DFS Discover Financial Services

Recently, Standard & Poor’s Rating Services (S&P) raised the long-term issuer credit rating (ICR) of the operating subsidiaries of American Express Co. (AXP) or AmEx to “A-” from “BBB+.” Additionally, the rating agency affirmed the ICR of the holding company at “BBB+/A-2” and the short-term ICR of its operating subsidiaries at “A-2.”  The outlook for all ratings remains stable.

The affirmation of AmEx’s ratings was based on the company’s consistent revenue growth even amid the global economic downturn and regulatory pressures. Revenue growth was driven by fee income, which remained comparatively unaffected by asset quality.

Moreover, the company’s asset quality also remained superior to other card companies given its focus on affluent customers. Additionally, the addition of direct-to-consumer deposits, which S&P considers stronger than wholesale funding but weaker than branch originated deposits, has enhanced AmEx’s funding profile.

Amex’s improving customer spending trends, superior asset quality and strong earnings resulted in the stable outlook on the ratings despite a slow economic recovery and higher regulatory restrictions. Moreover, S&P expects a moderate deterioration in the company’s asset quality from the current strong levels.

However, if AmEx’s risk-adjusted capital ratio increases to 10% from the current level of 7.6%, then the ratings can be revised upward. Alternatively, if the company’s profitability declines consistently, thereby straining the capital balance, or if there are any unfavorable regulatory, legislative or legal changes, then a downward revision of the ratings is imminent.

The Zacks Consensus Estimate for AmEx’s second-quarter 2012 earnings currently stands at $1.10 per share, up 2.5% year over year. For 2012, earnings are expected to be about $4.34 per share, reflecting growth of 5.3% over 2011.

AmEx primarily competes with Discover Financial Services (DFS), Visa Inc. (V) and MasterCard Incorporated (MA). The company carries a Zacks #3 Rank, which translates into a short-term Hold rating. We also maintain our long-term Neutral recommendation on the stock.

 
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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