American Express 2012 Annual Report Download - page 32

AMERICAN EXPRESS COMPANY
2012 FINANCIAL REVIEW
gains/losses on securities and derivatives, and net unrealized
pension and other postretirement benefit losses, all net of tax.
Tier 1 capital as of December 31, 2012 was $14.9 billion. This
ratio is commonly used by regulatory agencies to assess a
financial institution’s financial strength and is the primary form
of capital used to absorb losses beyond current loss accrual
estimates.
Total Risk-Based Capital Ratio — The total risk-based capital
ratio is calculated as the sum of Tier 1 capital and Tier 2 capital,
divided by risk-weighted assets. Tier 2 capital is the sum of the
allowance for receivable and loan losses (limited to 1.25 percent
of risk-weighted assets) and 45 percent of the unrealized gains on
equity securities, plus a $750 million subordinated hybrid
security, for which the Company received approval from the
Federal Reserve for treatment as Tier 2 capital. Tier 2 capital as
of December 31, 2012 was $2.4 billion.
Tier 1 Leverage Ratio — The Tier 1 leverage ratio is calculated by
dividing Tier 1 capital by the Company’s average total
consolidated assets for the most recent quarter. Average total
consolidated assets as of December 31, 2012 were $147.0 billion.
The following provides definitions for capital ratios widely used
in the marketplace, although they may be calculated differently
by different companies:
Tier 1 Common Risk-Based Capital Ratio — The Tier 1 common
risk-based capital ratio is calculated as Tier 1 common equity, a
non-GAAP measure, divided by risk-weighted assets. Tier 1
common equity is calculated by reference to total shareholders’
equity as shown below:
(Billions)
December 31,
2012
Total shareholders’ equity $ 18.9
Net effect of certain items in accumulated other comprehensive
loss excluded from Tier 1 common equity 0.1
Less: Ineligible goodwill and intangible assets (3.9)
Less: Ineligible deferred tax assets (0.2)
Total Tier 1 common equity $ 14.9
The Company believes the Tier 1 common risk-based capital
ratio is useful because it can be used to assess and compare the
quality and composition of the Company’s capital with the
capital of other financial services companies. Moreover, the
proposed U.S. banking capital standards known as Basel III
include measures that rely on the Tier 1 common risk-based
capital ratio.
Common Equity and Tangible Common Equity to Risk-Weighted
Assets Ratios — Common equity equals the Company’s
shareholders’ equity of $18.9 billion as of December 31, 2012,
and tangible common equity, a non-GAAP measure, equals
common equity less goodwill and other intangibles of $4.2
billion as of December 31, 2012. The Company believes
presenting the ratio of tangible common equity to risk-weighted
assets is a useful measure of evaluating the strength of the
Company’s capital position.
The Company seeks to maintain capital levels and ratios in
excess of the minimum regulatory requirements; failure to
maintain minimum capital levels could affect the Company’s
status as a financial holding company and cause the respective
regulatory agencies to take actions that could limit the
Company’sbusinessoperations.
The Company’s primary source of equity capital has been the
generation of net income. Historically, capital generated through
net income and other sources, such as the exercise of stock
options by employees, has exceeded the annual growth in its
capital requirements. To the extent capital has exceeded
business, regulatory and rating agency requirements, the
Company has historically returned excess capital to shareholders
through its regular common share dividend and share repurchase
program.
The Company maintains certain flexibility to shift capital
across its businesses as appropriate. For example, the Company
may infuse additional capital into subsidiaries to maintain
capital at targeted levels in consideration of debt ratings and
regulatory requirements. These infused amounts can affect the
capital profile and liquidity levels at the American Express
Company (Parent Company) level. The Company does not
currently intend or foresee a need to shift capital from non-U.S.
subsidiaries with permanently reinvested earnings to a U.S.
parent company.
Basel III
Basel III, when implemented by the U.S. banking agencies and
fully phased-in, will require bank holding companies and their
bank subsidiaries to maintain substantially more capital than
prior requirements, with a greater emphasis on common equity.
While final implementation of the rules related to capital ratios
will be determined by the Federal Reserve, the Company
estimates that had the new rules (as currently proposed) been in
place during 2012, the reported Tier 1 risk-based capital and Tier
1 common risk-based ratios would have been 11.7 percent, the
reported Tier 1 leverage ratio would have been 10.1 percent and
the supplementary leverage ratio would have been 8.5 percent.2
These ratios are calculated using the standardized approach as
described in the proposed rules and are based on the Company’s
reported Basel I ratios, without taking into account the potential
impact of Basel II implementation. As noted above, the
Company is currently taking steps toward Basel II
implementation in the United States.
The estimated impact of the Basel III rules will change over
time based upon changes in the size and composition of the
Company’s balance sheet as well as based on the U.S.
2The proposed capital ratios are non-GAAP measures. The Company believes
the presentation of the proposed capital ratios is helpful to investors by
showing the impact of Basel III, assuming the proposed new rules as
currently proposed are implemented by the Federal Reserve.
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