DBRS Morningstar Revises Trend on American Express to Negative, Confirms A (high) LT Issuer Rating

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 long-term ratings and the short term ratings for the top-tier holding company have been revised to Negative from 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 RATING CONSIDERATIONS
The Negative trend reflects our view that headwinds related to the uncertainty of the duration of the economic contraction caused by the Coronavirus Disease (COVID-19) coupled with the continued spread of the virus that could impede the emerging global economic recovery will likely continue to adversely impact the Company’s spend-centric business model. As a result of the pandemic, we expect the Company’s earnings generation to remain pressured over the near-to-medium-term reflecting lackluster and uneven card spending volume until economies can fully reopen. Further, Amex’s travel and entertainment related spending, that accounted for 29% of the proprietary billed business volume in 2019, has been the most impacted by the pandemic and will likely remain a headwind. On the other hand, the decline in variable expenses associated with customer engagement (rewards, Card Member services) due to lower card spending volume and Amex’s planned $1 billion operating expense reduction for 2020 should partially offset the earnings impact from lower revenues.

The ratings consider the Company’s strong franchise and defendable position in the global payments ecosystem, its resilient earnings generation capacity, strong risk management capabilities, solid funding profile with an improving deposit mix and sound capitalization. The ratings also contemplate the global economic uncertainty, the highly competitive nature of the card issuing industry and the increasingly restrictive regulatory regimes for the payments business globally.

RATING DRIVERS
Given the Negative trend, an upgrade of the ratings is unlikely. Nevertheless, if the Company’s earnings generation remains resilient while maintaining sound balance sheet fundamentals, the trend of the ratings would revert to Stable. Conversely, sustained weak earnings and/or a deterioration in credit performance that impact balance sheet fundamentals would result in a ratings downgrade. Any perceived franchise deterioration via a sustained erosion of the Company’s competitive positioning would also lead to a downgrade of the ratings.

RATING RATIONALE
Amex’s franchise strength is supported by its globally recognized brand and leading market position in the global payments industry. The Company’s franchise is also strengthened by the competitive advantage provided by its closed-loop network that enables Amex to integrate all aspects of the payments ecosystem and capture the inherent benefits in regard to pricing flexibility, differentiation and adaptability to customers’ needs, scalability as well as dynamic underwriting. The high satisfaction and loyalty of Amex’s customers also underpin its franchise strength as evidenced by the Company’s consistently high rankings in various credit card customer satisfaction studies.

Historically, Amex has demonstrated a robust earnings generations capacity driven by a diversified revenue mix along with a scalable and flexible expense base that enable the Company to remain profitable even under stressed conditions. While the Company’s results were solid for 2019, results for 1H20 were significantly impacted by the pandemic as a result of lower card spending volume and increased loan loss provisions due to reserve build for potential credit losses. In 2019, Amex generated $6.8 billion of net income, up 8% YoY, after adjusting for one-time items. For 1H20, the Company generated net income of $624 million, reflecting a 14% YoY decline in revenue net of interest and a 16% decline in total expenses (both on FX adj. basis) as well as sizeable reserve builds due to the challenging economic environment.

Amex has a strong credit risk profile, underscored by its disciplined approach to risk management and credit underwriting that is augmented by enhanced risk data analytics. Indicative of these risk management capabilities is the Company’s consistent best-in-class credit risk performance and substantially lower fraud loss rates relative to peers. Indeed, Amex’s worldwide Card Member loan net write-off rate of 2.6% in 1H20 was well below the peer average of 3.7%. Nonetheless, credit performance is expected to deteriorate in the coming quarters given high unemployment levels and the expiration of certain government stimulus measures. To reserve for expected future losses, Amex's forward looking Card Member loan loss reserves to total loans was a sizable 8.0% at June 30, 2020.

The Company has a solid funding profile underpinned by a diversified funding base including unsecured and asset-backed debt and a growing deposit franchise. Deposits have become a major part of Amex’s funding mix, accounting for 63% of total funding. Retail direct deposits have grown to 72% of its U.S. deposit base of $82.9 billion at June 30, 2020, up from 63% a year ago. Similar to most banks in 2Q20, the Company saw robust personal savings deposit growth of 16% from the first quarter despite lowering deposit yields. Amex's liquidity remains solid with $61.4 billion in cash and readily marketable securities (largely Treasuries) at June 30, 2020. Further, the Company has access to contingent liquidity sources of nearly $69 billion, including the Federal Reserve’s discount window, a committed bank credit facility and the undrawn balances on its secured credit facilities.

We view Amex’s capitalization as sound, supported by strong and consistent earnings generation ability and appropriate capital management. The Company’s capital position remained strong with Common Equity Tier 1 Capital ratio of 13.6% at June 30, 2020, comfortably above its target range of 10%-11% and the 7.0% regulatory capital requirement. While the Company suspended its share repurchase program in March 2020, Amex intends to continue to pay its quarterly dividend of $0.43 per share in 3Q20 and beyond, as long as financial conditions warrant.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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 principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020), which can be found on our website under methodologies and criteria: https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar 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 Morningstar 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.

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

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

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