American Express 2007 Annual Report Download - page 43

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
Valuations of securities held within the Company’s
investment portfolio will continue to be subject to changes in
external market factors including default rates, rating agency
actions, and the prices at which observable market transactions
occur. The Company’s future results may be impacted by the
valuation adjustments applied to these holdings.
Other Assets
As discussed in Note 6 of the Consolidated Financial
Statements, other assets include an interest only-strip, which
represents a retained interest in securitized cardmember loans.
The Company records any change in the fair value of the
interest-only strip in securitization income, net. As previously
discussed in the Critical Accounting Policies section, the
value of the interest-only strip may be impacted by changes in
certain key assumptions including expected credit losses and
the discount rate.
Liquidity
As discussed in more detail below, the Company’s reliance on
diverse sources of funding, with wide ranges of maturities, and
its contingent liquidity strategy allow for the continued funding
of business operations through difficult economic, financial
market and business conditions when access to regular funding
sources could become diminished or interrupted.
While the credit market environment that began to emerge
in the second half of 2007 included disruptions in the capital
markets, the Company had access to sufficient financing
through its existing funding sources to meet its business needs
in 2007. Disruptions in the financial markets, however, resulted
in a change of the Company’s debt funding mix in the second
half of 2007, particularly considering maturity and floating rate
versus fixed rate profiles. (See the Market Risk Management
section for further discussion regarding the mix of floating and
fixed rate funding.)
Continued disruptions in 2008 in the financial markets could
result in further changes in the funding mix. Specifically, a lack
of investor demand in sectors of the debt capital market, such as
for 1-to-5 year unsecured floating rate debt or the A-rated and
BBB-rated tranches of the card securitization market, could
alter the Company’s funding mix. In such cases, the Company
would increase its issuance of longer-term unsecured debt or
issue the AAA-rated tranches of its securitizations, where
investor demand has been stronger. Through February in 2008,
the Company issued approximately $3.7 billion of AAA-rated
securitization certificates. It retained approximately $235
million of related A-rated securities and approximately $275
million of BBB-rated securities, as the Company had more
cost-effective alternative sources of financing for these amounts.
The Company will continue to evaluate its alternative sources
of funding and seek the mix that achieves cost-efficiency
consistent with its funding and liquidity strategies.
Credit ratings have a significant impact on the borrowing
costs of the Company. There have been no changes in the
Company’s credit ratings during 2007.
Outlook
In early January 2008, as the Company saw clear signs that
the U.S. economy was weakening, the Company announced its
expectations for slower growth in cardmember spending and
weaker credit trends in the year ahead, and that these factors
would lead to slower growth in earnings per share in 2008 than
the Company has generated in recent years. The Company’s
planning assumptions were based on a moderate downturn in
the U.S. economy and a more cautious view of the business
environment in the coming year. However, the situation is
fluid and any significant change in the economic and credit
environment could alter the Company’s 2008 outlook.
CONSOLIDATED CAPITAL RESOURCES
AND LIQUIDITY
CAPITAL STRATEGY
The Company generates equity capital primarily through
net income to fund current needs and future business growth
and to maintain a targeted debt rating. The maintenance of a
solid equity capital base provides the Company with a strong
and stable debt rating, which facilitates uninterrupted access
to diversified sources of financing to fund asset growth. The
Company also has a contingency funding plan to help ensure
adequate sources of financing in difficult economic or market
environments and, in certain circumstances, adverse events
affecting the Company.
The Company believes allocating capital to growing
businesses with a return on risk-adjusted equity in excess of its
cost of capital will generate shareholder value. The Company
retains sufficient earnings and other capital generated to satisfy
growth objectives and maintain a solid equity capital base.
To the extent capital exceeds business, regulatory, and rating
agency requirements, the Company returns excess capital
to shareholders through dividends and the share repurchase
programs.
Assuming the Company achieves its financial objectives
of 12 to 15 percent EPS growth, 33 to 36 percent ROE and
at least 8 percent revenue growth, on average and over time,
it will seek to return to shareholders an average of 65 percent
of capital generated, subject to business mix, acquisitions and
rating agency requirements.
Important factors relating to ROE include the Company’s
margins, the amount and type of receivables and other assets
needed to generate revenue, the level of capital required to
support its assets, and the mix between shareholders’ equity
and other forms of financial capital that it holds as a result of
its financing activities.
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