American Express 2007 Annual Report Download - page 60

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2007 FINANCIAL REVIEW
AMERICAN EXPRESS COMPANY
RESULTS OF OPERATIONS FOR THE THREE YEARS
ENDED DECEMBER 31, 2007
International Card Services reported segment income of $291
million for 2007, a $52 million or 15 percent decrease from $343
million in 2006, which increased $37 million or 12 percent from
2005.
Revenues Net of Interest Expense
In 2007, International Card Services’ revenues net of interest
expense increased $366 million or 9 percent to $4.3 billion
due to higher discount revenue, net card fees and other and
increased cardmember lending finance revenue, partially
offset by higher interest expense. Discount revenue, net card
fees, and other revenues increased $298 million or 9 percent
to $3.7 billion in 2007, driven primarily by the higher level of
card spending and an increase in other revenues, partially offset
by card-related fees, the reclassification of certain card-related
acquisition costs as discussed previously and the impact of the
sales of card-related activities in Brazil, Malaysia, and Indonesia
during 2006. The 14 percent increase in billed business in
2007 reflected a 17 percent increase in average spending per
proprietary basic card and a 3 percent increase in total cards-
in-force. Assuming no changes in foreign currency exchange
rates from 2006 to 2007 and excluding the impact of the sales
in Brazil, Malaysia, and Indonesia, billed business and average
spending per proprietary basic card-in-force increased 8 percent
and 7 percent, respectively, in 2007 and all International Card
Services’ major geographic regions experienced high single-
digit or low double-digit billed business growth. Cardmember
lending finance revenue rose $226 million or 20 percent to
$1.4 billion in 2007, primarily due to 12 percent growth in the
average cardmember lending balances and a higher portfolio
yield. Cardmember lending interest expense and charge card
and other interest expense of $493 million and $251 million
in 2007, respectively, rose $100 million or 25 percent and
$58 million or 30 percent, respectively, as compared to a year
ago, due to higher debt funding levels in support of growth
in loan and receivable balances, and higher effective costs of
funds. Revenues net of interest expense of $4.0 billion in 2006
were $245 million or 7 percent higher than 2005 as a result of
increased discount revenue, net card fees, and other revenues
and higher cardmember lending finance revenue, partially
offset by higher interest expense.
Expenses
During 2007, International Card Services’ expenses increased
$601 million or 21 percent to $3.4 billion, due to higher
marketing, promotion, rewards and cardmember services costs
and increased human resources and other operating expenses.
Expenses in 2007 and 2006 included $16 million and $32
million, respectively, of reengineering costs primarily related to
the international payments business. Expenses in 2006 of $2.8
billion were slightly higher than 2005 primarily due to higher
marketing, promotion, rewards and cardmember services costs,
offset by lower human resources and other operating expenses.
Marketing, promotion, rewards and cardmember services
expenses of $1.6 billion increased $457 million or 41 percent
in 2007, due to higher Membership Rewards liability resulting
from enhancements to the method of liability estimation,
greater volume-related rewards costs, and higher marketing and
promotion and business building costs. Marketing, promotion,
rewards and cardmember services expenses in 2006 reflected
a $56 million charge associated with certain adjustments
made to the Membership Rewards reserve model outside the
United States. Human resources and other operating expenses
increased $144 million or 9 percent to $1.8 billion in 2007 and
reflected gains of $114 million during 2006 related to the sales
of the Company’s card-related activities in Brazil, Malaysia,
and Indonesia, which were reported as a reduction to human
resources and other operating expenses, partially offset by the
previously mentioned reclassification of certain card acquisition
related costs effective July 1, 2006.
Provisions for Losses
Provisions for losses decreased $40 million or 5 percent to
$812 million in 2007 compared to 2006, primarily due to lower
write-off and past due rates and lower provisions related to
Taiwan, partially offset by higher volumes and lending balances.
Provisions for losses increased $223 million or 35 percent
to $852 million in 2006 compared to 2005, primarily due to
strong volume and loan growth, and a higher level of charge
offs primarily related to industry-wide credit issues in Taiwan.
Income Taxes
The effective tax rate was negative 149 percent in 2007 versus
negative 10 percent in 2006 and negative 3 percent in 2005.
International Card Services includes a tax benefit, which is likely
to continue, since the Company’s internal tax allocation process
provides this segment with the consolidated benefit related to
its ongoing funding activities outside the United States. The
effective tax rate in 2007 also reflected several favorable items
primarily related to the resolution of prior years’ tax returns and
settlements with tax authorities.
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