American Express 2013 Annual Report Download - page 39

AMERICAN EXPRESS COMPANY
2013 FINANCIAL REVIEW
above, the Company is currently taking steps toward Basel III
advanced approaches implementation in the U.S. The Company’s $750
million subordinated hybrid security, which is presently included in
Tier 2 capital (but not in Tier 1 capital), is not expected to meet the
requirements of Tier 2 capital under Basel III. The disqualification of
this subordinated hybrid security from Tier 2 capital will affect our
total risk-based capital ratio under Basel III; however, this ratio is
expected to remain well in excess of the required minimum.
The following provides definitions for capital ratios as defined by
Basel III 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 to its estimated
Tier 1 and Tier 1 common risk-based capital under Basel III.
TABLE 19: BASEL I VERSUS BASEL III
(Billions)
December 31,
2013
Tier 1 and Tier 1 Common Risk-Based Capital under Basel I $ 16.2
Adjustments related to:
AOCI(a) for available for sale securities 0.1
Pension, other post-retirement benefit costs and other (0.4)
Estimated Tier 1 and Tier 1 Common Risk-Based Capital under
Basel III(b) $ 15.9
(a) Accumulated Other Comprehensive Income.
(b) Estimated Basel III Tier 1 capital and Tier 1 common equity reflects the
Company’s current interpretation of Basel III. The estimated Basel III Tier 1
capital and Tier 1 common equity could change if the Company’s business
changes; and the estimated impact for 2013 is not necessarily indicative of
the impact in future periods.
Basel III Risk-Weighted Assets — The Basel III risk-weighted assets
reflect the Company’s Basel I risk-weighted assets, adjusted for 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, 2013 were estimated to be
$130.5 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 total assets for leverage capital purposes under Basel III.
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,
2013 were $176.3 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 2013, the Company returned approximately $5.0 billion to
its shareholders in the form of dividends ($967 million) and share
repurchases ($4.0 billion). The Company repurchased 55 million
common shares at an average price of $72.51 in 2013. These dividend
and share repurchase amounts represent approximately 81 percent of
total capital generated during the year. This percentage for 2013 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. 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.
On January 6, 2014, the Company submitted its comprehensive
capital plan to the Federal Reserve. 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 its guidance on dividends and capital
distributions. The Company expects a response from the Federal
Reserve by March 31, 2014. In the first quarter of 2014, the Company
is expected to execute share repurchases up to $1.0 billion pursuant to
its capital plan that received no objections from the Federal Reserve in
March 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 funding strategy and activities are integrated into its
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