Fitch Affirms American Express at 'A/F1'; Maintains Negative Outlook

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has today 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 is Negative. A full list of ratings is detailed 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.

Rating constraints include meaningful erosion in AXP's earnings growth outlook, a modestly weakened market position and greater earnings volatility stemming from competitive and regulatory dynamics. Specifically, AXP faces challenges stemming from the loss of several co-brand card partnerships, most notably the termination of its co-brand relationship with Costco Wholesale Corporation (Costco) in the second quarter of 2016 (2Q16), which had represented nearly 10% of AXP's consolidated revenue. Additional 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.

The maintenance of the Negative Rating Outlook reflects continued execution risk as the company engages in strategic initiatives aimed at addressing the challenges related to its profitability and business model. These initiatives include a $1 billion cost reduction plan (run rate by the end of 2017), acceleration of revolving loan growth by expanding its share of loans from its existing Card Member base, achieving parity of merchant acceptance with Visa and MasterCard in the U.S. by the end of 2019, and accelerating revenue growth through increased penetration of the small business and middle market components of its Global Commercial Services segment. At the same time, AXP is seeking to respond to rapidly evolving technological developments in the payment space and a period of, what Fitch views as, elevated management turnover.

Although competitive intensity in the credit card sector has manifested itself most recently in the bidding process for co-brand partnerships, competition has also intensified in rewards offerings to premium customers, particularly cash-back products. 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. These developments could drive more rapid erosion of AXP's discount rate and add additional pressure to operating margins.

Additionally, the timing over which the company will be able to re-establish its long-term financial targets is uncertain. Recent earnings guidance which included an estimated $1 billion pre-tax gain from the expected sale of the Costco card portfolio, and excluded any restructuring charges related to its ongoing cost reduction initiatives implies that the company would be unable to achieve its long-term EPS growth target of 12% - 15% until 2018 at the earliest. Likewise, revenue growth has fallen short of the company's 8% long-term target in recent years, which has created uncertainty as to whether such a level of growth is reasonably attainable over the long term.

In addition to the previously mentioned secular headwinds, Fitch believes several cyclical headwinds could pressure AXP's revenue and EPS growth over the near term. These include a stronger dollar, 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. Fitch also expects the company to continue to seek to innovate and invest in new opportunities that accelerate growth toward its longer-term financial targets.

Credit performance is expected to remain among the strongest of large credit card issuers, although charge-offs and delinquencies will likely start to normalize later this year, particularly as balances from new accounts season. Fitch expects provision expenses to increase over the next several quarters driven primarily by portfolio seasoning and loan balance growth, as well as some modest deterioration in credit metrics. Net charge-offs on the lending portfolio increased 10 basis points (bps) to 1.5% in the first half of 2016 (1H16) but remained well below other large credit card issuers and are near historical lows. Reserve coverage remained strong at 1.8% of loans and 160% of loans past due at June 30, 2016.

Unlike many of its peers, rising interest rates are an earnings headwind for AXP, although Fitch believes the impact from rising interest rates is likely to be manageable. At Dec. 31, 2015, assuming an immediate 100 basis point increase in interest rates, AXP estimates that net interest income (NII) over the following 12-month period would decrease by approximately $216 million. The durability of AXP's internet deposits in a rising interest rate environment is also unproven.

The company's already strong regulatory capital ratios improved further from the prior year end, driven in large part by the sale of the Costco portfolio in June 2016. The company's common equity Tier I ratio increased 110 bps to 13.5% at the end of 2Q16. Additionally, AXP continued to perform well relative to peers in the Federal Reserve's most recent Comprehensive Capital Analysis and Review (CCAR), albeit not quite to the degree of outperformance in prior year CCARs. As part of this review, AXP received a non-objection related to its capital plan submitted in April 2016, and announced a roughly 10% increase in its quarterly common dividend and a share repurchase authorization of $3.3 billion over the four quarters ended 2Q17.

Given a share repurchase program that is significantly below its previous $6.6 billion (over five quarters) authorization, Fitch expects AXP's payout ratio as a percentage of earnings to moderate from the prior year's level when it exceeded 100% of net income. Nonetheless, Fitch expects the company's regulatory capital ratios to trend back toward 2015 levels over the next couple of years as management emphasizes loan growth as part of its overall growth strategy.

AXP's liquidity profile remains a rating strength. AXP had approximately $34 billion of readily available cash and marketable securities at June 30, 2016, of which a portion is used to fund daily operating activities. This compared to $16.7 billion of long-term debt and certificate of deposit maturities over the next 12 months. Of the $16.7 billion of debt and deposits maturing over the next 12 months, $10.4 billion consisted of unsecured debt maturities. The company is also subject to the Liquidity Coverage Ratio (LCR), a liquidity standard imposed by bank regulators to measure liquidity under a stress scenario, which AXP reported that it was in compliance with as of June 30, 2016.

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 AXP's 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 action could be driven by an inability to execute on management's growth initiatives and cost reduction plan, a material degradation in credit performance beyond expected normalization, a sharper than expected erosion in AXP's discount rate, the termination of additional co-brand card relationships, 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 increased competitive intensity that leads to significant erosion in AXP's market share and competitive position.

That said, potential further negative rating actions would be likely to be based on how several of the aforementioned factors develop rather than a single factor, and a resolution is more likely to occur toward the outer end of Fitch's Outlook period given the deliberate pace at which several of these factors are expected to evolve.

The Rating Outlook could be revised to Stable if the company is able to demonstrate resiliency in its competitive position and maintain operating performance that is consistently above peers without meaningfully weakening its credit profile and/or capitalization levels.

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, there is the potential 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'.

--Senior debt 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 Negative.

Additional information is available on www.fitchratings.com

Applicable Criteria

Global Bank Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884135

Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016)

https://www.fitchratings.com/site/re/884128

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012311

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012311

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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Source: Fitch Ratings

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