DBRS: Amex’s Strong 1Q14 Results Reflect Positive Operating Leverage

Summary:
• Amex reported a strong expansion in net income to $1.4 billion despite sequentially lower worldwide billed business growth.
• Earnings growth driven by positive operating leverage supported by a modest increase in loan balances and good operating cost control.
• DBRS rates American Express Issuer and Senior Debt at A (high) with a Stable trend.

DBRS, Inc (DBRS) views American Express Company’s (Amex or the Company) strong 1Q14 results as reflecting the strength of the franchise and flexibility of its spend-centric business model. Despite a slowing pace of growth in billed business, Amex reported a 12% year-on-year (YoY) increase in net income to $1.4 billion. Results were driven by positive operating leverage of 5% on solid revenue growth and good cost control.

In the quarter, on a foreign currency (FX)-adjusted basis, the pace of worldwide billed business growth decelerated modestly to 7% YoY from 9% in the prior quarter. Nevertheless, reflecting the strength of the Amex brand these solid volume growth rates outpaced those of Amex’s large bank card issuing peers. The sequentially slower pace of growth was primarily attributable to the U.S., and was more pronounced amongst the Company’s small business and corporate card members. Further, the abnormally severe winter weather across many regions of the U.S. in early part of the quarter was also a likely factor in the reduction in U.S. billed business. Indeed, Amex indicated that billed business volumes in the U.S. were stronger in the second half of the quarter. Outside the U.S., on an FX-adjusted basis, billed business grew 10% YoY anchored by double digit growth in Asia and Latin America and a modest upturn in Europe. DBRS sees the stronger pace of billed business growth outside the U.S. as illustrating the continuing success of the Company’s efforts to broaden its presence globally. Key to this strategy is the efforts of the Global Network Services (GNS) segment to expand card-issuing partnerships in key markets with strong bank partners that share Amex’s values. To this end, on an FX-adjusted basis, billed business growth in GNS was 15% YoY in 1Q14.

In 1Q14, Amex’s operating leverage benefited from solid revenue expansion but also disciplined cost control. Total revenues, net of interest expense totaled $8.2 billion, a 4% YoY increase. Discount revenues, the largest component of revenues, grew in line with billed business volumes, while net interest income expanded 8% to $1.3 billion on solid lending portfolio growth and stable net interest yield. Other commissions and fees grew 8% on higher delinquency fees and Loyalty Partner-related fees. 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, maintained yield and lower overall funding costs.

Consolidated expenses were 1% lower YoY at $5.5 billion. The primary driver of the reduction was a 4% YoY reduction in operating expenses, which is well within the Company’s target of growing operating expenses at less than 3% in 2014. DBRS notes that operating expenses were lower YoY across all reporting lines.

Capitalization at Amex remains sound underpinned by its strong organic capital generation. Despite returning 73% of net income to shareholders in 1Q14, Amex reported a Common Equity Tier 1 ratio of 13.7%, under Basel III transitional rules using the standardized approach. DBRS notes that Amex’s capital ratios benefited from Basel III transition rules which added approximately 50 bps to the Tier 1 Common ratio compared to prior regulatory requirements. On March 26th, the Federal Reserve Board announced that it had no objection to the Company’s 2014 Capital Plan, which included a proposed 13% increase in the quarterly dividend to $0.26 per share and up to $4.4 billion of share buybacks over the next four quarters.

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 primary 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: David Laterza
Approver: Roger Lister
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.