DBRS: Amex 3Q Results Lower YoY on Discrete Items and Stronger Dollar; Region Performance Mixed

Summary:
• Amex reported net income of $1.3 billion for 3Q15, 14% lower than in the comparable period a year ago with higher marketing and promotion expense, the costs from recently renewed co-brand partnerships, and the strengthening U.S. dollar impacting reported results.
• By region, performance was mixed with the U.S. experiencing deceleration in billed business growth, while growth was solid internationally, on a foreign currency (FX) adjusted basis.
• 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) 3Q15 results as satisfactory with total revenues, net of interest expense, slightly lower year-on-year (YoY) at $8.2 billion, but up 3% adjusting for the impact of the strengthening U.S. dollar. The subdued expansion in revenues and higher expenses due to discrete items were the primary contributors to the reduction in net income from the year ago period.

As expected, certain expenses increased with Amex investing in the franchise to capture growth opportunities over the medium-term, position the Company for the shifting competitive environment, and address the upcoming expiration of the U.S. Costco partnership. Costs associated with recently renewed co-brand partnerships drove both Card Member Rewards and Card Member Service expenses higher YoY. Meanwhile, Marketing and Promotion (M&P) expense was 8% higher YoY, as the Company accelerated investments in growth initiatives to acquire new Card Members and increase the share of Card Member wallet through strengthened Card Member engagement and broadening merchant acceptance of Amex cards.

Within the U.S., YoY billings growth decelerated to 5% with lower gas prices contributing to smaller average transaction sizes and slowing spend growth amongst middle market corporate customers. Moreover, airline-related spending was lower on both consumer and corporate cards, which is consistent with the recent decline in airline ticket prices. Nonetheless, total transaction volumes were 7% higher, demonstrating that card member loyalty remains sound. Importantly, DBRS views the fundamentals of the U.S. business as remaining solid; loan growth once again outpaced large bank card issuing peers and average card member spending was higher than peers.

Internationally, billed business was up 8%, on an FX-adjusted basis, to $78.6 billion. Good growth in cards in force and solid growth in card member spending (FX-adjusted) were the primary drivers of the solid underlying performance. Growth rates in billed business volumes were stable in Europe with double-digit growth in the U.K. Uncertainties in China led to a modest reduction in the billed business growth rate in the Japan-Asia region to a still very strong 14%. Latin America-Canada experienced a 4% YoY decline in billed business volumes due to the impact of the Costco Canada co-brand relationship expiring at YE14. However, DBRS notes that Amex’s two largest Latin American markets, Mexico and Argentina, had strong growth. DBRS views positively the underlying expansion in billed business volumes outside the U.S. This provides evidence that the benefits of Amex’s recent investments in growth opportunities outside the U.S. are being captured.

Balance sheet fundamentals remain sound and supportive of the ratings. Credit performance remains at, or near, cyclical lows across all business segments. Liquidity is robust, with Amex in compliance with the Liquidity Coverage Ratio for the quarter. Capital continues to be sound with an estimated fully phased-in common equity Tier 1 capital ratio of 12.6% under the standardized approach.

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.