September 8, 2017 / 8:32 PM / 10 months ago

Fitch Affirms American Express at 'A/F1'; Outlook Revised to Stable

(The following statement was released by the rating agency) NEW YORK, September 08 (Fitch) Fitch Ratings has affirmed American Express Company's (AXP) Long-Term Issuer Default Rating (IDR) at 'A', Viability Rating (VR) at 'a' and Short-Term IDR at 'F1'. The Rating Outlook has been revised to Stable from Negative. A full list of ratings follows at the end of this release. Today's rating actions have been taken as part of Fitch's periodic peer review of U.S. consumer lending-focused internet banks, which comprises four publicly rated firms. KEY RATING DRIVERS VR, IDRs, AND SENIOR UNSECURED DEBT The rating affirmations reflect AXP's strong franchise, spend-centric business model, leading market position in the payments industry, peer-superior credit performance, consistent profitability, diverse funding base, ample liquidity, and strong risk-adjusted capitalization. The revision of AXP's Outlook to Stable from Negative reflects the stabilization of its key operating performance metrics over the past year, specifically the resumption of billed business and revenue growth (adjusted for Costco) to levels more in line with those achieved prior to the termination of the Costco relationship. In addition, the company continues to make progress on other strategic initiatives that management outlined in 1Q16, which included reducing its operating expenses by $1 billion, increasing its penetration of existing cardholders' revolving balances, accelerating growth of its middle market and small business customer franchises, and improving merchant acceptance of its card products in the U.S. Fitch views the more stable trends as sustainable over the Outlook horizon. Rating constraints include AXP's concentrated and cyclical business model, potential funding sensitivity associated with wholesale and internet deposit funding sources, the likelihood of asset quality reversion from current levels, and continued elevated regulatory and legislative risk. Although competitive intensity in the credit card sector has manifested itself most prominently in the bidding process for co-brand partnerships, competition in rewards offerings to premium customers more broadly remains intense. Other payment networks have also become more aggressive in offering lower interchange fees to merchants that produce significant volume, and emerging payment technologies could further pressure merchant pricing. Although these developments could drive more rapid erosion of AXP's discount rate and apply further pressure to operating margins, the company has demonstrated an ability to leverage the flexibility of its closed loop business model in navigating similar challenges during previous market cycles. In addition to the previously mentioned secular headwinds, Fitch believes several cyclical headwinds could continue to pressure AXP's revenue and EPS growth over the near term. These include a FX volatility, higher interest rates, credit normalization, and weak global economic growth. Over the longer term, Fitch believes AXP's operating performance should remain strong relative to peers, supported by the company's largely fee-based business model and scale advantages, the continued secular shift in global payments away from cash and checks, a growing card member base, and continued expense discipline. Nonetheless, Fitch believes both cyclical and secular challenges may result in greater earnings volatility over the medium term than AXP has experienced in the past, particularly should lending become a larger driver of the company's revenue. Credit performance is expected to remain among the strongest of large credit card issuers, although charge-offs and delinquencies have begun to trend higher as balances from new accounts season. Fitch expects the growth in provision expense to continue to outpace loan growth over the next several quarters driven primarily by portfolio seasoning, as well as some modest deterioration in credit metrics. Net charge-offs on the lending portfolio increased 30 basis points (bps) to 1.8% in 2Q17 compared to 1.5% in 2Q16 but are well below other large credit card issuers and remain near historical lows. As a result of the increases in loss provision, reserve coverage increased to 2% of loans and 167% of loans past due at June 30, 2017, compared to 1.8% and 160%, respectively, a year ago. Although down from last year's level, AXP's regulatory capital ratios remain a rating strength. The company's common equity Tier I ratio (CET1) dipped 120 bps to 12.3% at the end of 2Q17 compared to the year ago quarter. While Fitch expects AXP's CET1 to continue to decline over time toward its 10% longer-term target, its payout ratio as a percentage of earnings should also moderate to reflect the increase in capital needed to support strong loan growth. AXP's liquidity profile is also a rating strength. The company had approximately $30 billion of readily available cash and marketable securities at June 30, 2017, of which a portion is used to fund daily operating activities. This compared to $11.8 billion of long-term debt and certificate of deposit maturities over the next 12 months. Of the $11.8 billion of debt and deposits maturing over the next 12 months, $8.6 billion consisted of unsecured debt maturities. The affirmation of AXP's Short-Term IDRs at 'F1' reflects the strongest intrinsic capacity for timely payment of financial commitments and maintains the correspondence between short-term and long-term IDRs, as the 'F1' short-term IDR can correspond to both an 'a+' and an 'a' VR under Fitch's criteria. