNS segment in expanding card-issuing partnerships over the last number of years. Importantly, growth rates in the Global Commercial Services segment (GCS) have improved each quarter sequentially through 2013 illustrating improving business confidence. Moreover, growth is occurring at a time when many large U.S. bank peers are still challenged to grow card balances. Indeed, Amex reported a 3% YoY increase in worldwide lending balances.

For 4Q13, Amex reported net income of $1.3 billion up from $637 million a year ago benefiting from solid revenue expansion, solid cost control and the absence of one-time charges incurred in 4Q12. While Amex is not as reliant on net interest income (NII) as its peers, DBRS views favorably the improvement in NII generation driven by growth in lending balances, improved yield and lower overall funding costs.

Operating expenses totalled $3.3 billion in 4Q13, a 12% reduction YoY. Annual operating expenses were largely flat YoY, however, excluding the restructuring charges incurred in 4Q12, but were well within management’s target of less than 3% growth annually for 2013 and 2014. Demonstrating its operating flexibility, Amex allocated a portion of the cost savings to investing in the franchise. Marketing and promotion expense was higher YoY as the Company took advantage of opportunities to acquire new customers and drive spending on its products. Meanwhile, full year Card Member Rewards expense, adjusted for the charge incurred a year ago, grew in line with billed business growth.

Liquidity is solid. Amex continues to hold cash and readily available securities in excess of the next twelve months of term maturities while deposits are a larger component of funding than a year ago. Capitalization is sound with an estimated Tier 1 Common ratio under Basel I of 12.5%, up 60 bps from YE12.

From DBRS’s perspective, Amex’s strong and defendable franchise, sustainable earnings generation, solid risk management and well-managed balance sheet support the rating at its current level.

DBRS rates American Express Company, and its related subsidiaries, Issuer and Senior Debt at A (high) with a Stable trend.

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

The principal applicable methodology is the Rating Finance Companies Operating in the United States. All DBRS methodologies and criteria can be found on 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.

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

Lead Analyst: William Schwartz
Approver: Alan G. Reid
Initial Rating Date: 2 May 2008
Most Recent Rating Update: 1 July 2013

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