American Express 2006 Annual Report Download - page 60

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2006 fi nancial review
american express company
as discussed previously. Growth was also suppressed by
the corporate travel environment, increased incentives
for corporate clients associated with growth in corporate
volumes, and the impact of the sales of card-related
activities in Brazil, Malaysia, and Indonesia. The 15
percent increase in billed business in 2006 reflected an
11 percent increase in spending per proprietary basic
card and a 1 percent decline in basic cards-in-force after
the transfer of cards in Brazil, Malaysia, and Indonesia
to Global Network Services during 2006. Assuming
no changes in foreign currency exchange rates from
2005 to 2006 and excluding the impact of the sales of
Brazil, Malaysia, and Indonesia, billed business and
spending per proprietary basic card-in-force increased
15 percent and 9 percent, respectively, in 2006, and all
of the Company’s major geographic regions experienced
double digit growth. International consumer and small
business spending, and global corporate spending rose 13
percent and 16 percent, respectively, compared to 2005.
Net finance charge revenue rose 18 percent to $808
million in 2006, primarily due to 20 percent growth
in the average cardmember lending balances, which
was partially offset by a lower net portfolio yield. Net
revenues of $8.9 billion in 2005 were 6 percent higher
than 2004 as a result of increased discount revenue, net
card fees, and other revenues.
Expenses
During 2006, International Card & Global Commercial
Services’ expenses increased 6 percent to $8.3 billion,
due to increased provisions for losses and benefits, and
higher marketing, promotion, rewards and cardmember
services expenses. Expenses in 2006 reflected a
$240 million gain related to the sales of card-related
activities in Brazil, Malaysia, and Indonesia as well as
the sale of an investment in EAB, which was reported
as a reduction to human resources and other operating
expenses. Expenses in 2006 and 2005 included $94
million and $168 million, respectively, of reengineering
costs primarily related to restructuring efforts in the
Corporate Travel business, and international operations
areas. Expenses in 2005 of $7.8 billion were 6 percent
higher than 2004 primarily due to increased provision
for losses and benefits, higher marketing and promotion
expenses, and greater rewards costs.
Marketing, promotion, rewards and cardmember
services expenses of $1.4 billion increased 13 percent
in 2006, due to greater volume-related rewards costs,
which was partially offset by a moderate reduction
in marketing and promotion costs. The increased
marketing, promotion, rewards and cardmember services
expenses in 2006 also reflected the adjustments related to
Membership Rewards ultimate redemption rate estimate
previously discussed. Total provisions for losses and
benefits increased 33 percent in 2006 compared to 2005,
principally due to higher interest rates on investment
certificate balances, strong volume and loan growth, and
a higher level of charge offs primarily related to industry-
wide credit issues in Taiwan.
The effective tax rate was 23 percent in 2006
versus 18 percent in 2005 and 30 percent in 2004. The
effective tax rate in 2006 reflected a higher tax expense
related to uncertainty regarding the Company’s ability
to obtain tax benefits for certain expenses attributable
to foreign subsidiaries, a relatively high effective tax rate
due to the impact of foreign exchange translation on the
gain on the sale of the Company’s investment in EAB,
and a relatively low effective tax rate benefit on credit
losses in Taiwan. These items were offset by a relatively
low effective tax rate on the sale of the Company’s card
and merchant-related activities in Brazil, resulting
principally from the difference between the applicable
Brazil tax rate and the higher U.S. statutory rate.
The effective tax rate was lower in 2005 as compared
to 2004 primarily due to tax benefits of $33 million,
resulting from the resolution of IRS audits of previous
years’ returns, in addition to the positive effect of
changes in the Company’s international funding strategy
in 2004.
GLOBAL NETWORK & MERCHANT SERVICES
SELECTED INCOME STATEMENT DATA
Years Ended December 31, (Millions) 2006 2005 2004
Net revenues:
Discount revenue, fees and other $3,161 $2,747 $2,531
Expenses:
Marketing and promotion 518 604 389
Provision (benefit) for losses 89 66 (2)
Human resources and other
operating expenses 1,366 1,195 1,233
Tota l expenses 1,973 1,865 1,620
Pretax segment income 1,188 882 911
Income tax provision 409 309 332
Segment income $ 779 $ 573 $ 579