DBRS: Amex Underlying Volumes and Revenue Solid despite Strong USD, Costco Canada, Lower Gas Prices

Summary:
• Amex reported 1Q15 net income of $1.5 billion, a 6% year-on-year (YoY) improvement with lower credit costs and good operating cost control offsetting the impact of the renewals of certain co-brand relationships.
• Underlying revenues were up 5% YoY excluding Global Business Travel revenues in the prior year period and adjusted for FX movements.
• 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) 1Q15 results as solid, demonstrating the strength of the franchise and business model in a challenging operating environment. Results were impacted by the strengthening U.S. dollar which continues to dampen growth rates, the costs of recently renewed co-brand relationships, and tepid global economic growth. Positively, asset quality remains the best in the industry while pre-provision earnings continue to be strong and liquidity and capital are ample; all of which are supportive of its ratings.

Despite an uneven global economy, Amex reported solid worldwide billed business growth of 7% YoY to $245.6 billion, on an FX adjusted basis. Lower gas prices and tepid retail sales resulted in a modest reduction in the U.S. Card Services (USCS) billed business growth rate but still outpaced most of the large U.S. banking peers. Global Commercial Services reported 4% YoY growth in billed business volumes, the lowest growth rate since 1Q13. DBRS notes that the lower growth rate in corporate cards spending is consistent with U.S. economic data indicating a slowing pace of corporate spending and investment. As such, DBRS does not view the deceleration in corporate card spending as an indication of a weakening in Amex’s strong position in the corporate card space. Nevertheless, DBRS will review data over the coming quarters to ascertain whether this slowing is a sign of a sustained slowdown in corporate spending volumes or just a one quarter anomaly. International Card Services growth slowed primarily due to the notable slowdown in Latin American and Canada (LACC) region. Moreover, the expiration of the Costco Canada relationship at year-end 2014 has impacted Canadian volumes with LACC billed business down 4% YoY.

Total revenues net of interest expense at $7.95 billion were 3% lower YoY on a reported basis. Underlying total revenues net of interest expense, however, were 5% higher YoY, adjusting for Business Travel revenues in the prior year, and the strengthening U.S. dollar. DBRS notes that underlying revenue growth is consistent with the prior quarters demonstrating the strength of Amex’s spend centric model and the benefits of the Company’s investments to drive card member spending and build card member loyalty.

Amex continues to demonstrate good operating cost control discipline partially mitigating the earning pressure of co-brand partnership renewals. Adjusted operating expenses, were slightly lower YoY at $2.7 billion, adjusted for Global Business Travel and well within management’s target of less than 3% growth annually for 2015. Card member reward and service expenses were higher YoY due to the higher costs and increased payments to co-brand partners associated with the renewed co-brand relationships. Seasonally lower Marketing and Promotion expense was higher 4% YoY though the Company plans to accelerate investments in growth initiatives later this year ahead of the U.S. Costco relationship ending in early 2016.

Reflecting normal seasonality, worldwide card member loans were lower sequentially, but were 7% higher YoY in USCS. Once again, Amex outpaced its U.S. bank peers in loan growth demonstrating the strength of the brand which is underpinned by its broad range of products. The sequential decline in loan and receivable balances along with a charge card reserve build in the year ago period resulted in a larger reserve release YoY and lower provisioning for loan losses, which provided a lift to earnings.

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.