I would now like to turn the conference over to your host, Mr. Rick Petrino. Please go ahead.
Thank you, and welcome, everybody. Thanks for joining us for today's call. Today's discussion contains certain forward looking statements about the company's future financial performance and business prospects, which are based on management's current expectations and are subject to risks and uncertainties. Factors that could cause actual results to differ materially from these forward looking statements are set forth within today's earnings press release and earnings supplement, which were filed in an 8 ks report and in the company's other reports already on file with the SEC. The discussion today also contains certain non GAAP financial measures.
Information relating to comparable GAAP financial measures may be found in the Q2 2014 earnings release, earnings supplement and presentation slides, as well as the earnings materials for prior periods that may be discussed, all of which are posted on our website at ir.americanexpress.com. We encourage you to review that information in conjunction with today's discussion. Today's discussion will begin with Jeff Campbell, Executive Vice President and CFO, who will review some key points related to the quarter's earnings through the series of slides included with the earnings documents distributed. Once Jeff completes his remarks, we will move to a Q and A session. With that, let me turn the discussion over to Jeff.
Well, thanks Rick and good afternoon everyone. I'm pleased to be on the call this afternoon to discuss another good quarterly performance by American Express. As you know, we are holding this call a little later than usual this quarter due to the complexity of the business travel joint venture transaction, which closed on the last day of the second quarter. The gain resulting from the creation of the joint venture and the related incremental investments impacted our reported results across a number of P and L lines this quarter. We'll walk you through these impacts in just a few minutes to provide a better understanding of our underlying performance.
Overall, we are pleased with this quarter's performance as the momentum seen at the end of the Q1 continued into Q2. We believe that our underlying operating performance continues to demonstrate the strength and flexibility of our business model and you will recognize some familiar themes in the quarter, including higher spending by our card members, modest growth in the loan portfolio, credit indicators at or near historical lows, disciplined control of operating expenses and a strong balance sheet that enabled us to return a substantial amount of capital to shareholders in the form of share repurchases and dividends over the past year. You will also see some significant and largely offsetting items related to our business travel joint venture. I'll come back to each of the moving pieces in a moment, but our bottom line came to $1.43 earnings per share on a fully diluted basis. To begin now with the financial results for Q2.
As you can see on slide 2, card member spending drove build business growth of 9% on both the reported and FX adjusted basis year over year. These growth rates represent acceleration versus Q1 with the improvement seen predominantly in the U. S. While volume growth improved 3 points overall versus last quarter, we saw a smaller increase in reported revenue growth, which increased to 5% during the current quarter from 4% in Q1. I'll discuss the drivers of revenue growth in a few minutes.
Pretax income rose 16% during the quarter, while net income grew 9%. This net income growth rate was lower than the 16% growth in pre tax income due to the unusually low tax rate we benefited from during the Q2 of last year. Over the last four quarters, we have repurchased $3,900,000,000 of common shares. That translated into a 4% decrease in average shares outstanding versus the prior year. This then helped to drive diluted EPS to the $1.43 I mentioned a moment ago, which was 13% higher than the prior year on a reported basis.
These results also brought our ROE for the period ending June 30 to 29% above our on average and overtime target of 25%. So now to provide context these overall results, let's review the gain from the creation of the business travel joint venture and the related incremental investments. As a reminder, American Express and an outside investor group each have a 50% ownership interest in the new joint venture. Our partners invested $900,000,000 of cash into the joint venture, while we contributed the assets of our business travel operations. We will continue to have a close working relationship with the joint venture.
We believe that the additional resources provided by the new investor group will support efforts to develop products, create capabilities and attract new customers. On slide 3, you can see that the closing of the joint venture resulted in a pre tax gain of $626,000,000 in line with the estimates we provided you earlier this year. We incurred associated transaction related costs of $79,000,000 And I would note that we will also incur a modest amount of transaction related costs in the next several quarters. As we first began to discuss at the beginning of this year, we used a substantial portion of the gain to fund incremental initiatives to better position the company for the future. 1st, the gain gave us the flexibility to absorb $133,000,000 in restructuring costs as we continue to focus on further increasing the overall efficiency of our organization in line with the evolving nature of our customer and business needs.
2nd, we made an incremental contribution of $40,000,000 to the AXP Foundation to support our future philanthropic activities. Last and most significantly, we stepped up our investments in support of many growth initiatives. While there is obviously some subjectivity involved in determining just what was incremental, as you can see on the slide, it was a significant amount. These investments were primarily in marketing and promotion, although there were smaller amounts in a number of other P and L lines, including operating expenses. These investments primarily consisted of media spending to support some of our newer products such as Amex Everyday and Serve in the U.
