Morningstar DBRS Confirms American Express Company's LT Issuer Rating at A (high); Stable Trend

DBRS, Inc. (Morningstar DBRS) confirmed the credit 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, Morningstar DBRS confirmed the credit ratings of American Express National Bank (the Bank), along with the Company's other main operating entities. The trends for all credit ratings are 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 credit ratings reflect the Company's strong franchise with a global brand recognition and defendable position in the global payments ecosystem, its resilient earnings generation, strong risk profile, solid funding and liquidity profile, and sound capitalization. The credit ratings also consider Amex's focused business model, the intense competitive landscape of the U.S. credit card issuing and payments markets, and the emergence of alternative payment schemes and lending products, as well as the more onerous regulatory framework globally.

The Stable trends reflect Morningstar DBRS's expectation that the Company will continue to generate solid operating results while maintaining sound balance sheet fundamentals. The Stable trends also incorporate the recent industrywide softening in credit card spending and the normalization in credit performance metrics. The key downside risks to Morningstar DBRS's expectations are a contraction in U.S. economic activity and a material weakening in the labor markets because of the higher-for-longer interest rate environment.

CREDIT RATING DRIVERS
Over the longer term, Morningstar DBRS would upgrade the credit ratings if there were a material market share expansion of the Company's key operating segments while maintaining strong profitability along with sound risk and balance sheet fundamentals. Conversely, Morningstar DBRS would downgrade the credit ratings if there were a sustained weakening in financial results, reflecting diminished competitive positioning or a significant and prolonged deterioration of credit performance metrics.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Strong
Amex's strong franchise is supported by its worldwide brand recognition, diversified product offerings in its focused markets, and prominent market position in the global payments sector. The Company's franchise also benefits from its closed-loop network that provides it a competitive advantage by enabling the integration of all key features of the payments ecosystem including payment processing, card issuance, and merchant acquiring. This integration enables Amex to capture scale, differentiation, and adaptability to the industry's and customers' evolving needs and has also contributed to the introduction of innovated product offerings. Furthermore, Amex's franchise is reinforced by the high satisfaction and customer loyalty as indicated by the consistently high rankings in various customer satisfaction studies as well as by its appeal and engagement by younger generation consumers.

Earnings Combined Building Block (BB) Assessment: Very Strong/Strong
The Company's resilient earnings generation is driven by sustainable revenue streams and a flexible and scalable expense base that enables it to achieve operating efficiencies and strong profitability. Amex's predominantly fee-based revenue mix is aided by its high spending cardmember base and by the favorable secular trends that support the electronification of payments. Even though the Company's spend-centric business model is highly correlated with overall economic activity, it has historically delivered persistent profitability even in adverse economic environments. In 2023, Amex reported net income of $8.4 billion, up from $7.5 billion in 2022, driven by positive operating leverage. In H1 2024, the Company generated net income of $5.5 billion, up 37% year-over-year (YOY), including an after-tax gain of approximately $479 million ($531 pretax) from the sale of Accertify, which closed in Q2 2024. Excluding this gain, H1 2024 results were driven by strong net revenue growth of 10%, which exceeded total expense growth (marketing, operating expenses, and customer engagement) of 5%, though partially offset by a 13% increase in provisions for credit losses. Reflecting the continued strength in its operating results, Amex has maintained its initial 2024 revenue growth guidance within the range of 9% to 11%.

Risk Combined Building Block (BB) Assessment: Strong
Amex's strong credit risk profile is supported by a sound underwriting approach, disciplined credit risk management, and extensive risk data analytics. The Company's focus on the higher end of the credit spectrum and closed loop network has contributed to its historically better credit and fraud risk performance than its industry peers. Over the past year, Amex's credit performance metrics have mostly trended higher, but on aggregate haven't exceeded pre-pandemic levels. In H1 2024, Amex's U.S. Consumer Services (USCS) card member loan net write-off rate of 2.3% was up from 1.6% in H1 2023, while the 30-plus day delinquency rate was 1.3%, up YOY, with both rates being lower than the comparable periods in 2019 (and also both rates being well below the top card issuer peer average of approximately 4.3% and 2.7% for H1 2024, respectively). For USCS card member receivables, at June 30, 2024, the 30-plus day delinquency rate was lower YOY while the net write-off rate in H1 2024 was flat YOY. The total card member loans and receivables 30-plus day delinquency rate was 1.2% at June 30, 2024, flat YOY while the net write-off rate was 2.1% in H1 2024, up from 1.7% in H1 2023 (but below pre-pandemic for both metrics). The Company expects the net write-off rate for the entire portfolio to remain largely stable in H2 2024.

Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
Amex has a solid funding and liquidity profile that encompasses diversified funding sources, including a sizable deposit base, unsecured and asset-backed debt, which is accompanied by ample available liquidity. Deposits have become a substantial part of the Company's funding profile, comprising 71% of total funding in Q1 2024, with direct (nonbrokered) deposits being the largest component, accounting for 80% of its U.S. retail deposit base of $133.3 billion. In Q2 2024, the Company's customer deposits increased by 9% YOY and remained essentially flat from the prior quarter while 92% of which were FDIC insured for the past four consecutive quarters. The Company has sizable liquidity by maintaining unencumbered and high-quality liquid assets along with contingent liquidity sources that are more than adequate to cover the entirety of its long debt, CDs, and brokered deposits. As of June 30, 2024, Amex had nearly $53 billion of cash and $1.2 billion of available for sale investment securities mostly comprising foreign government and Treasury bonds. Additional contingent liquidity includes a borrowing capacity of $62.2 billion based on pledged charge and credit card receivables by the Bank to the Fed's discount window and $10.0 billion of fully unutilized borrowing though a committed syndicated bank credit facility, as well as from two secured borrowing facilities.

Capitalisation Combined Building Block (BB) Assessment: Strong
The Company's strong capitalization is underpinned by its consistent organic capital generation capacity. As of June 30, 2024, Amex's common equity tier 1 (CET1) capital ratio of 10.8% was comfortably above the regulatory capital requirement of 7.0% that includes the Fed's stress capital buffer of 2.5%, and within the Company's target range of 10% to 11%. The Company has historically demonstrated solid loss absorption capacity in adverse economic environments including the Fed's supervisory stress tests in which capitalization has consistently remained above the regulatory minimum requirements under the severely adverse scenario. In 3Q24, the Company will become a Category III firm which will add a CET1 countercyclical capital buffer of up to 2.5% to Amex's regulatory capital requirements, if enacted by the Fed.

Further details on the Scorecard Indicators and Building Block Assessments can be found at: https://dbrs.morningstar.com/research/437449.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 4, 2024) https://dbrs.morningstar.com/research/433881. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) https://dbrs.morningstar.com/research/427030 in its consideration of ESG factors.

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

The primary sources of information used for these credit ratings include Morningstar Inc. and company documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.

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

Morningstar DBRS 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 an unsolicited credit rating.

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

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

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