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 RATING CONSIDERATIONS
The ratings reflect the Company’s strong franchise, leading brand recognition and defendable position in the global payments ecosystem. Additionally, supportive of the ratings are the Company’s resilient earnings generation capacity, sound risk management, good funding profile, and sound capitalization. The ratings also consider the highly competitive landscape of the U.S. credit card market, the emergence of alternative payment schemes as well as the regulatory risk related with its payment business that could adversely affect Amex’s business model and profitability.
The Stable trend reflects our expectation that the Company will continue to generate solid operating results even as spending volume growth moderates following the strong post-pandemic rebound and while credit performance gradually reverts towards more normalized levels. In absence of a significant spike in unemployment levels, Amex’s lending portfolio is likely to exhibit more resiliency to inflationary pressures relative to its peers given the Company’s preponderance of high FICO score customers who generally have a higher level of resources to effectively managing their debt obligations even with higher interest rates and inflation. Nevertheless, a prolonged contraction or sluggishness in economic activity caused by persistent inflationary pressures and a high interest rate environment present key downside risks to our expectations.
Over the longer-term, a notable market share expansion of the Company’s core businesses while maintaining strong risk-adjusted profitability and balance sheet fundamentals would result in an upgrade of the ratings. A persistent deterioration in the Company’s earnings power, reflecting weakened competitive positioning, or a substantial worsening in credit performance would result in a downgrade of the ratings.
Franchise Combined Building Block (BB) Assessment: Strong
Amex’s franchise strength is underpinned by its strong brand recognition, leading market position in the global payments industry and diversified product offerings in its focused market segments. The Company’s franchise also benefits from the competitive advantage provided by its closed-loop network that enables it to integrate all key facets of the payments ecosystem and to also capture the associated benefits in terms of pricing flexibility, scalability and adaptability to customers’ evolving needs. The high satisfaction and loyalty of Amex’s customers also strengthen its franchise as evidenced by the Company’s consistently high rankings in multiple credit card customer satisfaction studies. Furthermore, supportive of Amex’s franchise is its strong management team and a historically innovation-oriented business mindset.
Earnings Combined Building Block (BB) Assessment: Very Strong / Strong
The Company has a robust earnings generation capacity driven by sustainable revenue streams accompanied by a scalable and flexible expense base. The long-term revenue sustainability is bolstered by the favorable secular trends that support the electronification of consumer and commercial payments that bodes well with the Company’s market positioning and predominantly fee-based revenue mix. These characteristics have enabled Amex to consistently deliver strong profitability metrics and also remain profitable even under stressed environments. In 2021, Amex reported net income of $8.1 billion, up from $3.1 billion in 2020, benefiting from sizeable reserve releases, net gains on equity investments as well as from the pandemic-related spending volume recovery. For 1H22, the Company generated net income of $4.1 billion, down 10% YoY mostly as a result of the stabilization of loan loss reserves. Nonetheless, pre-provision, pre-tax earnings were up 21% YoY in 1H22 (or up 40% adj. for one-time gains in 1H21). Reflecting the continued strength in its operating results, Amex has recently revised its 2022 revenue growth guidance from the range of 18%-20% to 23%-25%.
Risk Combined Building Block (BB) Assessment: Strong
Amex has a strong credit risk profile, supported a disciplined approach to risk management, through-the-cycle underwriting and enhanced risk data analytics. The Company’s focus on premier credit segments along with its closed loop network have also contributed to its historically superior credit and fraud risk performance relative to its industry peers. Through 1H22, credit performance has remained strong with delinquency and loss metrics well below pre-pandemic levels. Amex’s U.S. consumer card lending net write-off rate of 1.1% in 1H22 and the 30+ day delinquency rate of 0.7% at June 30, 2022, remained well below the top card issuer peer average of approximately 1.7% and 1.4%, respectively. That said, we expect credit metrics to gradually revert towards more normalized levels over the next several quarters from the unsustainably historic lows observed over the last two years. While Amex has reported strong growth in U.S. consumer card lending, this has been accomplished while adhering to its strong underwriting criteria.
Funding and Liquidity Combined Building Block (BB) Assessment: Good / Moderate
Amex has a solid funding and liquidity profile supported by diversified funding sources that are appropriately aligned with its business model, including a sizable deposit base, unsecured and asset-backed debt. Deposits comprised 63% of total funding at June 30, 2022, while direct deposits (non-brokered) accounted for nearly three-fourths of its retail deposit base of $95.4 billion. Amex also has ample liquidity to meet its business needs while maintaining an elevated level of unencumbered, high-quality liquid assets along with an emergency liquidity plan. As of June 30, 2022, in addition to nearly $26 billion of cash and $4.1 billion of marketable securities (mostly Treasury bonds), additional contingent liquidity can be provided by the Company’s unencumbered charge and credit card receivables of $91.6 billion that could be pledged by the Bank to the Fed’s discount window, to Amex’s secured borrowing facilities with an aggregate and fully unutilized capacity of $8.5 billion, or sold through securitizations.
Capitalization Combined Building Block (BB) Assessment: Strong
The Company’s strong capitalization is bolstered by its consistent organic capital generation ability. As of June 30, 2022, Amex’s common equity tier 1 (CET1) capital ratio of 10.3% was comfortably above the regulatory capital requirement of 7.0% that includes the Fed's stress capital buffer and within its target range of 10% to 11%. Amex has historically demonstrated solid loss absorption capacity in adverse economic cycles as well as in the Fed’s supervisory stress tests in which capitalization has consistently remained above the regulatory minimum requirements with the Company still profitable under the severely adverse scenario.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/401051.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 23, 2022): https://www.dbrsmorningstar.com/research/398692/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 (May 17, 2022):
The primary sources of information used for this rating include Morningstar, Inc. and Company Documents. 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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