DBRS Confirms American Express at A (high), Upgrades Operating Entities to AA (low); Stable Trend

DBRS, Inc. (DBRS) confirmed the ratings for American Express Company (Amex or the Company) including its Long-Term Issuer Rating at A (high) and Short-Term Issuer Rating at R-1 (middle). At the same time, DBRS upgraded the Long-Term Issuer Rating of American Express National Bank (the Bank), along with the Company’s other main operating entities, to AA (low). DBRS also confirmed all short-term ratings at R-1 (middle). The trend on all ratings has been revised to Stable. The Intrinsic Assessment (IA) has now been assigned to the Bank at AA (low), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA reflecting the structural subordination of the top-tier holding company.

KEY RATING CONSIDERATIONS
The upgrade of the operating entities reflects Amex’s sustained positive operating leverage, which has been accompanied by sound balance sheet fundamentals. The upgrade also considers the progress Amex has made over the years in improving its funding profile by diversifying funding sources, as well as having deposits comprise over half of all funding, up from 30% in 2010.

The ratings and Stable trend reflect Amex’s franchise strength, which is underpinned by its leading brand recognition and market position in the global payments industry. Moreover, the Company’s resilient earnings generation capacity, strong risk management, solid funding profile, and sound capitalization also support the ratings. The ratings also consider the highly competitive landscape of the U.S. credit card market, the global economic uncertainty, as well as the regulatory risk associated with the payments business that could adversely affect the Company’s business model and long-term profitability.

RATING DRIVERS
Given the recent upgrade of the Company’s main operating entities, an upward movement of the ratings is unlikely in the near-term. Over the longer-term, an expanding market share of the Company’s payment and lending businesses while sustaining strong profitability and balance sheet fundamentals could have positive ratings implications. Conversely, a sustained deterioration in the Company’s earnings power, indicating a diminishing competitive positioning, due to new disruptive technologies, regulatory mandates or intensified competition, could have negative ratings implications. Additionally, a notable deterioration in credit performance, or a weakening in Amex’s risk management capabilities, could result in downward ratings pressure.

RATING RATIONALE
The Company’s franchise strength is underpinned by its strong brand recognition, leading market position in the global payments industry and product diversification. Amex’s franchise is also bolstered by the competitive edge inherent in its spend-centric model and closed-loop network. The closed-loop network enables the Company to integrate all aspects of the global payments industry, including payments processing, card issuance and merchant acquisition. This integration allows Amex to swiftly adapt to the evolving payments landscape while providing pricing flexibility, scalability and a differentiated value proposition to its clients and strategic partners. Supportive of the franchise is also the management’s innovation-oriented approach and solid track record in effectively navigating the Company through challenging business environments.

Amex’s demonstrated earnings generation resilience is driven by its diversified revenue mix and flexible expense base that enables it to achieve operating efficiencies and strong profitability. The Company’s growing revenue is buoyed by the pursuance of new business opportunities globally, as well as the favorable secular trends in consumer and commercial payments. Indeed, in 2018, the Company continued to generate solid results, coupled with positive operating leverage, as total net revenue increased 10% while total expenses were up 8% (both on FX adj. basis). Importantly, operating expenses were flat year-over-year on a FX adj. basis and thereby enabling Amex to increase customer engagement related spending. These trends in operating leverage persisted through 1H19, after adjusting for FX and one-offs, demonstrating continued franchise momentum.

The Company’s solid credit discipline, sound underwriting approach and sophisticated risk data analytics underpin its strong risk profile. The Company’s sound operational and risk management capabilities are evident by its consistently better than peer credit risk performance, as well as the substantially lower fraud loss rates relative to the other major payment networks. Specifically, Amex’s U.S. consumer card lending net write-off rate of 2.4% in 1H19 remained well below the peer average of approximately 3.5%. Demonstrating its ability to adjust to changing market conditions, the Company has over the past year proactively undertaken various credit risk management actions in order to be better positioned for any potential future downturn. This includes actively focusing on improving the credit quality of its customer base, with the average credit score for the U.S. consumer newly acquired cards ticking up in 2018 relative to the prior year.

Amex has a solid funding and liquidity profile supported by a diversified funding base and ample liquidity. The Company has maintained a consistent presence in the unsecured debt and asset-backed debt markets while it has expanded its deposit franchise over the past decade. Deposits have become a substantial part of Amex’s funding profile, comprising 54% of total funding at June 30, 2019, with direct deposits being the largest component (63%) of its U.S. retail deposit base of $71.8 billion. Wholesale funding is broadly aligned with the Company’s asset base. Amex applies a disciplined approach to meet its liquidity needs by maintaining an elevated level of unencumbered, high-quality liquid assets and a solid emergency liquidity plan. As of June 30, 2019, in addition to $35.5 billion of cash and marketable securities, additional liquidity can be provided by the unencumbered charge and credit card receivables of $74.9 billion. The total available liquidity available to the Company (including unencumbered receivables, cash and marketable securities and committed lines) is nearly twice the aggregate amount of maturing unsecured debt, card ABS and CDs spanning from 2H19 through 2023. Further, the Company’s liquidity coverage ratio (LCR) was 149%, well above the required minimum of 100%.

The Company has a solid capital cushion to absorb losses under times of stress, robust and consistent internal capital generation and prudent and flexible capital management. Amex’s track record has demonstrated a solid ability to improve its capital position through adjusting its capital return policy. Recently, following a sizable adverse capital impact due to one-time charges related to the latest tax legislation in 4Q17, the Company suspended its share repurchase program for just two quarters and swiftly rebuilt its capital levels to the desired levels for a Common Equity Tier 1 (CET1) ratio in the range of 10% to 11%. As of June 30, 2019, Amex reported a Common Equity Tier 1 (CET1) ratio of 11.0%.

The Grid Summary Grades for American Express Company are as follows: Franchise Strength – Very Strong/Strong; Earnings Power – Strong; Risk Profile – Strong; Funding & Liquidity – Strong/Good; Capitalisation – Strong.

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

The applicable methodology is Global Methodology for Rating Banks and Banking Organisations (June 2019), which can be found on our website under Methodologies.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating was not initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS did not have 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.

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