American Express 2012 Annual Report Download - page 33

AMERICAN EXPRESS COMPANY
2012 FINANCIAL REVIEW
implementation of the Basel III rules; and the estimated impact
for 2012 is not necessarily indicative of the impact in future
periods.
The following provides definitions for capital ratios as defined by
the proposed U.S. Basel III guidelines using the standardized
approach. All calculations are non-GAAP measures.
Basel III Tier 1 Common Risk-Based Capital Ratio — The Basel III
Tier 1 common risk-based capital ratio is calculated as adjusted
Tier 1 common equity divided by adjusted risk-weighted assets.
Basel III Tier 1 Risk-Based Capital Ratio — The Basel III Tier 1
risk-based capital ratio is calculated as adjusted Tier 1 capital
divided by adjusted risk-weighted assets.
The following table presents a comparison of the Company’s Tier
1 and Tier 1 common risk-based capital under Basel I rules to its
estimated Tier 1 and Tier 1 common risk-based capital under
Basel III rules.
(Billions)
December 31,
2012
Risk-Based Capital under Basel I $ 14.9
Adjustments related to:
AOCI for available for sale securities 0.3
Pension and other post-retirement benefit costs (0.5)
Other 0.1
Estimated Risk-Based Capital under Basel III(a) $ 14.8
(a) Estimated Basel III Tier 1 capital and Tier 1 common equity reflects the
Company’s current interpretation of the Basel III rules. The estimated Basel
III Tier 1 capital and Tier 1 common equity could change in the future as the
U.S. regulatory agencies implement Basel III or if the Company’s business
changes.
Basel III Risk-Weighted Assets — The Basel III risk-weighted
assets reflect the Company’s current interpretation of the Basel
III rules on the Company’s Basel I risk-weighted assets. Risk-
weighted assets include adjustments relating to the impact of the
incremental risk weighting applied to deferred tax assets and
significant investments in unconsolidated financial institutions,
as well as exposures to past due accounts, equities and
sovereigns. Basel III risk-weighted assets as of December 31, 2012
were estimated to be $126.8 billion.
Basel III Tier 1 Leverage Ratio — The Basel III Tier 1 leverage
ratio is calculated by dividing Basel III Tier 1 capital by the
Company’s average total consolidated assets.
Basel III Supplementary Leverage Ratio — The Basel III
supplementary leverage ratio is calculated by dividing Basel III
Tier 1 capital by the Company’s estimated total assets for
leverage capital purposes under Basel III. Estimated total assets
for leverage capital purposes includes adjustments for Tier 1
capital deductions, off-balance sheet derivatives, undrawn
unconditionally cancellable commitments and other off-balance
sheet liabilities. Total assets for leverage capital purposes as of
December 31, 2012 based on the Company’s current
interpretation of the Basel III rules were estimated to be $173.5
billion.
SHARE REPURCHASES AND DIVIDENDS
The Company has a share repurchase program to return excess
capital to shareholders. The share repurchases reduce shares
outstanding and offset, in whole or part, the issuance of new
shares as part of employee compensation plans.
During 2012, the Company returned $4.9 billion to its
shareholders in the form of dividends ($909 million) and share
repurchases ($4.0 billion). The Company repurchased 69 million
common shares at an average price of $57.56 in 2012. These
dividend and share repurchase amounts represent approximately
98 percent of total capital generated during the year. This
percentage for 2012 is significantly greater than the on average
and over time target to distribute approximately 50 percent of
the capital to shareholders as dividends or through the
repurchases of common stock. This payout percentage is also
higher than most of the other U.S. financial institutions that are
required to submit their capital distribution plans to the Federal
Reserve for approval. These distribution percentages result from
the strength of the Company’s capital ratios and the amount of
capital it generates from net income and through employee stock
plans in relation to the amount of capital required to support its
organic business growth and through acquisitions.
Since the inception of the program in December 1994, the
Company has distributed approximately 66 percent of capital
generated through share repurchases and dividends on a
cumulative basis.
On January 7, 2013, the Company submitted its
comprehensive capital plan to the Federal Reserve requesting
approval to proceed with additional share repurchases in 2013.
The capital plan includes an analysis of performance and capital
availability under certain adverse economic assumptions. The
capital plan was submitted to the Federal Reserve pursuant to the
Federal Reserve’s guidance on dividends and capital
distributions. The Company expects a response from the Federal
Reserve by March 14, 2013. Additionally, the Company was
informed in March 2012 that the Federal Reserve had no
objections to the Company’s plan to repurchase up to $1 billion
of shares in the first quarter of 2013.
FUNDING STRATEGY
The Company’s principal funding objective is to maintain broad
and well-diversified funding sources to allow it to meet its
maturing obligations, cost-effectively finance current and future
asset growth in its global businesses as well as to maintain a
strong liquidity profile. The diversity of funding sources by type
of debt instrument, by maturity and by investor base, among
other factors, provides additional insulation from the impact of
disruptions in any one type of debt, maturity or investor. The
mix of the Company’s funding in any period will seek to achieve
cost efficiency consistent with both maintaining diversified
sources and achieving its liquidity objectives. The Company’s
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