DBRS Morningstar Confirms American Express Company’s Long-Term Issuer Ratings at A (high); Stable Trend

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of 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 Morningstar confirmed the ratings of American Express National Bank (the Bank), along with the Company’s other main operating entities. The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is AA (low), while the 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.

KEY CREDIT RATING CONSIDERATIONS
The ratings consider the Company’s franchise strength which is supported by its leading brand recognition and defendable market position in the global payments industry, its earnings generation resilience, strong risk management, solid funding profile and sound capitalization. The ratings also consider Amex’s focused business model, the highly competitive landscape in the card issuing and payments space coupled with the intensifying regulatory framework globally, as well as the emergence of alternative financing and payment schemes.

The Stable trend reflects our expectation that the Company will sustain its solid earnings generation despite the likely reversion of the industrywide card spending volume growth to pre-pandemic, single-digit norms along with the expected normalization of credit performance metrics. Nonetheless, a contraction in the U.S. economy as a result of the Fed’s tightening measures coupled with a material deterioration in the labor markets and dwindling consumer sentiment constitute key downside risks to our expectations.

CREDIT RATING DRIVERS
Over the longer-term, significant market share expansion in the Company’s key operating segments while sustaining similar risk adjusted performance metrics and balance sheet fundamentals would result in a ratings upgrade. Conversely, a sustained weakening in financial results or a material and prolonged deterioration on credit performance metrics would result in a ratings downgrade.

CREDIT RATING RATIONALE

Franchise Combined Building Block (BB) Assessment: Strong
The Company’s strong franchise is bolstered by its globally recognized brand, leading market position in the global payments industry and product diversification in its chosen market segments. Amex’s franchise is also supported by the competitive advantage inherent in its closed-loop network that enables the Company to integrate all core aspects of the payments ecosystem, including payments processing, card issuance and merchant acquisition. This integration allows Amex to swiftly adapt to the evolving needs of the payments industry and its customers while providing scalability, pricing flexibility and historically innovative and differentiated product offerings. The high satisfaction and loyalty of the Company’s customers also underpin its franchise strength as evidenced by Amex’s consistently high rankings in various credit card customer satisfaction studies.

Earnings Combined Building Block (BB) Assessment: Very Strong / Strong
Amex’s strong earnings power supported by its robust revenue generation capacity and a flexible and scalable expense base that enables it to achieve operating efficiencies and strong profitability. While Amex’s predominantly fee-based revenue base is closely associated with spending and economic trends, the Company’s business model has demonstrated resiliency and consistent profitability even during stressed economic environments. In 2022, the Company generated a solid net income of $7.5 billion, down 7% year-over-year (YoY), despite the notable drag on earnings from higher credit loss provisions ($2.2 billion) and the recording of net losses on Amex’s Ventures investments relative to negative provisions (-$1.4 billion) and sizeable net gains in 2021, respectively. In 1H23, the Company reported net income of $4.0 billion, slightly lower from $4.1 billion in 1H22. Income before provisions and taxes totaled $7.2 billion in1H23, up from $5.6 billion from the same prior year period as Amex registered positive operating leverage, a trend expected to persist for the full year 2023, given the Company’s reaffirmed expectation of 15% to 17% revenue growth and largely flat non-variable customer engagement expenses.

Risk Combined Building Block (BB) Assessment: Strong
The Company’s disciplined approach to risk management and credit underwriting, which is supplemented by enhanced risk data analytics, underscore its strong credit risk profile. Amex has consistently maintained leading asset quality metrics in the card issuing industry while its fraud loss metrics are substantially better than the other major payment networks. Through 1H23, while credit performance metrics are trending higher, they are likely to remain below pre-pandemic levels at least through 2H23, even as some of the other top card issuers have already reverted to these levels. In 1H23, although the U.S. Consumer Services (USCS) card member loan net write-off rate doubled to 1.6%YoY, it remained below the 2.4% rate in 1H19 and significantly lower than the top card issuers’ peer average of 2.8%. Further, at June 30, 2023, the 30+ days delinquency rate of 1.1% was nearly half of the peer average and below the 1.4% at June 30, 2019. Similarly, the credit performance for commercial services lending and charge card receivables remains sound. Notably, despite the above industry growth in Amex’s U.S. card member loan and receivables over the past two years, the portion of the outstanding portfolio balances associated with subprime credit quality customers (FICO <660) is lower relative to YE19 (8% vs 10%) and consistently lower than that of its peers.

Funding and Liquidity Combined Building Block (BB) Assessment: Good / Moderate
The Company has a solid funding and liquidity profile underpinned by a well-diversified funding base and ample liquidity. While Amex maintains consistent access to the unsecured and asset-backed debt markets, deposits provide a stable source of funding for the Company, and over the last decade, has become a major part of its funding mix, accounting for 71% of total funding at June 30, 2023. Amex’s retail deposit base demonstrated resilience by growing 10% quarter-over-quarter (QoQ) in 1Q23 and by 2% QoQ in 2Q23 to $121.8 billion with 92% being FDIC insured. At June 30, 2023, Amex had ample liquidity with $43.0 billion in cash and $4.1 billion in readily marketable securities, of which 77% were Treasury securities. The Company’s liquidity is supplemented with contingent liquidity sources of slightly greater than $72 billion, comprised of the Fed’s discount window through the Bank, a committed bank credit facility and the undrawn balances on its secured credit facilities. The Bank also had approximately $2.0 billion in U.S. Treasuries, agency debt and mortgage-backed securities that could be pledged through the Fed’s Bank Term Funding Program (BTFP). Amex’s readily available liquidity alone is adequate to cover nearly the entirety of its outstanding unsecured debt, card asset-backed debt, brokered deposits, and direct certificates of deposits.

Capitalisation Combined Building Block (BB) Assessment: Strong
Amex’s strong capitalization is reinforced by its robust organic capital generation. The Company’s capital position remains solid with a common equity tier 1 (CET1) capital ratio of 10.6% at June 30, 2023, comfortably above the 7.0% regulatory capital requirements, including the Fed's stress capital buffer and within its target range of 10% to 11%. Of note, the Company’s regulatory capital includes the accumulated other comprehensive income (AOCI) since it has elected not to opt-out for such treatment. Amex has a track record demonstrating a solid ability to absorb losses in prior economic downturns and in the Fed’s stress test exercises as well as maintaining its capital position above its regulatory capital requirements and within its desirable range. The Company doesn’t expect any material near-term changes to its capital management approach as a result of the finalization of Basel III.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/418917.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (July 4, 2023).

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

The principal methodology is the the Global Methodology for Rating Banks and Banking Organisations (June 22, 2023): https://www.dbrsmorningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations.
In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

The primary sources of information used for this credit rating include Morningstar Inc. and Company Documents. DBRS Morningstar considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
DBRS Morningstar did not have access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and credit ratings are under regular surveillance.

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

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