American Express May Face Moody's Downgrade

Moody's Investors Service placed on review for possible downgrade the ratings of American Express and American Express Travel Related Services and its rated operating subsidiaries.

The Prime-1 short-term ratings for Amex and rated subsidiaries were affirmed. Moody's noted that were the long-term ratings to be downgraded, they would most likely be lowered by one notch.

Today's rating action reflects Moody's concerns over Amex's asset quality trends and lending exposures, particularly within geographic markets in the United States that have experienced sharp home price declines.

Broad economic weakness in the US, heavy consumer debt burdens, and home price erosion have also combined to place a damper on Amex's card-member spending growth in the U.S.

Although Amex has made great strides in diversifying 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 during its review it will assess the outlook for Amex's core earnings generation and the related capacity to absorb elevated credit costs in the face of a more challenging revenue outlook, particularly in the US market. The review will include an assessment of cost flexibility as well.

Amex's profitability and earnings sustainability have both benefited over time from the company's sharp focus on cost control and continuous reengineering of the way it does business.

The rating agency noted that Amex's credit profile and ratings have been based upon the firm's strong franchise that has allowed the firm to generate consistently solid profitability and cash-flow generation, 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.

Though facing increased credit costs and weaker spending volume, Amex continues to perform well on an absolute basis and relative to other market-funded finance companies and commercial banks, with a very respectable return on average managed assets of about 1.79% through June 2008, even after a $600 million addition to loss reserves.

Moody's also said that Amex's funding and liquidity management has been sound. However, volatile unsecured and ABS funding markets have made liquidity management an even more critical task for all financial institutions.

In the face of this issue, the firm has built up a material liquidity portfolio, termed out debt, and has demonstrated consistent access to funding and securitization markets throughout the market downturn. Moody's viewed Amex's recent addition of a $5 billion bank conduit funding facility as a prudent enhancement to the firm's contingent liquidity plan.

American Express 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 June 30, 2008, American Express reported total managed assets of $164 billion, shareholders equity of $12.3 billion, and six-month net revenues of $14.7 billion.

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