DBRS: Amex Results Lower YoY on Expected Discrete Items; Underlying Trends Solid Supportive of Rtngs

Summary:
• Amex reported 2Q15 net income of $1.5 billion, 4% lower than in the comparable period a year ago as the strengthening U.S. dollar and other discrete items impacted reported results.
• Underlying fundamentals remain solid with total revenues net of interest expense growing, on a foreign-currency (FX) adjusted basis and excluding business travel revenues in the prior year, and continuing cost control discipline.
• 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) 2Q15 underlying results as sound; with solid revenue growth and continuing disciplined cost control; all of which DBRS sees as supportive of the ratings. Amex’s reported results were lower year-on-year (YoY) as the strong U.S. dollar continues to dampen growth rates, while the year ago period results included the operating results of Business Travel and the gain on the Business Travel joint venture (JV) transaction. Reported results were also impacted by the recently renewed co-brand relationships and the costs associated with the Amex’s incremental spending on growth opportunities, which is in its early stages.

Once again, Amex delivered solid growth in billed business volumes despite a mixed global economy. Worldwide billed business volumes grew 6% YoY to $262.0 billion, on an FX-adjusted basis. Amex’s efforts to grow its international presence continues to bear fruit. International billed business volumes expanded by double digits, excluding Canada, which continues to be impacted by the expiration of the Costco Canada co-brand relationship at YE14. However, Amex noted that it is retaining over half of the out-of-store spend related to former Canadian Costco co-brand cards. While DBRS views these early results as a positive and evidence of Card Member loyalty, DBRS is mindful that these results are not indicative of the potential outcome with U.S. Costco due to possible differences in the outcome of the relationship. Meanwhile, U.S. billed business was higher by 5% YoY despite the continuing impact of lower gas prices and slowing of growth in the U.S. Costco portfolio as the relationship winds down and Amex reduces new card acquisition.

Total revenues net of interest expense were 5% higher YoY at $8.3 billion, adjusting for Business Travel revenues in the prior year, and the strengthening U.S. dollar. The aforementioned growth in billed business volumes and higher loan balances underpinned revenue expansion. Worldwide loan volumes were modestly higher as U.S. loan growth continues to outpace peers demonstrating the strength of Amex’s product offering and card member loyalty. Meanwhile, international loan volumes were lower YoY due to the strengthening dollar and the impact of the expiration of the Costco Canada co-brand relationship.

Expenses at Amex continue to be a focus for management and well-managed in DBRS’s view. Adjusted operating expenses, were 5% lower YoY, adjusted for Global Business Travel and well within the Company’s target growth rate. Marketing and Promotion (M&P) expense was notably lower YoY as the prior year period was abnormally higher as the Company invested a portion of the gain on the Business Travel JV transaction on growth opportunities. DBRS notes that the Company expects M&P to be higher in 2H15 as the Company accelerates investments in growth initiatives ahead of the U.S. Costco co-brand relationship expiring in early 2016.

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.