On Friday, Moody’s Investor Service of Moody’s Corp. (MCO) raised its ratings outlook on American Express Co. (AXP) (AmEx) and its subsidiaries to ‘stable’ from ‘negative.’ The rating agency also affirmed its status on the company’s debt.
Accordingly, Moody’s avowed its “A3” rating on AmEx’s long-term debt, placing it at an upper-medium level of the investment grade. Besides, the company’s short-term debt is maintained at “P-2”, which is placed at the middle level of the investment grade. The ratings imply a strong debt repayment capability of AmEx.
The ratings also reflect the company’s strong brand name that benefits its cards usage growth, while also improving its loan portfolio. Moreover, substantially reduced provision for losses has helped boost the company’s liquidity. AmEx has also been witnessing lesser defaults, over the last few quarters, as consumers resum their spending to the pre-recession period.
AmEx has pulled itself out of the recession more quickly than its rivals, owing to its creditworthy customers. Moreover, less reliance on revolving credit and back-end fees along with fairly balanced debt maturities has helped gain competitive advantage while also improving its overall risk profile. Besides, there has been an impressive recovery in credit trends, with increased card spending and strong billings over the last few quarters.
Moroever, the company’s transition to a bank holding company has enhanced AmEx’s capital flexibility and helped it maintain strong unrestricted cash and marketable securities’ reserve.
However, the rating agency is worried about the company’s funding, for which AmEx is mostly dependent on the capital market rather than the comparably rated banks. About 66% of the company’s fund source comes from unsecured debt and securitization, which again poses a risk on AmEx’s capital position in case of a volatile economy bringing in another credit thump.
Besides, concerns prevail over the company’s ability to sustain expenses, particularly now when settlement payments with MasterCard Inc. (MA) and Visa Inc. (V) are reaching an end in the second and fourth quarter this year. Going ahead, even the challenging regulatory environment, demand of latest technologies and litigation hurdles continue to pose operating and financial risks on AmEx. Based on the above-mentioned pointers, currently, Moody’s maintains a stable but cautious stance on the AmEx.
On Friday, the shares of AmEx closed at $51.19, down 1.2%, at the New York Stock Exchange.
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