American Express 2007 Annual Report Download - page 41

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
Other, net expenses in 2007 decreased $969 million or 71
percent to $389 million compared to 2006 driven by a gain of
$1.13 billion related to the settlement of litigation with Visa,
and the reclassification of certain card-acquisition costs to card
fee revenue beginning July 1, 2006, partially offset by the $177
million gain related to the sale of the Company’s card and
merchant-related activities in Brazil, Malaysia, and Indonesia
in 2006, litigation expenses of $74 million related to settlement
with Visa, and a $50 million contribution to the American
Express Charitable Fund. Other, net expenses in 2006 increased
$55 million or 4 percent to $1.4 billion compared to 2005 due
to the September 11, 2001-related insurance settlement in 2005
and higher volume and technology-related costs in 2006 offset
by the reclassification of certain card-acquisition costs to card
fee revenue beginning July 1, 2006, and the 2006 gains on the
sales of the Company’s card and merchant-related activities in
Brazil, Malaysia, and Indonesia.
Provisions for Losses and Benefits
Consolidated provisions for losses and benefits in 2007
increased $1.3 billion or 43 percent over last year to $4.3
billion reflecting a $1.1 billion or 70 percent increase in the
cardmember lending provision and a $205 million or 22
percent increase in the charge card provision. The increase
in cardmember lending provision for losses was due to higher
write-off and delinquency rates, increased loan volumes, and
the charge for credit-related trends previously discussed. The
increase in charge card provision was due to the additional
charge for credit-related trends previously discussed and
higher business volumes.
Consolidated provisions for losses and benefits in 2006
increased $268 million or 10 percent over 2005 to $3.0 billion
as the cardmember lending and other (including investment
certificates) provisions growth of $274 million or 20 percent
and $97 million or 26 percent, respectively, was partially offset
by a $103 million or 10 percent decline in the charge card
provision. The increase in the lending provision was driven by
increased loan volumes globally and higher loss rates outside
the United States, primarily in Taiwan, partially offset by
the favorable impact of lower bankruptcy-related charge-
offs and strong credit quality in the United States, and lower
than expected costs related to Hurricane Katrina losses that
were provided for in 2005. The other provision (including
investment certificates) rose due to higher interest rates on
larger investment certificate balances and increased merchant-
related reserves. Compared to 2005, the charge provision
reflected the lower loss rate, lower than expected costs for
Hurricane Katrina losses that were provided for in 2005, and
improved results from collection activities.
Income Taxes
The effective tax rate was 27 percent in 2007 compared to 30
percent in 2006 and 24 percent in 2005. The effective tax rate
in 2007 as compared to 2006 included tax benefits of $140
million from Internal Revenue Service (IRS) settlements and
resolution of prior years’ tax items and lower tax rates applied to
the earnings of the Company’s non-U.S. subsidiaries, partially
offset by an increase in state and local income tax. The effective
tax rate in 2006 as compared to 2005 reflected higher state
and local income taxes in 2006, and 2005 included the benefit
related to the resolution of IRS audits of previous years’ tax
returns.
Discontinued Operations
(Loss) Income from discontinued operations, net of tax, was
($36) million, $96 million and $672 million in 2007, 2006, and
2005, respectively. Loss from discontinued operations, net of tax,
during 2007, primarily related to AEB’s results from operations,
which included $71 million ($45 million after-tax) compliance-
related remediation costs and $60 million pretax and after-tax
of regulatory and legal expense, as well as businesses disposed
of in previous years. Income from discontinued operations, net
of tax, during 2006, reflected AEB results from operations,
including an $88 million ($40 million after-tax) gain from the
sale of its investment in Egyptian American Bank and a $48
million ($22 million after-tax) loss related to the sale of its
international banking activities in Brazil, as well as a tax benefit
related to Ameriprise upon finalization of the Company’s 2005
U.S. federal tax return and costs related to businesses disposed
of in previous years. 2005 results from discontinued operations
included the results of Ameriprise and certain other dispositions
(primarily TBS) through September 30, 2005.
Impact of Credit and Capital Market Environment
Overview
In December, the Company began to feel the effects of the
weakening U.S. economy as cardmember spending slowed and
past-due and write-off rates in U.S. Card Services increased.
In the latter part of 2007, there was also significant volatility in
the capital markets, particularly for the valuations of mortgage-
backed and other asset-backed structured products as well as in
the issuance cost and availability of short-term, asset-backed
debt for certain issuers.
U.S. Card Services cardmember lending and receivables
While overall cardmember spending for U.S. Card Services
continued to be relatively strong and the Company benefited
from a focus on the affluent sector of the market, the Company
saw negative credit trends among U.S. consumers in the
latter part of 2007, particularly in certain parts of California,
Florida and other regions of the country most affected by the
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