Fitch Affirms American Express, Discover and SLM; Outlooks Stable

  Fitch Affirms American Express, Discover and SLM; Outlooks Stable

Business Wire

NEW YORK -- April 18, 2013

Fitch Ratings has completed a peer review of three rated consumer finance
companies and their related entities. Based on this review, Fitch has affirmed
the long-term Issuer Default Ratings (IDR) of American Express Company (AXP)
at 'A+', Discover Financial Services (Discover) at 'BBB', and SLM Corporation
(SLM) at 'BBB-'. A full list of ratings is provided at the end of this
release. The Rating Outlook for all issuers is Stable.

KEY RATING DRIVERS

The rating affirmations reflect the solid market positions of each issuer in
their respective product categories and the continuation of strong consumer
credit trends, which has supported solid earnings performance and internal
capital generation.

AXP and Discover continue to maintain peer-superior capital ratios and strong
liquidity profiles, with each retaining sufficient cash and liquid securities
to cover funding maturities over the next 12 months. Loss metrics on their
credit card portfolios lead the industry, as do portfolio expansion and
purchase volume growth, which are expected to continue to support solid
earnings performance over the near term. While Fitch believes growth in
provision expense will be a headwind in 2013, Fitch also believes loss metrics
will remain well below historical norms, and the low cost funding environment
will serve as a partial offset to higher credit costs.

AXP's superior rating continues to reflect its spend-centric business model,
which allowed the company to remain profitable and build capital throughout
the recent credit crisis. In 2012, interchange revenue accounted for
approximately 56% of net revenue, while other large credit card firms are much
more heavily reliant on net interest spread for income. AXP has an attractive
customer base, with the highest average spend-per-card in the industry, which
Fitch believes will continue to support billed business growth and earnings.

Credit trends in the private student loan space continue to move in a positive
direction, as tighter underwriting criteria, including higher co-signer rates
on undergraduate loans and increased school certifications, have and will
continue to benefit loan vintages entering repayment. Fitch expects further
stabilization of private student loan credit metrics in 2013, which should
yield further reductions in provision expense for SLM. Discover's organic
student loan portfolio is still relatively new, and, therefore, Fitch believes
loss metrics will rise modestly as the portfolio seasons.

SLM has demonstrated improved earnings consistency in recent years, despite
the run-off of its federally guaranteed student loan business, given stronger
credit trends on the private education loan side, reduced funding costs, and
greater operational efficiencies. Fitch believes the supply-demand imbalance
in the private student loan industry will benefit players of scale, of which
SLM is the largest, as portfolio growth can be achieved without loosening
underwriting criteria. While legislative risk remains a headline risk, as it
pertains to the dischargeability of private loans in bankruptcy, Fitch
believes the impact of a potential change in legislation is becoming less
significant, as portfolio co-signer rates rise.

Separately, SLM recently completed the sale of a residual interest in an ABS
FFELP transaction, which was relatively modest in size. Fitch does not view
the sale as a change in operating strategy, but as an accelerated realization
of cash proceeds expected from the amortization of the transaction. Cash flows
from servicing the assets will remain intact, as servicing has been retained.
Should residual sales happen on a larger scale, Fitch would expect a portion
of cash proceeds generated from the sale to be used to repay unsecured debt,
as a meaningful portion of the unsecured debt remaining is being used to
support the legacy FFELP business. The use of significant cash proceeds for
higher dividend distributions and/or share repurchases would be viewed
negatively from a creditor's perspective and could result in a ratings
downgrade.

Given strong earnings performance across the consumer sector, aggregate
dividends and share repurchases were significant in the space in 2012,
amounting to payouts of 98% of earnings for AXP, 60% of earnings for Discover,
and 107% of core earnings for SLM. Still, Fitch believes risk-adjusted
capitalization levels remained solid for each. AXP's ability to generate
capital internally, in particular, is superior given its spend centric
business model and focus on fee revenue. Given current capital positions,
Fitch expects AXP and Discover will retain relatively high payout rates in
2013.

The Stable Rating Outlook for AXP and Discover reflects Fitch's expectation
that both will continue to generate consistent earnings, exhibit peer-superior
asset quality, and maintain solid liquidity and strong risk-adjusted
capitalization.

The Stable Rating Outlook for SLM reflects Fitch's expectations for consistent
operating performance in consumer lending and business services, sustained
operating efficiencies, stability in credit metrics for the private education
loan portfolio, growing capitalization, with the amortization of the FFELP
portfolio, and the continued ability to repay maturing debt obligations with
operating cash flow and liquidity on hand.

RATING SENSITIVIES - AXP and Discover

For AXP and Discover, negative rating action could be driven by an inability
to maintain competitive positions and earnings prospects in an increasingly
digitized payment landscape. While each is focused on strategic acquisitions
and/or alliances to expand online and mobile capabilities, competition from
technology companies and social networks, with access to significant consumer
data, is expected to intensify. Still, a meaningful shift in consumer payment
behavior is expected to take some time to develop.

Negative rating momentum for each could also be driven by a decline in
earnings performance, resulting from a decrease in market share, declines in
merchant acceptance, significant credit deterioration or an inability to
contain costs, a weakening liquidity profile, significant reductions in
capitalization, and legislative and/or regulatory changes that alter the
earnings prospects of the credit card business.

