DBRS: Amex 4Q Results Higher on Investment Gain, Solid Growth in Revenues despite FX Headwind

Summary:
• Amex reported 4Q14 pre-tax income of $2.2 billion, up 12% year-on-year (YoY) reflecting solid revenue growth and good cost management discipline.
• Adjusting for foreign currency movement and non-recurring items, total revenues net of interest expense grew 5% YoY on higher card member spending and expansion of the loan portfolio.
• 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) 4Q14 financial results as solid, supported by good net revenue generation across business segments and regions, and a continuing focus on cost control. For 4Q14, Amex reported pre-tax income of $2.2 billion, which benefited from a $719 million pre-tax gain on the sale of the Company’s investment in Concur Technologies (Concur) offset by investments in the franchise. Importantly, Amex continues to generate strong returns, supported by its spend-centric business model and strong brand.

Consistent with Amex’s philosophy of utilizing one-time gains to invest in the franchise, Amex used a portion of the Concur gain to invest in growth initiatives designed to drive card member spending and acquire new card members. Indeed, marketing and promotion expense was higher YoY and sequentially as the Company focused much of its incremental investments on acquiring card members across its broad portfolio of products. Additionally, Amex used a portion of the gain to absorb a restructuring charge related to headcount reductions and reengineering actions that will improve operating efficiency and to fund the upfront costs of the renewal of the Delta Airlines co-brand partnership. DBRS views these investments as a prudent use of one-time capital generation that will position the Company to capitalize on future growth opportunities. To this end, DBRS considers Amex’s ability to consistently outperform its peers in the post-recession period as evidence that the benefits of prior investments are being captured by the Company.

Total revenues net of interest expense were up 7% YoY to $9.1 billion on a reported basis. However, underlying total revenues net of interest expense were $8.3 billion, 5% higher YoY, adjusting for the Concur gain, Business Travel revenues in the prior year, and the strengthening U.S. dollar. Underlying revenues benefited from higher card member spending and growth in net interest income. Billed business volumes were higher YoY across all business segments and regions, although DBRS notes the rate of growth decelerated modestly on a linked quarter basis across all regions with the exception of EMEA which was bolstered by the strengthening U.K. economy and higher billing growth in Germany. Latin America and Canada experienced the most notable slowdown in growth which was primarily due to slowing volumes in Canada as a result of the loss of the Costco Canada co-brand partnership. In the U.S. billings growth slowed, reflecting lower energy prices and subdued retail sales in December. Nevertheless, Amex once again reported billed business volume growth and loan growth in the quarter that outpaced its large U.S. bank peers while also maintaining industry leading asset quality metrics.

Amex continues to demonstrate good cost control discipline. In the quarter, operating expenses were up slightly YoY adjusted for the restructuring charge, Business Travel related expenses a year ago, and foreign currency movement. Meanwhile, annual adjusted operating expenses were essentially flat YoY, and well within management’s target of less than 3% growth annually for 2014. Positively, Amex continues to utilize the cost savings generated to invest in growth initiatives.

Amex’s balance sheet remains sound supported by strong asset quality metrics and strengthening regulatory capital. Worldwide lending net write-off rates and 30-past due rates improved modestly quarter-on-quarter to levels that are at or near historic lows. Meanwhile, capital continues to strengthen even with balance sheet growth and share repurchases. On a Basel III transitional basis, Amex reported an estimated Common Equity Tier 1 ratio of 13.1%, up 60 bps from year-end 2013.

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

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