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 rating 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 has successfully navigated the challenges associated with the loss of certain co-brand card relationships, the intense competitive environment and the uneven global economic prospects. The ratings consider the strength of Amex’s franchise and its closed-loop network that collectively constitute the cornerstone of its competitive advantage and the Company’s leading market position in the global payments ecosystem. The resiliency of the Amex’s earnings power through adverse business cycles is also a key factor in the ratings, along with its strong risk management capabilities and the robust balance sheet that is supported by ample liquidity, and sound regulatory capital. The ratings also consider the management’s solid track record in steering the Company through challenging business environments, along with its growth oriented vision. 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, lackluster spending by large corporations, heightened competitive environment in the cards business and adverse regulatory mandates globally.

The Stable trend reflects DBRS’s expectation that Amex’s revenue growth will likely remain in the mid-single digits over the near-to-medium, which coupled with a reset of the addressable cost base and more restrained investment spending growth should all contribute to positive operating leverage. Furthermore, DBRS anticipates the Company’s long-term earnings generating capacity to persist as a result of its growth initiatives across all businesses and disciplined expense management. The Stable trend also incorporates DBRS’s view that the long-term fundamentals in the payments industry continue to be favorable.

In DBRS’s view, Amex’s franchise remains strong supported by its well-established brand, diversified mix of products and services, Card Member loyalty and its closed-loop network that provides added flexibility to rapidly adapt to the evolving payments landscape and deliver value to merchants, consumers and businesses. From DBRS’s perspective, Amex’s planned revenue growth of approximately 5% CAGR during the 2016-2017 period, after adjusting for FX and the U.S. Costco portfolio related revenue, and a reduction of its addressable cost base by 7%, or approximately $1 billion by the end of 2017, are attainable. DBRS considers the Company’s 9M16 results as providing evidence that Amex is making good progress in executing on its cost restructuring plan to lower its addressable cost base and achieving its revenue growth targets, a trend that bodes well for sustaining positive operating leverage and earnings growth. In 9M16, Amex generated total revenues, net of interest expense, of $24.1 billion, up 5% YoY, adjusted for FX and the U.S. Costco portfolio, while DBRS estimated operating expenses were essentially unchanged YoY, on an adjusted basis, excluding one-time items.

DBRS considers Amex’s performance under the Federal Reserve’s 2016 Dodd-Frank Act Stress Test (DFAST) as providing additional evidence of the robust earnings generation capacity and resiliency in generating capital derived from the strong franchise and “spend-centric” business model. Under the DFAST’s very onerous assumptions of the severely adverse scenario, Amex was not only profitable, but also generated the highest pre-tax net income rate as a percentage of earning assets among the 33 bank holding company participants.

The ratings are supported by the Company’s robust balance sheet and its best in class risk management capabilities. In DBRS’s view, the Company’s loan portfolio is well positioned to navigate through the next credit cycle given Amex is predominantly reliant on prime, affluent transactors, coupled with disciplined underwriting and servicing capabilities. The U.S. Consumer Services (USCS) lending net write-off rate of 1.4% in 2015 and 1.5% YTD, remains at, or near, historic lows, are well below the recessionary peak of approximately 10% in 2Q09, and are nearly half of the industry average of approximately 2.9%. Nevertheless, DBRS expects, and has tolerance for, a gradual deterioration in credit metrics to more normalized levels as 2017 advances, due to portfolio seasoning and Amex’s continuing focus on growing its revolving card receivables portfolio.

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). Amex’s solid deposit-gathering capability provides an important additional layer of liquidity, which is becoming a more substantial part of the funding profile. As a component of funding, deposits increased to 53% of total funding in 3Q16, up from 49% in 3Q15. DBRS considers the Company’s capitalization as sound supported by high quality capital and strong organic capital generation capacity. At September 30, 2016, Amex reported a fully phased-in Basel III common equity Tier 1 ratio of 13.1% at September 30, 2016.

RATING DRIVERS
While upward ratings pressure is unlikely over the near-to-medium term, ratings could come under pressure due to a sustained deterioration in financial results, reflecting weaker performance related to Amex’s targeted revenue growth and expense savings initiatives. Furthermore, if financial or operating 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, could add to downward ratings pressures. 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.

Notes:
All figures are in USD unless otherwise noted.

The applicable methodologies are Global Methodology for Rating Finance Companies (October 2016), Global Methodology for Rating Banks and Banking Organisations (July 2016), 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), which can be found on our website under 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: Yanni Koulouriotis, CFA
Rating Committee Chair: Michael Driscoll
Initial Rating Date: May 2, 2008
Most Recent Rating Update: May 20, 2016

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.