S. As well as incremental customer acquisition activities around the world. I'll provide more detail when we review our quarterly expense performance in a few minutes. Overall, we estimate that the total impact of the business travel joint venture this quarter after netting out all of these items was a small net benefit of approximately $0.05 to quarterly EPS. Let's turn now to a more detailed look at several trends that will give you a better sense of the quarter starting with billed business on slide 4.
Total company billings growth increased from 6% in Q1 to 9% in Q2 on a reported basis and from 7% to 9% on an FX adjusted basis. Moving to slide 5, which shows the billing trends by region. You can see that the accelerated growth was seen predominantly in the U. S. Where our consumer, small business and corporate volumes all accelerated from the lower levels we saw in the Q1.
As you might remember, we mentioned that U. S. Billings growth improved during the second half of Q1 and we saw that momentum continue during the second quarter. Overall, international billings growth was relatively consistent with the prior quarter, declining slightly to 9% in Q2 versus 10% in Q1 on an FX adjusted basis. We did see a decline in growth rates in the JAPA region driven primarily by slower growth in China as we lap the rollout of new partners and products by our G and S partners during the prior year.
We also saw slower growth in Australia, consistent with an overall slowdown in industry credit card volumes seen in the country during Q2. Turning to build business by segment on slide 6. You can see that the moderation in volume growth in China and Australia also had an impact on G and S performance during the quarter. However, G and S remained our fastest growth segment in terms of billings, up 13% year over year on an FX adjusted basis. Moving on to loans, the 2nd key revenue driver.
We see on slide 7 that loan balances grew 5% globally. U. S. Loans were up 6% from a year ago and continue to outpace the industry. Both of these growth rates improved by 200 basis points versus the prior quarter.
It's probably worth noting that our loan growth continues to come primarily from greater spending by our card members and is not due to any significant change in our underwriting strategy. I'll also note that the new everyday product has performed well relative to our expectations since its launch a few months ago. But it is of course far too early for Putting it all together then, our billings and loan performance helped drive total revenue growth of 5% on both the reported and FX adjusted basis as you can see on slide 8. Consistent with prior periods, this growth was primarily driven by greater discount revenue from higher billed business volumes. During the quarter, discount revenue growth did not accelerate as fast as billings growth due primarily to a 4 basis point year over year decline in the reported discount rate.
Now on this point, I would remind you that in any given quarter, the year over year discount rate variance can be influenced in part by the timing of certain items. This can lead to some volatility in the variance from quarter to quarter. For example, as you will recall, our discount rate was flat year over year during Q1 before being down 4 basis points this quarter. On a year to date basis, therefore, the discount rate is down 2 basis points, which is roughly in line with our expectations. Moving on from discount revenue, the other primary driver of revenue growth was a 9% increase in net interest income, as we continued to benefit year over year from both lower funding costs and an increase in average loan balances.
Turning now to provision. You can see on slide 9 that our credit metrics are near or at historical low levels. Worldwide lending write off and delinquency rates decreased in the quarter with our delinquency rate reaching an all time low at 1%. As we've said previously, our goal is not to have the lowest possible write off rate, but is instead to achieve the best returns on our portfolio. Therefore, we would continue to expect that lending write off rates will increase somewhat from these low levels at some point.
Slide 10 shows the trend in our lending reserve coverage levels. Overall, our coverage levels remain relatively consistent with the prior quarter and we believe are appropriate given the risk level inherent in the portfolio. Finally, as you can see on slide 11, provision was down 6% versus the prior year, reflecting lower lending write offs in the current period. Charge card provision increased by 14%, driven by a larger reserve release in the prior year. While the charge card delinquency rate declined versus Q1 during both years, we saw a larger sequential decline last year.
Turning now to expenses on slide 12. Total reported expenses increased by 2%. In understanding this increase, it's important to note that both marketing and promotion and operating expenses were significantly impacted by the business travel joint venture gain and related incremental initiatives. Turning to marketing and promotion first. The vast majority of the incremental costs incurred to support our growth initiatives were within marketing and promotion, driving a 25% year over year increase in this line, though there were some incremental costs that hit other lines.
2nd, as you can see, operating expenses were down 8% on a reported basis, primarily as a result of the gain from the business travel joint venture, which was recognized as an expense reduction. On the operating expense line, this gain was partially offset by transaction related costs, the restructuring charge and the incremental contribution to the AXP Foundation. Turning to rewards expense, we saw an 11% increase relatively in line with reported billings growth. Finally, the tax rate in the quarter was 33.9%, which was significantly higher than the unusually low 29.6 percent tax rate that we experienced during the Q2 of 2013. This quarter's 33.9% was in line with our prior expectations though that our tax rate could be closer to the mid-30s.
