DBRS Confirms American Express Company at A (high); Trend Revised to Positive from Stable

DBRS, Inc. (DBRS) confirmed the ratings for American Express Company (Amex or the Company) and its subsidiaries, including its Long-Term Issuer Rating at A (high), and Short-Term Issuer Rating at R-1 (middle). The trend on all long-term ratings has been revised to Positive from Stable, while the trend on all short-term ratings remain Stable. The Intrinsic Assessment (IA) for the Company is A (high), while its Support Assessment is SA3. As such, Amex’s final ratings are equalized with its IA.

KEY RATING CONSIDERATIONS
The ratings consider the Company’s defendable position in the global payments ecosystem, its strong franchise and its closed-loop network that constitute the foundation of its competitive advantage. Furthermore, the ratings consider Amex’s resilient earnings generation capacity, strong risk management, solid funding profile and sound capitalization. The ratings also consider the heightened competitive environment in the cards business and the adverse regulatory mandates for the payments business globally that could adversely impact Amex’s profitability.

The Positive trend on the long-term ratings reflects the Company’s improving earnings power that is supported by unique competitive positioning that provides Amex with distinct advantages over peers. Furthermore, the Company successfully completed its strategic two-year plan that was prompted from the cessation of the U.S. Costco cobrand relationship. The Company is also poised to benefit from the positive economic environment in the U.S. and the favorable secular trends in digital payments globally. Additionally, Amex has consistently demonstrated resiliency, adaptability and discipline in coping with challenging operating and competitive environments.

RATING DRIVERS
If Amex continues to deliver positive operating leverage while maintaining sound balance sheet fundamentals, DBRS sees an upgrade of the long-term ratings as likely.

Given the Positive trend on the long-term ratings, downward ratings action in the near term is unlikely. Nonetheless, significant adverse developments related to any operational risk or governance missteps could result to downward ratings pressure. In the longer-term, a sustained deterioration in the Company’s earnings power, reflecting diminishing competitive positioning, or material weakening in credit performance, could result to downward ratings pressure.

RATING RATIONALE
Amex’s franchise is bolstered by its strong brand recognition, leading market position in the global payments industry, product diversification, flexible business model, and strong management team. The Company’s franchise is also underpinned by the competitive advantage provided by its spend-centric model and its closed-loop network that enables Amex to integrate all aspects of the payments ecosystem and capture the associated benefits in terms of pricing flexibility, scalability, adaptability to evolving clients’ needs, dynamic underwriting, and strengthening its strategic partnerships. Moreover, indicative of Amex’s franchise strength is the high satisfaction and loyalty of its customers stemming from its differentiated value proposition relative to its peers.

The Company has a robust earnings generation capacity driven by the diversified revenue base comprised of its steadily growing businesses, as well as a scalable and flexible expense base. These attributes contribute to consistent profitability even in times of stress. Through 1H18, Amex’s results were strong, reflecting consistent growth in its consumer and commercial segments, continued card member engagement and pursuance of new business opportunities. The Company’s focus in streamlining its operations and becoming more efficient, along with the scalability of its business model, have enabled it to continue to generate positive operating leverage. Specifically, in 1H18, total revenue net of interest expense of $19.7 billion grew 10.3% YoY (8.8% on an FX adj. basis) while total expenses of $14.0 billion increased by 8.0% YoY. Amex also reported positive operating leverage in 2017 when revenues grew by 4.1% YoY (8% adj. for FX and U.S. Costco) while total expenses increased by 1.9% YoY (adj. for one-time charges and gain on sale of the Costco portfolio).

DBRS views Amex’s solid credit discipline, sound underwriting approach, and sophisticated risk data analytics as the anchors of its strong risk profile and supportive of the ratings. Amex continues to generate best-in-class credit risk performance among its card issuing peers while its fraud loss metrics remain considerably below the other major payment networks, both indicative of its well-managed risk management processing and servicing capabilities. Indeed, Amex’s U.S. consumer card lending net write-off rate of 2.1% in 1H18 remained significantly lower than the industry’s charge-off rate of 3.6% and the peer average of approximately 3.3%. DBRS considers an increasingly higher portion of loan growth from existing customers as a net positive from a credit perspective since the Company has better insights into the Card Members’ credit behavior. Specifically, tenured customers accounted for 59% of total U.S. Consumer loan growth in 2017, up from 39% in 2015. Furthermore, despite the strong growth in Amex’s non-card lending portfolio, comprised of merchant financing and personal consumer loans, DBRS sees this credit extension as measured and having a minor impact on the Company’s overall risk profile since it accounts for just 4% of its worldwide loans.

The Company has a solid funding and liquidity profile, underpinned by well-diversified funding sources and ample liquidity. Positively, deposits accounted for 53% of total funding as of June 30, 2018, adding both stability and diversity to the Company’s funding profile. While DBRS does have some concerns over the stickiness of online deposits, the majority of these online deposits are sourced from existing Card Members, which would likely be more stable than deposits from non-Card Members. Liquidity is well-managed as Amex has a robust contingent liquidity plan and also maintains a high level of unencumbered high-quality liquid assets as evidenced by a liquidity coverage ratio (LCR) of 150% as of June 30, 2018.

DBRS views the Company’s capitalization as sound, supported by high quality capital, strong and consistent capital generation and appropriate capital management. As of June 30, 2018, Amex reported a Common Equity Tier 1 (CET1) ratio of 10.1% under the fully phased-in Basel III approach, up from 8.8% in 4Q17 when capital was adversely impacted by a non-recurring charge of $2.6 billion in 4Q17 related to new U.S. tax legislation. After prudently rebuilding its CET1 ratio, the Company plans to resume its share repurchase program in 3Q18.

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

The applicable methodologies are Global Methodology for Rating Finance Companies (November 2017), Global Methodology for Rating Banks and Banking Organisations (July 2018), DBRS Criteria: Rating Corporate Holding Companies and Their Subsidiaries (December 2017) and DBRS Criteria: Guarantees and Other Forms of Support (January 2018), 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
Last Rating Date: April 2, 2018

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

For more information on this credit or on this industry, visit www.dbrs.com.