Fitch believes positive rating momentum is relatively limited for AXP given
its already strong rating and its concentration in payments and consumer
products. For Discover, however, positive rating momentum could develop from
increased revenue diversity, proven competitive positioning and credit
performance in non-card loan categories over time, and enhanced funding
flexibility. To date, positive momentum has been constrained by the continued
introduction of new product categories, where underwriting capabilities are
largely untested. Further seasoning of these new product portfolios will allow
Fitch to assess whether underlying performance alters the risk profile of the
firm.

RATING SENSITIVIES - SLM

For SLM, negative rating momentum could result from free cash flow generation
below Fitch's expectations, which impairs the company's ability to meet its
debt service obligations. As discussed, should FFELP residual sales happen on
a larger scale, Fitch would expect an appropriate portion of cash proceeds to
be used to repay unsecured debt. The use of significant cash proceeds for
higher shareholder distributions, which Fitch believes impairs the company's
ability to meet unsecured debt maturities, could result in a ratings
downgrade.

Negative rating action could also result from deterioration in asset quality
metrics to crisis levels, legislative change which removes the private sector
from the servicing and collection of government guaranteed student loans,
and/or an inability to arrange economically attractive term funding for
private education loans over time. While Fitch believes the impact of the
private student loan dischargeability issue is declining, the ability for a
borrower to discharge their private student loan without a demonstrated
payment history, would not be viewed favorably.

Furthermore, an inability for SLM to regain its market share in the servicing
of government loans through the ED contract, could pressure the ratings. While
not a meaningful portion of revenue or income at present, third-party
servicing income is expected to grow in importance as the owned portfolio runs
off. Given the company's scalable servicing platform and default performance,
Fitch expects SLM to achieve and maintain a meaningful share of the contract.

Conversely, while upward rating momentum is likely limited to the current
rating category, positive rating actions could result from improved
consistency of term liquidity for private education loans, stable credit
performance of Smart Option loan vintages, and measured core earnings
expansion over time, resulting from growth in business services, consistent
risk-adjusted margins in the consumer lending segment, and an increase in
third party servicing revenue.

Fitch has affirmed the following ratings with a Stable Outlook:

American Express Company

-- Long-term IDR at 'A+';

-- Short-term IDR at 'F1';

-- Short-term debt at 'F1';

-- Senior debt at 'A+';

-- Hybrid capital instrument at 'BBB';

-- Viability Rating at 'a+';

-- Support at '5'; and

-- Support Floor at 'NF'.

American Express Credit Corp.

-- Long-term IDR at 'A+';

-- Short-term IDR at 'F1';

-- Short-term debt at 'F1'; and

-- Senior debt at 'A+'.

American Express Centurion Bank

-- Long-term IDR at 'A+';

-- Short-term IDR at 'F1';

-- Senior debt at 'A+';

-- Long-term deposits at 'AA-'.

-- Short-term deposits at 'F1+';

-- Viability Rating at 'a+';

-- Support at '5'; and

-- Support Floor at 'NF'.

American Express Bank, FSB

-- Long-term IDR at 'A+';

-- Short-term IDR at 'F1';

-- Senior debt at 'A+';

-- Long-term deposits at 'AA-'.

-- Short-term deposits at 'F1+';

-- Viability Rating at 'a+';

-- Support at '5'; and

-- Support Floor at 'NF'.

American Express Travel Related Services Company, Inc.

-- Long-term IDR at 'A+'; and

-- Short-term IDR at 'F1'.

American Express Canada Credit Corp.

-- Long-term IDR at 'A+';

-- Short-term IDR at 'F1'; and

-- Senior debt at 'A+'.

Discover Financial Services

-- Long-term IDR 'BBB';

-- Short-term IDR 'F2';

-- Viability Rating 'bbb';

-- Senior debt 'BBB';

-- Preferred stock 'B+';

-- Support '5'; and

-- Support Floor 'NF'.

Discover Bank

-- Long-term IDR 'BBB';

-- Short-term IDR 'F2';

-- Viability Rating 'bbb';

-- Short-term Deposits 'F2';

-- Long-term Deposits 'BBB+';

-- Senior Debt 'BBB';

-- Subordinated Debt 'BBB-';

-- Support '5'; and

-- Support Floor 'NF'.

SLM Corporation:

--Long-term IDR at 'BBB-';

--Short-term IDR at 'F3';

--Senior unsecured debt at 'BBB-'; and

--Preferred stock at 'BB'.

Additional information is available at 'www.fitchratings.com.'

Applicable Criteria and Related Research:

-- 'Global Financial Institutions Rating Criteria' (August 2012);

-- 'Finance and Leasing Companies Criteria' (December 2012);

-- 'Assessing and Rating Bank Subordinated and Hybrid Securities' (December
2012);

-- 'Treatment of Hybrids in Nonfinancial Corporate and REIT Credit Analysis'
(December 2012).

Applicable Criteria and Related Research

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696720

Assessing and Rating Bank Subordinated and Hybrid Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=695542

Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=788930

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Contact:

Fitch Ratings
Primary Analyst
Meghan Neenan, CFA
Senior Director
+1-212-908-9121
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst - AXP and Discover
Mohak Rao, CFA
Director
+1-212-908-0559
or
Secondary Analyst - SLM
Doriana Gamboa
Director
212-908-0865
or
Committee Chairperson
Joo-Yung Lee
Managing Director
+1-212-908-0560
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com
 
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