DBRS Confirms American Express Company 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 the strength of the Amex franchise and business model as demonstrated by the Company’s ability to grow billed business and loan balances during a period of slow economic growth. Moreover, Amex has achieved this growth while large card issuing bank peers struggle to grow their card portfolios. DBRS sees Amex’s strong business franchise as underpinned by its closed loop network and “spend-centric” model. The ratings are also supported by the substantial earnings generation capacity produced by the business model, sound risk management and its strong balance sheet.

The Stable trend reflects DBRS’s view that earnings will be solid in 2014, supported by growth in billed business volumes as consumer and business spending expands and the card member base grows. Further, DBRS sees earnings benefiting from prudent control of operating expenses while provisioning for loan losses is likely to increase due to growth in the lending portfolio, some normalization in credit and the absence of reserve releases.

Given Amex’s high rating for a finance company, upward rating pressure is unlikely at the current time. That said, a further expansion of retail deposits as a component of total funding and a strengthening international presence evidenced by an improved balance of revenue generated outside the US would be viewed favorably. Conversely, a sustained and notable weakening of earnings generation accompanied by a reduction in billed business, signaling a deterioration in the strength of the franchise, a deterioration in liquidity or substantial reduction in capital levels could have negative rating consequences.

DBRS considers Amex’s closed loop network a competitive advantage that not only supports revenue generation, but is also an important contributor to its strong risk management capabilities. The closed loop network provides the Company with informational advantages it leverages to bring value to card members as well as merchants, which builds brand loyalty and allows Amex to rationalize premium pricing. Moreover, the closed loop network provides Amex with information on card members and merchants, which is analyzed for patterns allowing Amex to react more quickly than other networks and issuers to identify instances of fraud. Indeed, Amex’s annual fraud loss rate has been stable at 3 basis points of total U.S. billed business volumes since 2008, and half the rate of its major global payment peers.

The premium pricing afforded by the closed-loop network combined with the “spend-centric” business model, which focuses on generating revenue primarily by driving spending on its cards and secondarily by finance charges and fees, drives the Company’s substantial earnings power. Amex targets affluent, prime quality card members that are high spending transactors and provides card members incentives to spend through its Membership Rewards program and superior card member service. The strength of this model was evident in 1Q14 when Amex reported billed business of $238.1 billion, a 7% year-on-year increase, while average card member spending grew 3% over 1Q13, both on a foreign exchange (FX) adjusted basis. As a result, revenues expanded 5% on an FX adjusted basis to $8.2 billion, the highest first quarter in Company history. DBRS views these solid increases, at a time when consumer and business confidence is still fragile and overall economic growth was impacted by abnormally severe winter weather in many parts of the U.S. as demonstrating both the depth and breadth of the Amex franchise and card member brand loyalty.

Importantly to the rating, Amex generates substantial and recurring pre-provision income (IBPT), which allows the Company to absorb credit costs across economic cycles while investing in the franchise and remaining capital accretive. Indeed, during the most recent recession this earnings ability allowed the Company to absorb the elevated credit costs associated with the downturn while remaining profitable every quarter. In 1Q14, provisions for loan losses absorbed 18% of DBRS-calculated adjusted IBPT, which totaled $2.65 billion.

Amex’s strong balance sheet continues to support the ratings. Credit metrics remain at or near cyclical lows while both liquidity and capital are sound and well-managed. At March 31, 2014, Amex maintained excess cash (defined by Amex as cash in excess of requirements necessary to fund day-to-day operations) totaling $15.5 billion compared to $12.1 billion of funding maturities for the next 12 months. Liquidity is further supported by Amex’s growing deposit base, which constitutes 43% of total funding. Importantly, the quality of deposits is improving with stable retail deposits becoming the predominant source of deposits. At March 31, 2014, direct retail deposits were 64% of total deposits, up from 30% at year-end 2010.

Regarding regulatory capital, at March 31, 2014, Amex reported a Common Equity Tier 1 ratio of 13.6% under Basel III transitional rules using the standardized approach; well beyond expected capital requirements.

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 (May 2008). Other applicable methodologies include: Global Methodology for Rating Banks and Banking Organisations (June 2012) and DBRS Criteria: Support Assessments for Banks and Banking Organisations (January 2014). All DBRS methodologies and criteria can be found on DBRS website under Methodologies.

[Amended on February 18, 2015 to reflect actual methodologies used.]

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
Rating Committee Chair: Elisabeth Rudman
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.