Fitch Ratings has affirmed American Express Company (AXP)'s and its subsidiaries Long- and Short-Term Issuer Default Ratings (IDRs) at 'A' and F1, respectively, and has affirmed AXP's and American Express National Bank's (AENB) Viability Rating (VR) at 'a'.

The Rating Outlook is Stable.

Fitch has also affirmed its VR for American Express Travel Related Services Company (TRS) Inc. at 'a' and a Shareholder Support Rating (SSR) for American Express Credit Corporation (Credco) of 'a'. A full list of rating actions follows at the end of this release.

Key Rating Drivers

Affirmation and Stable Outlook: The ratings affirmation reflects AXP's strong franchise and spend-centric business model, peer-superior credit performance, above-average profitability, relatively diverse funding, and solid liquidity and risk-adjusted capitalization. The Stable Outlook reflects steady earnings visibility, with revenues supported by growth in card membership and balances, positive operating leverage helped by a variable expense base, with room for higher credit costs in an environment of normalizing consumer credit.

Resilient Business Profile: AXP's diverse revenues and variable expense base make it more resilient than peers. The company generates revenues from affluent credit and charge card customers across age groups, business enterprises and merchants who subscribe to its closed loop network. This group of customers is more resilient in downturns, continuing to spend while generating lower charge-offs, and variable costs to serve them offer operating margin support. AXP's closed loop network provides economic and risk management benefits but requires significant investment to comply with regulatory requirements and compete with other networks, like Visa, Mastercard and Discover.

Moderate Risk Profile: AXP maintains a moderate risk profile as it balances regulatory, cross-border, market and credit pressures. The company has successfully navigated increasing regulations in the U.S. and payments markets worldwide. As a U.S. bank holding company, AXP is subject to the Federal Reserve's capital and liquidity requirements, which will increase as it anticipates moving into Category III after assets surpassed the $250 billion threshold in 2023. AXP's closed loop network contends with merchant pricing pressures and competition with Visa and Mastercard, while its card business competes with several issuers for partnerships, customers and wallet share. In recent years, above average loan growth has been led by less seasoned Millennial and Gen Z cohorts while it has continued to outperform on credit.

Best in Class Asset Quality: AXP is one of few card issuers whose loss rates remain below pre-pandemic levels after unsustainably benign credit in the pandemic. It has achieved this despite growing loans an average of 9% twice and faster than peers, which typically reflects a higher risk portfolio. In addition to growing cardmembers, it has marketed lending products to basic charge card customers with favorable credit profiles, reducing risk. AXP has produced superior credit performance through multiple cycles, helped by its affluent cardmember base, consumer and corporate charge card business and sophisticated credit management.

Since the pandemic, AXP has continued to deploy loan modifications for customers undergoing financial stress, including many not in delinquency. While this has led to a higher ratio of impaired loans to total loans, it has also contributed to improved credit loss ratios relative to pre-pandemic levels and enhanced customer loyalty.

Spend-Centric Model Underpins Robust Profitability: Fitch views AXP's revenue streams as high quality, with a range of consumer and commercial clients in the U.S. and developed markets. With only a quarter of revenue from net interest income, AXP's revenues are less rate sensitive than peers. Non-interest income includes fees on cards, services, processing, and discount revenue, AXP's largest source. This reflects fees from merchants like Delta, Marriott and Hilton and provides recurring revenue over multi-year contracts.

Approximately 55% of 2023 expenses are attributed to 'variable customer engagement', which along with other variable expenses can offset revenue declines, as occurred in 2020. AXP offers reliable earnings visibility, giving it ample headroom in its 'a' score for Earnings & Profitability.

Strong Capital Formation: Fitch views AXP's capital ratios as sufficient at its current rating level given low credit losses and AXP's capital generation with its peer-leading return on equity. Management targets a CET1 ratio of 10% to 11% and has maintained this or higher for 10 of the past 11 years. AXP will phase additional loss reserves for current expected credit losses (CECL) into CET1 through 1Q25. Fitch estimates AXP's fully phased in CET1 was 10.4% at year-end 2023, a modest difference from its reported CET1 of 10.5%. AXP has maintained a steady cash dividend payout ratio of less than 25% of earnings over the years, which Fitch expects to continue.

Funding and Liquidity Improved: AXP's loan/deposit ratio improved to 100% since 2021 from 120%+ pre-pandemic. AXP has grown average deposits to 72% of funding from 54% in 2019, led by growth in retail deposits, of which 92% are FDIC insured. In 2023, AXP demonstrated resilience amid deposit flight to quality with average non-brokered retail deposits up 23% year over year. While AXP's loan/ deposit ratio implies in the 'a' category, Fitch maintains its 'bbb+' score to reflect continued reliance on brokered deposits and non-deposit funding.

Holding Company: AXP's IDR and VR are equalized with those of its bank subsidiary, reflecting its role as the BHC, which are mandated in the U.S. to act as a source of strength for their bank subsidiaries. The equalization of the ratings also reflects the very close correlation between BHC and subsidiary failure and default probabilities

Rating Sensitivities

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

A sharp and sustained decline in operating profit as a percentage of risk-weighted assets (RWA) and equity, including a steady decline in AXP's operating margins or credit performance over several years;

A decline in CET1 ratio below 10% for multiple quarters, degradation of reserve coverage, or meaningfully weaker liquidity and funding;

Meaningful market share losses resulting from rising competitive pressures in cards and payments;

Adverse regulatory and/or legal challenges, notably as AXP is likely to become a Category III bank, subject to higher liquidity and stress testing requirements.