To provide more context now on marketing and promotion expenses, which include the majority of the investments to grow our business, Slide 13 shows that these expenses were at $985,000,000 this quarter. We continue to believe that we have a number of attractive investment opportunities across both our core businesses and from newer initiatives. The gain from the Business Travel joint venture transaction this quarter provided the opportunity to increase our investments in some of our growth initiatives and better position the company for the future. The incremental investments included some media spending you may have seen in the U. S.
To support the launch of the Amex Everyday Card and the relaunch of Serve. It also included some less visible investments, including incremental card acquisition activities across the U. S. And international markets. During Q2, we also made progress on other important strategic initiatives including our OptBlue program, small merchant coverage.
During the current quarter, we announced that 4 new merchant acquirers were added up to OptBlue including First Data and we continue to add new partners to the program. We also continue to be at the forefront of connecting consumers and merchants in new and innovative ways through digital capabilities. Our recent partnership with Uber, which creates an elegant seamless experience for U. S. Card members to earn or redeem membership rewards points within the Uber mobile app is the latest example of how we are leveraging unique technology to create value for merchants and consumers.
While it is still early days for many of our digital initiatives, we are excited about the new capabilities we are developing in this space. Moving to operating expenses now on Slide 14. Let me provide a bit more detail about the impact of the Business Travel joint venture. On a reported basis, total operating expenses decreased by 8% versus the prior year during the quarter. They were heavily impacted by the Business Travel joint venture transaction and related items, including the gain, which is recorded in other net expense, the restructuring charge and the incremental charitable contribution.
After taking into account these impacts, adjusted operating expenses increased by 4% versus the prior year. The higher adjusted growth rate compared to earlier this year is due to a number of smaller items. I'd also remind you that we are now growing over the Q2 of last year, which did experience the lowest levels of operating expenses of any quarter during 20 13. Let's turn now to the efficiency initiatives, which drove the $133,000,000 restructuring charge this quarter. The actions we are taking here are primarily related to positions that do not directly impact revenue, including some actions that will be taking place over the next year.
These initiatives are designed to improve our efficiency, better align us with changing customer preferences and behaviors and contain operating expenses moving forward. More broadly, I would also remind you that going forward, business travel revenues and costs will no longer be embedded in our financial results. We will report only our share of the joint venture's earnings as we will account for it using the equity method. To help you with modeling this, business travel costs
2013.
On the
revenue side, business travel revenues constituted approximately 80% of our total travel commissions and fees during full year 2013. To conclude now with operating expenses on slide 15. On a year to date basis, operating expenses remain well controlled. After taking into account the specific items this quarter, adjusted operating expenses were flat versus the prior year. We remain committed to our annual target to have operating expenses grow by less than 3% during 2014.
We will adjust our target for the balance of the year to account for the business travel operating expenses that will no longer be reflected in our P and L. Now let's turn to capital. The substantial amount of new capital we generate provides us with significant degrees of flexibility as shown on slide 16. This quarter, we were able to return 87% of capital to shareholders, while also maintaining our strong capital ratios. As you can see on slide 17, we have also improved the diversity of our funding sources by building a significantly larger deposit base over the last several years.
Our funding mix during Q2 was consistent with the prior year and we believe that the mix should be relatively stable going forward. Let me now turn to one more topic before I conclude and take your questions. As you are aware, our trial with the DOJ began earlier this month. The government is currently presenting their case. We will then present our defense and call witnesses on behalf of American Express.
The trial is expected to end later this quarter and will be followed by the issuance of a decision, which could take several months or longer to complete. There will then likely be a lengthy appeals process. As much as we might like to, I don't think it's appropriate or beneficial for us to offer color commentary on any of these specific testimony. We will make our argument where it matters in the courtroom. We believe that our legal defense is strong, but ultimately it will be up to the courts to decide.
To remind everyone of the context, we decided to fight for 3 key reasons. First, it is unfair to allow merchants who have agreed to honor our cards to then discriminate against American Express and our card members. 2nd, it is fundamentally unfair to interfere with the consumers' right to choose how they want to pay at the checkout counter. And 3rd, the result the Justice Department seeks would provide no benefit to consumers. Instead, it would weaken competition.
So to summarize now on the quarter. While there is some complexity in our reported results this quarter from the gain related to the Business Travel joint venture transaction and our incremental initiatives, we feel good about our underlying performance during the quarter. Reported EPS was up 13% versus the prior year, driven by accelerated billings and loan growth, write off rates that remained at historical lows, disciplined control of our operating expenses and our strong capital position. Looking forward, we continue to believe that the flexibility of our business model enables us to deliver significant value to our shareholders. With that, I'll turn the call back to the operator for your questions.
I would ask that you limit yourself to one question with one follow-up, so that we can ensure we give as many people as possible the chance to participate. Operator?
