The operational risk facing American Express Company (NYSE:AXP) from the forthcoming Basel 3 endgame/Basel 4 proposal (B3/B4), being efforts by regulators to amend certain aspects of large banks’ capital rules, has been overstated according to analysts at UBS.
“Calculation of operational risk-weighted assets (RWAs) under the Basel proposal is especially punitive for firms with greater size and fee income streams,” the analysts explained in a note to clients.
They wrote that given American Express earns about 80% of its revenue from fees, their estimated 39% increase to RWAs screens well above peers and the median 8% for all the banks they provide coverage on.
Despite American Express screening poorly, they stated: “We think there are multiple reasons for the net impact to be manageable for AXP, including potential RWA relief on the credit side and its industry-leading levels of capital generation.”
Further, while the analysts believe the operational risk of the upcoming regulations to American Express is overstated, they wrote that questions remain, for example, around credit risk weights in the US compared to internally and a potential cap on the fee income component.
They noted uncertainty would continue until the Notice of Proposed Rulemaking (NPR) is released in the next six weeks or so.
The UBS analysts have a ‘Neutral’ rating on American Express and a 12-month price target of $182. The company’s shares are currently trading at $167.64.
Contact the author at emily.jarvie@proactiveinvestors.com
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