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

DBRS, Inc. (DBRS) confirmed the A (high) Long-Term Senior Debt rating of American Express Company (Amex or the Company) and its subsidiaries, as well as assigned a Long-Term Issuer Rating of A (high) to the Company and its subsidiaries. Concurrently, DBRS confirmed the Company’s R-1 (middle) Short-Term Instruments rating, as well as assigned a Short-Term Issuer Rating of R-1 (middle). Amex’s Support Assessment is SA3, reflecting DBRS’s view that systemic support is not expected and as such, the Company’s Intrinsic Assessment of A (high) is equalized with the final rating. The trend for all ratings is Stable.

The confirmation of the ratings reflects DBRS’s view that Amex continues to successfully execute on its strategic plan for accelerating revenue growth, optimizing investment spending and operating expense savings. Announced in early 2016, the strategic two-year plan has enabled the Company to cope with the loss of the U.S. Costco co-brand card relationship, while successfully navigating the tough competitive environment. The ratings also consider Amex’s franchise strength, which is anchored by its leading market position in the global payments industry and the competitive advantage inherent in its spend-centric and closed-loop network. Key considerations in the ratings are also the Company’s resilient earnings generation throughout various economic and business cycles, strong risk management, solid funding and sound capitalization. These positive ratings factors are partially restrained by the intense competition in the U.S. credit card industry and the restrictive regulatory regimes for the payments business in the international markets that could adversely impact the Company’s profitability and market positioning.

The Stable trend reflects DBRS’s expectation that Amex will successfully complete its strategic plan, which should contribute to sustainable earnings growth. The Stable trend also incorporates DBRS’s expectation that Amex should uphold its competitive positioning, while capitalizing on new growth opportunities in the payments industry.

DBRS considers Amex’s franchise as strong, underpinned by its global presence and strong brand recognition, as well as strong card member relationships and diversified mix of products and services. Furthermore, Amex’s franchise strength is also supported by the satisfaction and loyalty of its card members. This is demonstrated by Amex regaining the top ranking in J.D. Power’s 2017 U.S. Credit Card Satisfaction Study, a position held by the Company until 2014 for eight consecutive years. In DBRS’s opinion, the solid track record of Amex’s management in overcoming challenging business conditions while maintaining its growth and innovation-oriented vision is supportive of the franchise strength.

The Company’s strong and resilient profitability through cycles is supported by a diversified and sustainable revenue base that is benefitting from favorable secular trends in the global payments industry, as well as its flexible and prudently managed expense base. Through 1H17, Amex’s results remain solid, as the Company continues to focus on accelerating revenue growth, streamlining its operations and thus enabling it to continue to generate solid levels of operating leverage. Importantly, DBRS notes that in 2Q17, adjusted YoY revenue growth accelerated for a fourth consecutive quarter. Indeed, in 1H17, total revenue net of interest expense of $16.2 billion, grew 7.6% YoY when adjusted for FX and the U.S. Costco portfolio, while adjusted operating expenses declined by 4.5% YoY. This follows a similar performance in 2016 in which adjusted revenues grew 5%, while adjusted operating expenses were lower by 2%.

DBRS acknowledges that the competition amongst U.S. credit card issuers has intensified with card issuers seeking to gain wallet share through the use of aggressive rewards offerings, which are a headwind to profitability. In DBRS’s view, Amex has demonstrated a disciplined approach on its rewards offerings by focusing on delivering value and superior service to its card members, and thus is more likely to attain long-term customer engagement and satisfaction, as well as sustained profitability.

DBRS views Amex’s disciplined approach to risk management, sound underwriting and sophisticated data analytics as the foundation of its strong risk profile and key determinants of the ratings. The Company’s credit risk and fraud risk performance remains the strongest among its industry peers. From DBRS’s perspective, this performance is indicative of the Company’s conservative stance towards credit extension, solid credit risk management capacity and enhanced processing and servicing capabilities. While the 1H17 U.S. Consumer Services (USCS) lending net write-off rate increased 20 bps to 1.7%, in 1H17 year-over-year (YoY), it remains significantly lower than the industry’s charge-off rate of 3.2%. During the months of July and August 2017, the USCS net write-off rate increased slightly to 1.8% while solid loan growth of 10% YoY to $49.5 billion continues to outpace the industry. While DBRS anticipates a gradual deterioration in credit metrics towards more normalized levels due to portfolio seasoning and the Company’s focus on growing its lending portfolio, any indications that the Company’s risk appetite has increased would be viewed negatively by DBRS.

Amex has a solid funding and liquidity profile reinforced by a well-diversified funding base and ample liquidity. Liquidity remains well-managed and 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 and has become a substantial part of the funding profile, accounting for 51% of total funding at the end of 2Q17. Retail direct deposits remain the largest source of deposit funding, totaling $31 billion, or 53% of total deposits at June 30, 2017. DBRS views positively that the majority of the retail deposits is comprised of existing Amex card members, which DBRS views more favorably than brokered deposits. DBRS considers the Company’s capitalization as sound, supported by high quality capital and robust and consistent capital generation capacity. As of June 30, 2017, Amex reported a fully phased-in Basel III Common Equity Tier 1 ratio of 12.0%.

RATING DRIVERS
Given the high rating level for a finance company, upward ratings pressure is unlikely over the near-term. Meanwhile, a sustained deterioration in financial results, reflecting diminishing competitive positioning due to aggressive competition, new disruptive technologies or regulatory mandates, could result to downward ratings pressures. A notable and sustained deterioration in credit performance, liquidity or regulatory capital levels could also have negative implications for the ratings.

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

The applicable methodologies are the Global Methodology for Rating Finance Companies (October 2016), Global Methodology for Rating Banks and Banking Organisations (May 2017), DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (December 2016) and DBRS Criteria: Guarantees and Other Forms of Support (February 2017), 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, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: May 2, 2008
Most Recent Rating Update: December 14, 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.