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Rating Action:

Moody's lowers American Express to A2; outlook negative

20 Oct 2008
Moody's lowers American Express to A2; outlook negative

Approximately $75 Billion of Debt Securities Affected

New York, October 20, 2008 -- Moody's Investors Service lowered the Long-term Senior ratings of financial services holding company American Express Company ("Amex") to A2 from A1, and also lowered the ratings of American Express Travel Related Services ("TRS") and its rated operating subsidiaries to A1 from Aa3. The Prime-1 short-term ratings for Amex and rated subsidiaries were affirmed. The rating outlook for Amex and its subsidiaries is negative. Today's rating actions conclude the rating review of Amex that was initiated on August 7, 2008.

The lower ratings reflect Amex's negative asset quality trends and lending exposures, particularly within geographic markets in the United States that have experienced sharp home price declines. Amex has maintained its 'spend-centric' strategic model, which emphasizes non-interest income from fees relating to customer spending, as opposed to interest income from revolving credit balances; however, the company's lending exposures have grown significantly over time. With this shift, eroding economic conditions across the US will likely pose a greater burden on Amex's asset quality and profitability.

Broad economic weakness in the US, heavy consumer debt burdens, and home price erosion have also combined to dampen Amex's card-member spending growth in the US. Although Amex has made strides to diversify its spending mix away from its historical reliance on corporate travel and entertainment, the company's revenue and earnings profile remains heavily weighted towards the US market in terms of both spending volumes and credit exposure.

Moody's said that the downgrade also reflects the potential vulnerability within Amex's current market-funded business model. This vulnerability has always been inherent within Amex and similar institutions. However, the current credit crisis has highlighted the risk to firms that rely on wholesale funding, both in terms of funding availability and cost.

The rating agency noted that Amex's approach to funding and liquidity management has been sound and strengthened over time, with the firm's goal of being able to fund Amex for over a year following the loss of access to unsecured and secured debt markets. Amex has established a $20 billion liquidity portfolio, termed out debt, added a $5 billion bank conduit funding facility, and has demonstrated consistent access to unsecured funding and securitization markets throughout most of the market downturn.

Further enhancing contingent liquidity, on October 3, 2008 Amex's banks, American Express Centurion Bank and American Express Bank, FSB were approved by the Federal Reserve Bank of San Francisco to access the Fed's discount window, if necessary, by pledging eligible collateral, including credit card receivables. These receivables are also eligible collateral for the Fed's Term Auction Facility (TAF) program. Amex should be able to access $14 billion of term-CP via the Treasury's new CP Funding Facility, and its banks should be able to fund up to $8.8 billion of 3-year term debt via the Fed's Temporary Liquidity Guarantee Program. Though these two funding programs are temporary, they nonetheless should prove to be highly valuable for Amex as the company manages through the current market dislocation and continues to reposition its funding mix. Their availability during this period is supportive of the ratings at the current levels. As a key element of ongoing analysis, Moody's will evaluate Amex's future plans to manage liquidity risk in anticipation of the elimination of these extraordinary official forms of liquidity support.

Moody's said that the negative outlook reflects Amex's exposure to a potentially severe consumer-led economic downturn in the US and its potential effects on the firm's asset quality, customer spending volumes, and profitability. Given the severity of the current housing and credit crisis, the ability to forecast the future performance of Amex is very limited. For the outlook to return to stable, Amex will have to continue to generate asset quality and profitability levels consistent with the firm's performance in past economic downturns. An elevation in credit costs outside of historical peaks and that is not effectively mitigated by offsetting cost reductions or revenue gains could result in a negative rating action.

The rating agency noted that Amex's credit profile and ratings have been based upon the firm's strong brand-name franchise and fee-driven revenue strategy that have allowed the firm to generate consistently solid profitability and cash-flow, a high proportion of non-spread income, and industry leading asset quality. Internal capital generation has also been strong, with Amex retaining ample capital to support its balance sheet and provide flexibility.

Amex has continued to perform acceptably well on an absolute basis and relative to other market-funded finance companies and commercial banks. To this point, Amex today reported Q3-08 results that included $861million of net income from continuing operations on net revenues of $7.2 billion. This level of net operating income is noteworthy given the firm's 51% year-over-year increase in loss provisions.

The current ratings will require that Amex is able to illustrate that these franchise characteristics can endure through this severe credit cycle.

The following ratings were affirmed:

American Express Company

Commercial Paper P-1

American Express Travel Related Svcs Co., Inc.

Commercial Paper P-1

Other Short Term P-1

American Express Bank, FSB

Short-term Bank Deposits P-1

American Express Credit Corporation

Bkd Commercial Paper P-1

Other Short Term P-1

American Express Centurion Bank

ST Bank Note Pgm P-1

Short-term Bank Deposits P-1

The following ratings were downgraded:

American Express Company

Issuer Rating from A1 to A2

Senior Unsecured from A1 to A2

Subordinate Shelf from (P)A2 to (P)A3

Preferred Shelf from (P)A3 to (P) Baa1

American Express Travel Related Svcs Co., Inc.

Issuer Rating from Aa3 to A1

Senior Unsecured from Aa3 to A1

Subordinate MTN from A1 to A2

American Express Bank, FSB

Long-term Bank Deposits from Aa3 to A1

Bank Financial Strength from B to B-

Issuer Rating from Aa3 to A1

American Express Credit Corporation

Issuer Rating from Aa3 to A1

Senior Unsecured from Aa3 to A1

Subordinate MTN from A1 to A2

American Express Centurion Bank

Bank Deposits from Aa3 to A1

Bank Financial Strength from B to B-

Issuer Rating from Aa3 to A1

Senior Unsecured from Aa3 to A1

Subordinate MTN from A1 to A2

American Express Company is a New York-based holding company that is comprised of a group of operating and financing subsidiaries that operates in the global payment-services, charge card, credit card and travel services industries. As of September 30, 2008, American Express reported total managed assets of $157 billion and shareholders equity of $13 billion.

New York
Blaine A. Frantz
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Curt Beaudouin
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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