Should the BHC begin to exhibit signs of weakness, demonstrate trouble accessing capital markets or have inadequate cash flow coverage to meet near-term obligations, Fitch could notch the BHC's IDR and VR from the ratings of the bank subsidiary.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

A positive rating action in the short term is not likely as AXP remains one of the highest rated banks in North America. Longer-term, positive action could arise from:

Successful navigation of regulatory, competitive and technological challenges yielding materially higher earnings and profitability, capital and leverage and liquidity and funding metrics;

Enhanced funding diversity and stability, including increased retail deposits held by cardmembers and growth in retail checking that surpasses brokered deposits.

OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS

Fitch's baseline approach is to rate the senior unsecured debt of banks and BHCs in line with the respective entity's Long-Term Issuer Default Rating (IDR). This reflects Fitch's view that default on senior obligations equates to a default of the bank/BHC (as captured by the issuer's IDR) and usually average expected recoveries upon default.

Short-Term Issuer Default Rating

The affirmation of AXP's and its subsidiaries' Short-Term IDRs at 'F1' reflects a strong intrinsic capacity for timely payment of short-term financial commitments. While a VR of 'a' also corresponds with a Short-Term IDR of 'F1+' under Fitch's global bank criteria, the 'F1' Short-Term IDR is assigned because AXP's funding and liquidity score of 'bbb+' is below the 'aa-' minimum threshold for an 'F1+' Short-Term IDR.

Subordinated Debt and Other Hybrid Securities

The subordinated debt rating is one notch below the entity's VR of 'a'. In accordance with Fitch's 'Bank Rating Criteria,' this reflects alternate notching to the base case of two notches due to Fitch's view of U.S. regulators' resolution alternatives for an entity such as AXP, as well as early intervention options available to banking regulators under U.S. law.

AXP's preferred stock ratings are four notches below AXP's VR of 'a'. The preferred stock ratings include two notches for loss severity given that these securities are at deep subordination in the capital structure, as well as two notches for nonperformance given that the coupons of these securities are noncumulative and fully discretionary.

Long-Term and Short-Term Deposit Ratings

AENB's long-term uninsured deposit rating is one notch higher than the bank's Long-Term IDR 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. AENB's short-term uninsured deposit rating of 'F1' is equalized with the bank's Short-Term IDR.

AXP and AENB have been assigned a Government Support Rating (GSR) of 'ns'. In Fitch's view, there is no reasonable assumption of support being forthcoming.

OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES

The Short-Term IDRs are directly linked to the Long-Term IDRs, and these ratings would be expected to move in tandem. Secondarily, the Short-Term IDRs are sensitive to improvement in AXP's funding and liquidity factor score.

The subordinated debt rating is directly linked to AXP's VR, and these ratings would be expected to move in tandem.

The preferred stock rating is directly linked to AXP's VR, and these ratings would be expected to move in tandem.

AENB's long-term uninsured deposit rating is one notch higher than the bank's IDR; therefore, it is sensitive to any change in the IDR. The deposit ratings are primarily sensitive to any change in AXP's Long-Term and Short-Term IDRs.

SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS

Fitch has assigned an 'a' SSR to Credco, a nonbank operating subsidiary of TRS. The SSR reflects Fitch's view of the likelihood that, in the event of failure, Credco will receive support from AXP and/or TRS to prevent them from defaulting on their senior obligations. The SSR is assigned based on key rating drivers defined in Fitch's criteria relating to the parent's ability and propensity to provide support. Fitch has equalized the SSR for Credco with the IDR of its direct parent, TRS.

SHORT-TERM IDRs

The Short-Term IDRs are directly linked to the Long-Term IDRs and would be expected to move in tandem with them. The Short-Term IDRs are sensitive to improvements in AXP's funding and liquidity factor score.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The subordinated debt rating is directly linked to AXP's VR and would be expected to move in tandem with it.

The preferred stock rating is directly linked to AXP's VR and would be expected to move in tandem with it.

SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES

Fitch has assigned a Viability Rating (VR) of 'a' to TRS, which is an intermediate holding company between the ultimate parent, AXP, and American Express National Bank (AENB). Similar to AXP, TRS is classified as a bank holding company (BHC) that is regulated by the Fed and subject to prudential regulatory standards. Under the group VR approach, as defined in Fitch's 'Bank Rating Criteria,' BHCs are assigned VRs at the same level as the group VR if Fitch views the BHC's failure risk as substantially the same as that of the group as a whole.

LONG-AND SHORT-TERM DEPOSIT RATINGS

AENB's long-term uninsured deposit rating is rated one notch higher than the bank's IDR and is therefore sensitive to any changes in the IDR. The deposit ratings are primarily sensitive to any change in AXP's Long- and Short-Term IDR.

SHAREHOLDER SUPPORT RATING

Credco's SSR is sensitive to significant changes in Fitch's view of AXP's ability and propensity to provide extraordinary shareholder support when needed or a change in TRS's IDR.

VR ADJUSTMENTS

The Asset Quality score of 'a-' has been assigned above the 'bbb' category implied score due to the following adjustment reasons: Loan classification policies (positive) and Underwriting standards and growth (positive).

The Earnings and Profitability score of 'a' has been assigned below the 'aa' category implied score due to the following adjustment reason: Revenue diversity (negative).

The Funding and Liquidity score of 'bbb+' has been assigned below the 'a' category implied score due to the following adjustment reasons: Deposit structure (negative) and nondeposit funding (negative).

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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