American Express 2013 Annual Report Download - page 38

AMERICAN EXPRESS COMPANY
2013 FINANCIAL REVIEW
Tier 1 Risk-Based Capital Ratio — The Tier 1 capital ratio is calculated
as Tier 1 capital divided by risk-weighted assets. Tier 1 capital is the
sum of common shareholders’ equity, certain perpetual preferred
stock (not applicable to the Company), and non-controlling interests
in consolidated subsidiaries, adjusted for ineligible goodwill and
intangible assets, as well as certain other comprehensive income items
as follows: net unrealized 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, 2013 was $16.2 billion.
This ratio is commonly used by regulatory agencies to assess a
financial institution’s financial strength. Tier 1 capital 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, 2013 was $2.4 billion. The
$750 million subordinated hybrid security is not expected to meet the
requirements of Tier 2 capital under Basel III, and will begin to be
transitioned out of capital beginning in 2014. See “Basel III” below.
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, 2013 were $148.6 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:
TABLE 18: TOTAL TIER 1 COMMON EQUITY
(Billions)
December 31,
2013
Total shareholders’ equity $ 19.5
Net effect of certain items in accumulated other
comprehensive loss excluded from Tier 1 common equity 0.4
Less: Ineligible goodwill and intangible assets (3.5)
Less: Ineligible deferred tax assets (0.2)
Total Tier 1 common equity $ 16.2
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, Basel III includes 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 $19.5 billion as of December 31, 2013, and tangible common equity,
a non-GAAP measure, equals common equity less goodwill and other
intangibles of $4.0 billion as of December 31, 2013. 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 and finance such capital in a
cost efficient manner; 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’s business operations.
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 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 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. The
Company estimates that had Basel III been fully phased-in during 2013,
its reported Tier 1 risk-based capital and Tier 1 common risk-based
ratios would have been 12.2 percent, and its reported Tier 1 leverage
ratio would have been 10.7 percent. As of December 31, 2013, had the
Basel III rules been effective, the Company’s supplementary leverage
ratio would be 9.0 percent.6These ratios are calculated using the
standardized approach for determining risk-weighted assets. As noted
6The capital ratios are non-GAAP measures. The Company believes
the presentation of the capital ratios is helpful to investors by
showing the impact of Basel III.
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