American Express 2014 Annual Report Download - page 41

AMERICAN EXPRESS COMPANY
2014 FINANCIAL REVIEW
Common Equity Tier 1 Risk-Based Capital Ratio — The Common Equity Tier 1 risk-based capital ratio is calculated as Common Equity Tier
1 capital, divided by risk-weighted assets. Common Equity Tier 1 is the sum of common shareholders’ equity, adjusted for ineligible goodwill
and intangible assets, certain deferred tax 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 and subject to transition
provision. Common Equity Tier 1 capital as of December 31, 2014 was $17.5 billion.
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 Equity Tier 1 capital, our perpetual preferred stock and third-party non-controlling interests in consolidated subsidiaries.
Tier 1 capital as of December 31, 2014 was $18.2 billion.
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) a
portion of the unrealized gains on equity securities, $600 million of subordinated notes issued in the fourth quarter of 2014 and a $750
million subordinated hybrid security. The $750 million subordinated hybrid security does not meet the requirements of Tier 2 capital under
Basel III, and is being transitioned out of capital (the total amount included in Tier 2 capital as of December 31, 2014 was $375 million).
Hence, the total amount of subordinated debt included in Tier 2 capital as of December 31, 2014 was $975 million. Tier 2 capital as of
December 31, 2014 was $2.6 billion. See “Fully Phased-in Basel III” section.
Tier 1 Leverage Ratio — The Tier 1 leverage ratio is calculated by dividing Tier 1 capital by our average total consolidated assets for the most
recent quarter. Average total consolidated assets as of December 31, 2014 were $154.7 billion.
The following provides a definition for Tangible Common Equity to Risk-Weighted Assets ratio, which is widely used in the marketplace,
although it may be calculated differently by different companies:
Common Equity and Tangible Common Equity to Risk-Weighted Assets Ratios — Common equity equals our shareholders’ equity of $20.7
billion as of December 31, 2014, less preferred shares of $0.7 billion. Tangible common equity, a non-GAAP measure, equals common equity
less goodwill and other intangibles of $3.9 billion as of December 31, 2014. We believe presenting the ratio of tangible common equity to
risk-weighted assets is a useful measure of evaluating the strength of our capital position.
FULLY PHASED-IN BASEL III
Basel III, when fully phased-in, will require bank holding companies and their bank subsidiaries to maintain more capital than prior
requirements, with a greater emphasis on common equity. We estimate that had Basel III been fully phased-in during the twelve months
ended December 31, 2014, our reported Common Equity Tier 1 risk-based capital and Tier 1 risk-based capital ratios would have been 12.2
percent and 12.8 percent, respectively, and our reported Tier 1 leverage ratio would have been 11.1 percent. As of December 31, 2014, had the
Basel III rules been fully phased-in, our supplementary leverage ratio would be 9.4 percent.5These ratios are calculated using the
Standardized Approach for determining risk-weighted assets. As noted previously, we are currently taking steps toward Basel III Advanced
Approaches implementation in the U.S.
The Basel capital standards establish minimum requirements for the Tier 1 risk-based capital ratios that are 1.5 percent higher than the
minimum requirements for Common Equity Tier 1 risk-based capital ratios. This difference between Tier 1 capital, which includes common
equity and qualifying preferred securities, and Common Equity Tier 1 is also present in the minimum capital requirements within
Comprehensive Capital Analysis and Review (CCAR), beginning with the 2014 plan submissions. We received no-objection to issue
preferred stock in our 2014 CCAR submission. Accordingly, we issued $750 million of preferred shares in the fourth quarter of 2014. We also
anticipate a further issuance of preferred shares in the first quarter of 2015, subject to market conditions. The preferred shares issuance helps
to finance a portion of the Tier 1 capital requirements in excess of common equity requirements.
Our $750 million subordinated hybrid security, which was previously fully included in Tier 2 capital (but not in Tier 1 capital), does not
meet the requirements of Tier 2 capital under Basel III. The phase-out of this subordinated hybrid security from Tier 2 capital began in the
first quarter of 2014, which affects our total risk-based capital ratio. As previously mentioned, we issued $600 million of subordinated debt in
the fourth quarter of 2014, which qualifies as Tier 2 capital under Basel rules. Our total risk-based capital ratio is expected to remain well in
excess of the required minimum.
5The Fully Phased-in Basel III capital ratios are non-GAAP measures. We believe the presentation of the capital ratios is helpful to investors
by showing the impact of future regulatory capital standards on our capital ratios.
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