DBRS: Amex 3Q14 Results Reflect Positive Operating Leverage and Sound Credit Performance

Summary:
• 3Q14 pre-tax income of $2.2 billion driven by solid revenue growth on good billed business expansion across the franchise and well controlled expenses.
• Excluding the revenues and expenses in the prior year result from the Company’s Business Travel operations, which were part of a joint venture transaction that closed in 2Q14, Amex generated positive operating leverage of 4%.
• DBRS rates American Express Issuer and Long-Term Debt at A (high) with a Stable trend.

DBRS, Inc. (DBRS) views American Express Company’s (Amex or the Company) 3Q14 results as demonstrating the strength of the franchise, the flexibility of its operating model, as well as its sound risk appetite, all of which are supportive of the current rating.

Amex continues to consistently outperform most of its large card issuing bank peers in billed business growth and loan expansion. On a foreign currency (FX) adjusted basis, worldwide billed business volumes were 10% higher YoY at $258.1 billion. U.S. billed business volumes continued to expand with growth in U.S. corporate and small business spending accelerating over 2Q14. Outside the U.S., international billed business growth continues to outpace overall Company growth, and was up 11% YoY, on an FX-adjusted basis. International growth was primarily driven by the Japan/Pacific (JAPA) region with strong volumes in China, and strengthening growth in Australia and Korea. Worldwide card member loans grew 5% YoY on higher card member spending. DBRS views Amex’s ability to consistently outperform the industry in billing and loan growth as demonstrating the strength of the franchise and card member loyalty. Further, DBRS sees this performance as evidence that the benefits of Amex’s investments in prior quarters, designed to drive card member spending are being captured.

Growth in card member spend and higher loan balances combined with disciplined cost management resulted in positive operating leverage in the quarter, underpinning earnings expansion. While revenue growth was below the Company’s target of 8% due to the slow growth economic environment, on an FX adjusted basis, excluding business travel revenue from the prior year results, total revenues net of interest expense did improve a solid 6% YoY to $8.3 billion. Discount revenue, the largest component of revenues, grew at a slower pace than billed business volumes due to a three basis point reduction in the discount rate to 2.49%. The decline in the discount rate was driven by the continuing shift in the mix of spending volume to more everyday spend items, as well as the Company’s OptBlue program beginning to have a modest impact. While traditionally net interest income only accounts for approximately 15% of Amex’s total revenues, results did benefit from higher net interest income, driven by higher earning asset balances and lower cost of funds.

Disciplined cost management continues to benefit the Company’s earnings. Adjusted for Business Travel expenses in the prior year results, total expenses were slightly higher YoY at $5.6 billion. Excluding Business Travel operating expenses in the prior year period, operating costs were flat YoY at $2.9 billion. DBRS notes that on an adjusted basis, year-to-date operating expense growth is flat YoY and well within the Company’s target of growing operating expenses at less than 3% in 2014.

Worldwide lending credit metrics continue to be at historical lows and best in industry. DBRS considers this as evidence that while Amex continues to drive card member spending and introduce new products to reach new card members, Amex is achieving this while not sacrificing its traditional conservative underwriting standards and risk appetite. Net write-offs in the world-wide total lending portfolio were 10 basis points lower QoQ, while loans 30-days past due remain at very low levels.

DBRS rates American Express Company, and its related subsidiaries, Issuer and Long-Term Debt at A (high) with a Stable trend.

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