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 has been revised to Stable from Negative. 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 ratings confirmation and revision of the trend to Stable reflect the Company’s demonstrated earnings generation resilience and solid credit performance, despite the notably adverse impact on Amex’s spend-centric model from the spending contraction caused by the Coronavirus Disease (COVID-19) induced downturn and the associated restrictions. The ratings also reflect Amex’s franchise strength, which is underpinned by its leading brand recognition and market position in the global payments industry, as well as continued sound balance sheet fundamentals. Moreover, the Company’s sound risk management, solid funding profile, and strong capitalization are also supportive of the ratings. The ratings also consider the intense competitive environment in the U.S. credit card market, the emergence of alternative payment schemes and the regulatory risk associated with its payments business that could adversely impact the Company’s business model and long-term profitability.
The Stable trend reflects our expectation that Amex’s operating results will continue to improve gradually with the removal of most pandemic-related restrictions and the resumption of travel and other social activities as well as by the accompanied strong economic growth. The Stable trend also contemplates that credit performance will gradually revert towards more normalized levels as government stimulus and other actions supportive of households are removed. Nonetheless, these expectations could be tempered to some extent if the new variants of the coronavirus result in renewed localized restrictions, reduced spending or weaker economic prospects.
DBRS Morningstar considers the Company’s ratings as well-placed in the current rating category. Over the longer-term, an expanding market share of the Company’s payment and lending businesses while maintaining strong risk-adjusted profitability and balance sheet fundamentals would result in an upgrade of the ratings. Conversely, a sustained deterioration in financial results reflecting diminishing competitive positioning or a weakening in the Company’s risk management capabilities would result in a ratings downgrade.
Franchise Combined Building Block (BB) Assessment: Strong
The Company’s franchise strength is bolstered by its strong brand recognition, leading market position in the global payments industry, product diversification in its chosen markets and strong management team. The Company’s franchise is also underpinned by the competitive advantage inherent in its closed-loop network that enables Amex to integrate all aspects of the payments ecosystem encompassing payment processing, card issuance and merchant acquiring. This integration provides the Company an added flexibility and adaptability to the evolving payments landscape. Additionally, the Company’s franchise is supported by the high satisfaction and customer loyalty as indicated by the consistently high rankings in various J.D. Power customer satisfaction studies.
Earnings Combined Building Block (BB) Assessment: Very Strong/Strong
Amex has a strong earnings generation capacity supported by a sustainable revenue base benefiting from the ongoing secular trends toward the electronification of payments as well as from a scalable and flexible expense base. These attributes contribute to consistent profitability even in times of stress. Indeed, despite the credit card sector headwinds since the onset of the pandemic, Amex has remained profitable while delivering solid profitability metrics. In 2020, the Company generated net income of $3.1 billion with a return on total assets (ROA) of 1.7%. Subsequently, with a strengthening economy, Amex generated net income $4.5 billion with a ROA of 4.7% in 1H21. As a result of the Company’s spend centric model, its earnings are expected to benefit from the improving spending trends as a result of the gradual lift of the pandemic related restrictions even though travel and entertainment (T&E) related spending, particularly by large corporate clients, will likely be a near-term drag.
Risk Combined Building Block (BB) Assessment: Strong/Good
The Company’s sound underwriting approach, solid credit discipline, and sophisticated risk data analytics support its strong risk profile. Indicative of its well-managed risk management and operational capabilities, Amex continues to generate best-in-class credit performance among its card issuing peers while its fraud loss metrics remain below the other major payment networks. Asset quality metrics have been sound throughout the pandemic-induced downturn, and in 2Q21, stood at near historic lows reflecting the benefits from the government stimulus and other support measures, as well as the Company's strong risk management and the solid credit profile of its customer base. Amex’s U.S. consumer card lending net write-off rate of 1.1% in 1H21 remained significantly lower than the industry peer average of approximately 2.5%. However, over the next several quarters, we anticipate credit performance to trend towards more normalized levels from the current multi-year lows that will likely be driven from growing account acquisitions, the gradual resumption of loan growth as well as from the lapsing of the government stimulus and other support measures provided to borrowers.
Funding and Liquidity Combined Building Block (BB) Assessment: Good/Moderate
The Company has a solid funding and liquidity profile reinforced by a well-diversified funding base and ample liquidity. Amex’s deposit-gathering capabilities provide a stable source of funding, and over the last decade, has become a major part of its funding mix, accounting for 68% of total funding at June 30, 2021. Notably, retail direct deposits comprise the predominant component (80%) of its U.S. retail deposit base of $83.8 billion. In addition to the deposit base, Amex continues to access the unsecured and asset-backed debt markets. The Company has ample liquidity with $43.2 billion in cash and readily marketable securities at June 30, 2021, augmented with contingent liquidity sources of nearly $79 billion, comprised of the Federal Reserve’s discount window, a committed bank credit facility and the undrawn balances on its secured credit facilities. Amex’s readily available liquidity alone is adequate to cover nearly the entirety of its scheduled maturities of outstanding unsecured debt, card asset-backed debt and long-term certificates of deposit.
Capitalisation Combined Building Block (BB) Assessment: Strong
Amex’s strong capitalization is reinforced by its robust organic capital generation ability and flexible capital management. The Company’s capital position remains solid with a common equity tier 1 (CET1) capital ratio of 14.2% at June 30, 2021, comfortably above its target range of 10% to 11%, and the 7.0% regulatory capital requirements, including the Fed's stress capital buffer. Following the Fed’s lift of the capital distribution restrictions in June 2021, and the Company’s expected increase in share repurchases, we expect a gradual migration towards lower capital levels over the following quarters until Amex reaches its desired CET1 target range.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/382631.
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/373262.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (July 19, 2021): https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks-and-banking-organisations.
Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021):
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.
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