DBRS Confirms Issuer and Long-Term Debt of American Express Company at A (high), Stable Trend

DBRS, Inc. (DBRS) has today confirmed the A (high) Issuer and Long-Term Debt ratings of American Express Company (Amex or the Company), and its related subsidiaries. Concurrently, DBRS has confirmed the R-1 (middle) Short-Term Ratings. The trend on all ratings is Stable. Today’s rating action follows a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

The confirmation of the ratings reflects Amex’s strong operating performance during a period of uneven global economic growth and low interest rates. Despite below average growth in many key markets, Amex has delivered billed business and loan growth that has outpaced industry peers while consistently generating strong returns on equity. Ratings also consider Amex’s sound risk management and servicing capabilities and strong balance sheet that is supported by ample liquidity and sound regulatory capital. These positive rating factors are partially offset by a number of near-term challenges facing Amex, including the impact of the strengthening dollar, the loss of the Costco Wholesale Corporation (Costco US) co-brand card relationship, and elevated regulatory and litigation risk.

The Stable trend considers DBRS’s view that the strength of Amex’s spend-centric business model will provide the Company the flexibility to meet the challenges associated with the loss of the Costco US relationship, as well as the increasingly competitive payments landscape. While DBRS expects Amex’s near-term results to be affected by these headwinds, DBRS sees the Company’s long-term earnings capacity as remaining strong supported by its business model, leading market positon, and favorable industry fundamentals. Ratings could come under pressure by a sustained deterioration in financial results reflecting that Amex’s investments to support growth and offset the loss of the Costco relationship have not been successful, or if financial performance indicates that Amex is failing to respond to new disruptive technologies in the payments space.

Amex’s franchise remains strong supported by its well-established brand, significant card member loyalty and the benefits of its closed-loop network. Importantly, Amex continues to make significant investments in the franchise to capitalize on growth opportunities and position the Company for the evolving payments landscape. In DBRS’s view, the strength of the brand, the business model and the continuous investments result in a strong, defendable franchise that DBRS sees as ultimately navigating the near-term headwinds successfully.

While achieving revenue and earnings growth will be a challenge over the near-term due to the headwinds noted above, overall, DBRS sees the underlying earnings fundamentals of Amex as remaining resilient. Amex’s spend-centric model provides a natural hedge as lower revenues associated with reduced billed business volumes are partially offset by lower Card member rewards expense which is also driven by billed business volumes. Overall, DBRS expects Amex’s strong income before provisions and taxes generation will be sustained through the near-term and strong enough to easily absorb the likely normalizing of credit costs.

Ratings are supported by the Company’s strong balance sheet. Net write-off and delinquency rates remain at or near cyclical lows across all business segments. Liquidity remains well-managed with Amex maintaining excess cash and available securities that exceed the next 12 months of maturities. However, while diversified Amex’s funding continues to have a tendency towards wholesale funding. Importantly for the evaluation of the funding profile going forward will be the resiliency of Amex’s internet sourced deposit base in a rising rate environment.

Regulatory capital is sound with Amex reporting a fully phased-in Basel III common equity Tier 1 ratio of 13.1% at March 31, 2015. DBRS notes that Amex received a non-objection from the Federal Reserve on its 2015 CCAR Capital Plan submission. Reflecting Amex’s substantial earnings capacity, under the Fed’s severely adverse scenario, Amex generated the second highest level of pre-provision income as a percentage of average assets and was the most profitable bank holding company in the stress test. As a result, Amex reported the third highest Tier 1 common ratio of the bank holding companies participating in the stress test.

Consistent with other large U.S. financial institutions, DBRS has assigned an SA3 support assessment to American Express Company meaning that no systemic support is expected. As a result of the SA3, the final rating of American Express is equalized with the intrinsic assessment (IA) of American Express at A (high). The ratings across Amex and its operating subsidiaries are equalized reflecting the central and core nature of each subsidiary to Amex’s overall strategy and operations. Also, the ratings of American Express Canada Credit Corporation reflect a guarantee from American Express Credit Corporation.

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

The principal applicable methodology is the Global Methodology for Rating Finance Companies (October 2014). Other applicable methodologies include the Global Methodology for Rating Banks and Banking Organisations (June 2014), DBRS Criteria – Rating Holding Companies and Their Subsidiaries (January 2015), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2015), DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2015) and DBRS Criteria: Guarantees and Other Forms of Explicit Support (February 2015).
These can be found at: http://www.dbrs.com/about/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
Rating Committee Chair: Roger Lister
Initial Rating Date: May 2, 2008
Most Recent Rating Update: May 16, 2014