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES AXP's rating on the 3.625% subordinated notes due December 2024 is one notch below the entity's VR of 'a' in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profile. The subordinated note rating includes one notch for loss severity given the subordination of these securities in the capital structure, and zero notches for non-performance given contractual limitations on interest payment deferrals and no mandatory trigger events which could adversely impact performance. AXP's preferred stock ratings are rated five notches below its VR of 'a' in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profile. The preferred stock ratings include two notches for loss severity given these securities' deep subordination in the capital structure and three notches for non-performance given that the coupons of these securities are non-cumulative and fully discretionary. LONG- AND SHORT-TERM DEPOSIT RATINGS AXP Centurion Bank's and AXP Bank, FSB's uninsured deposit ratings of 'A+/F1+' are rated one notch higher than their respective IDR's because U.S. uninsured deposits benefit from depositor preference in the U.S. Fitch believes depositor preference in the U.S. gives deposit liabilities superior recovery prospects in the event of default. HOLDING COMPANY AXP's IDR and VR are equalized with those of its bank subsidiaries, reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary failure and default probabilities. SUPPORT RATING AND SUPPORT RATING FLOOR AXP has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, AXP is not systemically important and therefore, the probability of sovereign support is unlikely. AXP's IDRs and VRs do not incorporate any support. RATING SENSITIVITIES IVR, IDRs, AND SENIOR DEBT Negative rating momentum could be driven by an inability to sustain the recent stabilization in AXP's core operating trends for an extended period, a material degradation in credit performance relative to peers, a sharper than expected erosion in AXP's discount rate, and/or meaningfully weaker liquidity and capital levels. Negative rating momentum could also be driven by additional regulatory and/or legal challenges, technological developments in payments, and continued competitive intensity that leads to significant erosion in AXP's market share and competitive position. Fitch believes positive rating momentum is relatively limited in the near term, given the heightened competitive environment, AXP's concentrated exposure credit/charge cards, and its high reliance on wholesale funding. Longer-term positive rating momentum could potentially be driven by successful navigation of current regulatory, partnership and competitive/technological challenges, increased earnings diversification that results in less cyclical financial performance, and enhanced funding diversity/stability, particularly with respect to internet-based deposits. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The subordinated debt rating is directly linked to AXP's VR and would move in tandem with any changes in AXP's credit profile. The preferred stock ratings are directly linked to AXP's VR and would move in tandem with any changes in AXP's credit profile. LONG-AND SHORT-TERM DEPOSIT RATINGS AXP Centurion Bank and AXP Bank, FSB's uninsured deposit ratings are rated one notch higher than each company's IDR and therefore are sensitive to any changes in their respective IDR's. The deposit ratings are primarily sensitive to any change in AXP's long- and short-term IDRs. HOLDING COMPANY Should AXP's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, Fitch could notch the holding company IDR and VR below the ratings of the operating companies. SUPPORT RATING AND SUPPORT RATING FLOOR Since AXP's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future. Fitch has affirmed the following ratings: American Express Company --Long-Term IDR at 'A'; --Short-Term IDR at 'F1'; --Viability Rating at 'a'; --Senior debt at 'A'; --Short-term debt at 'F1' --3.625% subordinated notes due December 2024 at 'A-'; --Preferred shares, series B at 'BB+'; --Preferred shares, series C at 'BB+'; --Support at '5'; --Support Floor at 'NF'. American Express Credit Corp. --Long-Term IDR at 'A'; --Short-Term IDR at 'F1'; --Senior debt at 'A'; --Short-term debt at 'F1'. American Express Centurion Bank --Long-Term IDR at 'A'; --Short-Term IDR at 'F1'; --Viability Rating at 'a'; --Senior debt at 'A'; --Long-term deposits at 'A+'; --Short-term deposits at 'F1+'; --Support at '5'; --Support Floor at 'NF'. American Express Bank, FSB --Long-Term IDR at 'A'; --Short-Term IDR at 'F1'; --Viability Rating at 'a'. --Long-term deposits at 'A+'; --Short-term deposits at 'F1+'; --Support at '5'; --Support Floor at 'NF'. American Express Travel Related Services Company, Inc. --Long-Term IDR at 'A'; --Short-Term IDR at 'F1'. American Express Canada Credit Corp. --Long-Term IDR at 'A'; --Short-Term IDR at 'F1'. --Senior debt at 'A'. The Rating Outlook is Stable. 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