DFS Discover Financial Services

On Thursday, Fitch Ratings affirmed the long and short-term Issuer Default Rating (IDR) of American Express Co. (AXP) or AmEx and its subsidiaries at “A+” and “F1,” respectively, with a stable outlook.

The affirmation of ratings was based on AmEx’s stable operating results, strong market position, high quality assets and diversified financial sources. Sturdy capitalization, high liquidity and franchise strength also played a role, but the lack of diversity in revenue sources and regulatory pressures prevented an upgrade.

Meanwhile, anticipation of continued stable earnings, ample liquidity, strong capitalization and better asset quality compared to peers prompted Fitch to assign a stable outlook on the ratings, which means that there is very low possibility of a change in ratings in the near future.

Fitch expects revenue growth in 2012 to be offset by lower reserve releases, thereby keeping the earnings at the 2011 level. Strong growth is expected in the billed business, while adjusted expenses are expected to decline owing to cost containment measures and improved operating leverage.

Loss rate is also projected to decline in 2012, although provision expenses are expected to rise.  Meanwhile, capital ratios are expected to stay flat over the 2011 level as earnings are expected to be utilized in dividend payment, share buyback and asset purchase.

However, a decline in AmEx’s earning ability or competitive strength could lead to a rating downgrade. Reduced market share, lower merchant acceptances, higher costs and lower liquidity could have a negative impact on earnings, thereby resulting in lower ratings.

Concurrently, Standard & Poor’s Rating Services also affirmed AmEx’s long-term debt ratings at “BBB+” and short-term debt rating at “A2.” The stable outlook on the ratings also remained unaltered. The ratings affirmation was prompted by the release of the company’s first-quarter 2012 earnings result.

Earlier this week, AmEx reported first-quarter 2012 operating earnings of $1.07 per share that was modestly higher than the Zacks Consensus Estimate of $1.00 per share and 97 cents recorded in the year-ago quarter. Results benefited from an improved credit quality with an increased usage of cards and fewer defaults, across all business segments.

Going ahead, the Zacks Consensus Estimate for AmEx’s second-quarter 2012 earnings currently stands at $1.08 per share, up an estimated 1.4% over the prior-year quarter. For 2012, earnings are expected to be about $4.28 per share, a forecasted growth of 3.9% over 2011.

AmEx primarily competes with Discover Financial Services (DFS), Visa Inc. (V)and MasterCard Incorporated (MA). The company carries a Zacks #2 Rank, which translates into a short-term Buy rating. We also maintain a long-term Neutral recommendation on AmEx.

 
AMER EXPRESS CO (AXP): Free Stock Analysis Report
 
DISCOVER FIN SV (DFS): Free Stock Analysis Report
 
MASTERCARD INC (MA): Free Stock Analysis Report
 
VISA INC-A (V): Free Stock Analysis Report
 
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