Fitch Downgrades American Express to 'A/F1'; Outlook Revised to Negative

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has downgraded American Express Company's (AXP) long-term Issuer Default Rating (IDR) to 'A' from 'A+' and affirmed its short-term IDR at 'F1'. The Rating Outlook has been revised to Negative from Stable. A full list of rating actions 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 finance companies, which comprises five publicly rated firms.

KEY RATING DRIVERS

VR, IDRs, AND SENIOR UNSECURED DEBT

The rating downgrade reflects 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 upcoming termination of its co-brand relationship with Costco Wholesale Corporation (Costco) in 2Q16, which represented nearly 10% of AXP's consolidated revenue in 2015.

From an earnings and profitability perspective, the loss of the Costco U.S. contract is now expected to be more impactful and more challenging to recoup than originally anticipated. The company also faces several challenges on the regulatory front including its appeal pending in the U.S. Department of Justice (DOJ) 'anti-steering' case, and regulatory actions in the European Union (EU) and Australia that are likely to weigh on AXP's discount rate and/or billed business volume in those regions.

The revision of AXP's Outlook to Negative from Stable reflects increased 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. Despite the aforementioned challenges, the newly assigned ratings are supported by AXP's strong franchise and brand, spend-centric business model, leading market position in the corporate payments industry, peer-superior credit performance, diverse funding base, ample liquidity, and strong risk-adjusted capitalization.

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 the largest 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% for at least the next two years. Likewise, revenue growth has consistently 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 other large credit card issuers in 2016, although charge-offs and delinquencies will likely start to normalize. Fitch expects provision expenses to increase in 2016 driven primarily by portfolio seasoning and growth, as well as some modest deterioration in credit metrics. Net charge-offs on the lending portfolio improved 10 basis points (bps) to 1.4% in 2015 and remained well below other large credit card issuers and the industry average. Reserve coverage remained strong at 1.8% of loans and 164% of loans past due at Dec. 31, 2015.

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 steadily rising interest rate environment is also unproven.

Regulatory capital ratios moderated from the prior year but remained strong in 2015. The company's common equity Tier I ratio declined 70 bps to 12.4% at the end of 2015. Additionally, AXP continued to perform well relative to peers in the Federal Reserve's most recent Comprehensive Capital Analysis and Review (CCAR). AXP plans on submitting its 2016 CCAR application this month (April), with results expected to be released by the end of June.

AXP's capital ratios should improve further in the near term from the sales of the Costco and JetBlue Airways Corporation (JetBlue) portfolios, which management estimates should free up an additional $1.0-$1.5 billion in capital. Following the co-brand portfolio sales, Fitch expects capital ratios to moderate over time as management emphasizes loan growth as part of its growth strategy.

AXP's liquidity profile remains a rating strength. AXP had approximately $14 billion (excluding commercial paper and operating cash) of readily available cash and marketable securities at Dec. 31, 2015. This compared to $9.3 billion of long-term debt and certificate of deposit maturities over the next 12 months. Of the $9.3 billion of debt and deposits maturing in 2016, $6.4 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 Viability Rating (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 rating on the 6.80% subordinated debentures due September 2036 is rated three notches below the entity's Viability Rating (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 two notches for non-performance given the ability to defer interest payments.

AXP's preferred stock ratings are rated five notches below AXP's VR of 'a' in accordance with Fitch's assessment of each instruments 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

Further negative rating actions 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 a 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 ratings are 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 from 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 downgraded the following ratings:

American Express Company

--Long-term IDR to 'A' from 'A+';

--Viability Rating to 'a' from 'a+'.

--Senior debt to 'A' from 'A+';

--3.625% Subordinated Notes due Dec 2024 to 'A-' from 'A';

--6.80% Subordinated Debentures due September 2036 to 'BBB' from 'BBB+';

--Preferred Shares, Series B to 'BB+' from 'BBB-';

--Preferred Shares, Series C to 'BB+' from 'BBB-'.

American Express Credit Corp.

--Long-term IDR to 'A' from 'A+';

--Senior debt to 'A' from 'A+'.

American Express Centurion Bank

--Long-term IDR to 'A' from 'A+';

--Viability Rating to 'a' from 'a+'.

--Senior debt to 'A' from 'A+';

--Long-term deposits to 'A+' from 'AA-'.

American Express Bank, FSB

--Long-term IDR to 'A' from 'A+';

--Viability Rating to 'a' from 'a+'.

--Senior debt to 'A' from 'A+';

--Long-term deposits to 'A+' from 'AA-'.

American Express Travel Related Services Company, Inc.

--Long-term IDR to 'A' from 'A+'.

American Express Canada Credit Corp.

--Long-term IDR to 'A' from 'A+';

--Senior debt to 'A' from 'A+'.

Fitch has affirmed the following ratings:

American Express Company

--Short-term IDR at 'F1';

--Short-term debt at 'F1'

--Support at '5';

--Support Floor at 'NF'.

American Express Credit Corp.

--Short-term IDR at 'F1';

--Short-term debt at 'F1'.

American Express Centurion Bank

--Short-term IDR at 'F1';

--Short-term deposits at 'F1+';

--Support at '5';

--Support Floor at 'NF'.

American Express Bank, FSB

--Short-term IDR at 'F1';

--Short-term deposits at 'F1+';

--Support at '5';

--Support Floor at 'NF'.

American Express Travel Related Services Company, Inc.

--Short-term IDR at 'F1'.

American Express Canada Credit Corp.

--Short-term IDR at 'F1'.

The Rating Outlook is Negative.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Global Bank Rating Criteria (pub. 20 Mar 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=863501

Global Non-Bank Financial Institutions Rating Criteria (pub. 28 Apr 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=865351

Additional Disclosures

Dodd-Frank Rating Information Disclosure Formhttps://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1002090

Solicitation Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1002090

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

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160406006502/en/

Fitch Ratings
Primary Analyst
Michael Taiano, CPA, +1-646-582-4956
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Meghan Neenan, CFA, +1-212-908-9121
Senior Director
or
Committee Chairperson
Julie Solar, +1-312-368-5472
Senior Director
or
Media Relations, New York
Hannah James, +1-646-582-4947
[email protected]

Source: Fitch Ratings

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