DBRS Confirms Issuer and Long-Term Debt Rating 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 confirmed the R-1 (middle) Short-Term Debt ratings. The trend on all ratings is Stable. The rating action followed a detailed review of the Company’s operating results, financial fundamentals, and future prospects.

The confirmation of the ratings reflects DBRS’s view that Amex’s franchise has remained intact despite the loss of co-brand card relationships and that the Company will successfully execute on its cost restructuring plan and business growth initiatives. The ratings of Amex are anchored by the strength of Amex’s franchise, which is underpinned by the Company’s leading market position in the global payments industry, the competitive advantage inherent in its closed-loop network, and the diversified mix of products and services. The resiliency of the Company’s earnings power through both economic and business cycles is also a key factor in the ratings. The ratings also consider Amex’s solid risk management capabilities, management’s track record in navigating the Company through challenging business environments, and a 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 loss of the U.S. Costco co-brand card relationship, intense competitive environment in the cards business, regulatory mandates and litigation risk.

The Stable trend considers DBRS’s view that Amex’s 2016 earnings will be lower year-on-year due to the loss of the U.S. Costco co-brand relationship, heightened marketing spend and restructuring charges. Nonetheless, DBRS anticipates the Company’s long-term earnings generating capacity to persist as a result of its growth initiatives across all businesses, disciplined expense management and credit underwriting, as well as favorable long-term fundamentals in the payments industry. Ratings could come under pressure by a sustained deterioration in financial results reflecting that Amex’s expectations of revenue growth and expense savings initiatives do not materialize. Furthermore, if financial performance indicates that Amex is failing to respond to aggressive competition, regulatory changes in Europe and Australia, or new disruptive technologies in the payments space, downward ratings pressure could result. A notable and sustained deterioration in credit performance indicating a change in the Company’s risk appetite could also have negative implications for the ratings.

In DBRS’s view, Amex’s franchise remains strong supported by its well-established brand, Card Member loyalty and its closed-loop network that provides added flexibility to rapidly adopt to the evolving payments landscape and deliver value to merchants, consumers and businesses. Despite the still challenging global economic environment, DBRS views management’s goal of achieving revenue growth of approximately 5% CAGR during the next two years, after adjusting for FX and the Costco related revenue, as reasonable given recent trends and Amex’s increased focus on growth opportunities. From DBRS’s perspective, this revenue goal, coupled with the Company’s aim to reduce its addressable cost base by 7%, or $1 billion by the end of 2017, bodes well for achieving positive operating leverage and earnings growth. Indeed, DBRS sees 1Q16 as providing very early evidence of success in the Company’s initiatives with Amex generating total revenues net of interest expense of $8.1 billion, up 5% YoY adjusted for FX and the U.S. Costco portfolio, compared to 4% in 4Q15 and 3% in 3Q15.

Ratings are supported by the Company’s strong balance sheet and its best in class risk management capabilities. U.S. Consumer Services (USCS) lending net write-off rate of 1.4% in 2015 remains at historic lows, well below its peak of approximately 10% in 2Q09 and it is nearly half of the industry average of about 2.9%. In 1Q16, the USCS lending net write-off rate was 1.5% stable from the same period a year ago. DBRS has tolerance for a gradual increase in credit metrics to more normal levels. While Amex continues to focus on growing its revolving card receivables portfolio, in DBRS’s view, the loan portfolio is well positioned to navigate through the next credit cycle given the Company’s focus on prime, affluent transactors, as well as the Company’s strong servicing capabilities.

Liquidity remains well-managed with Amex maintaining excess cash and available securities that exceed the next 12 months of maturities, while the Company is compliant with the Basel III liquidity coverage ratio (LCR) at March 31, 2016. Amex’s solid deposit-gathering capability provides an important additional layer of liquidity, which is becoming a more substantial part of the funding profile. At March 31, 2016, customer deposits totaled $55.8 billion, an increase of 24% compared to a year ago. 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 12.0% at March 31, 2016.

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

The principal applicable methodology is the Global Methodology for Rating Finance Companies (October 2015), Global Methodology for Rating Banks and Banking Organisations (December 2015), DBRS Criteria: Rating Holding Companies and Their Subsidiaries (January 2016), DBRS Criteria: Support Assessment for Banks and Banking Organisations (March 2016), DBRS Criteria: Guarantees and Other Forms of Support (February 2016) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2016). 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: William Schwartz
Initial Rating Date: May 2, 2008
Most Recent Rating Update: May 22, 2015

For additional information on this rating, please refer to the linking document under Related Research.