Certainly. Your first question comes from the line of Don Fendetti of Citigroup. Please go ahead.
Hi, good evening. Jeff, I was wondering if you could talk a little bit about your thoughts on loan growth. Obviously, a little bit of an uptick this quarter. We're seeing a similar trend with some of the other issuers. Can you put that into some contracts?
Are you seeing a little bit better demand? Or is this something that is more one time ish?
Well, it's a good and important question. Certainly, we have been pleased over the last number of quarters to see loan growth in the 3% to 4% range at a time when the industry numbers really has been driven by spending of our card members. So it really has been driven by spending of our card members. And as we look at the sequential acceleration from 4% last quarter to 6% this quarter, we still see it pretty much just driven by spend levels of our card members that certainly one could speculate goes along with just continued levels or growth and levels of confidence about the economy. So there's certainly nothing unusual in terms of timing or accounting or any of those items.
I mean, we think that the sequential pickup in growth rates is very solid. And assuming the economic environment stays the same, we would hope that it continues at that trend. I think the other thing I really do want to emphasize that I mentioned in the earlier remarks is it is just increased spend that has driven the loan growth. We are very focused and very comfortable with our current risk profile. And so you haven't seen us make any significant changes in the various decisions we're making around risk.
Okay. Thank you. And the next question is from the line of Eric Wasserstrom of SunTrust Robinson. Please go ahead.
Thanks. I just wanted to follow-up on some of the spending trends, understanding everything that you've gone through in great detail about how the sale of the or the formation of the JV influenced in the spending trends in the period. How should we contemplate some of these line items going forward, particularly of course the marketing and promotion line and as well as the salaries and employee benefits line as a consequence of some of the restructuring actions you've undertaken?
So I'd probably break that into 2 parts, Eric. On things like marketing and promotion, as we've said for a couple of quarters now, we clearly saw the opportunity with the business travel gain to increase spending levels this quarter, but I would expect to see them go back towards what I would call more normalized levels beginning next quarter. There's some seasonality in that and you see that seasonality quite clearly in the chart on slide 13, but that's what I would expect to see next quarter on the marketing and promotion side. In terms of the restructuring charge that we took, you are quite correct in that that will drive some economies for us in the coming quarters. However, you can imagine that given the size of the charge, there is some complexity to the changes that we will be making.
And so it will take us into 2015 before you will see the economic benefit on the operating expense side of the restructuring charge we took and the changes that it will facilitate us making to our operation over the course of the next year or so. Okay.
Great. And just if I could also just follow-up, I think in the footnotes, you mentioned that you took a charge for a change in the membership rewards ultimate redemption rate. And is that distinct from the restructuring charges that you've called out? And if so, can you give us a sense of the magnitude of that figure?
Yes. It's completely distinct from anything we called out. And the way I would think about this Eric is you have seen us over the last couple of years make a couple of all related incremental improvements in the methodology we use for estimating this liability. This was one of the last remaining pieces of that change. We made earlier changes in the more material markets.
And so that's why this was a smaller charge, but it was still significant enough to call out for you that I believe now brings us globally to where we have adopted a new and we believe better methodology for how we calculate URR around the globe. But that is all completely separate from the discussion we had around the incremental investments we chose to affirmatively make in the quarter to help grow the business.
And the magnitude?
Yes. The magnitude is probably worth a couple of pennies.
All right. Thanks very much.
Okay. Thank you. Next question from the line of Vincent Caintic of Macquarie. Please go ahead.
Yes. Thank you. Just one quick question and then a more follow-up question. On the spend growth this quarter, it was very, very strong. I was wondering if you could kind of guide us on to whether to expect that spend growth for the rest of 20 14 or if we should be kind of thinking about the first half of twenty fourteen as loan growth?
And then kind of on the incremental growth initiatives investments made this quarter and understanding it's early days, but when should we be thinking about say the revenue opportunities that come from those investments? Thank you.
Well, on spend growth going forward, boy, we are always really cautious about trying to project forward, because as you know, Vincent, our results are tied to a number of things, but including what happens economically. And I would say as we look at the June quarter 9% billings growth rate, we are reasonably pleased with that number given the fact that the very, very big slowdown that we saw in Q1. When you look at Q2 and you look at year over year growth in the economy and I'd remind everyone that's really what our year over year billings growth is more correlated to not coming weeks, make an estimate that the year over year trend is coming weeks, make an estimate that the year over year growth in GDP is probably down in the 1.5% to 2% range. So when it's given if that in fact turns out to be the case, they have 9% billings growth is actually something we're fairly pleased with. Obviously, what happens going forward is going to be heavily impacted by what happens to that year over year economic growth number, particularly in the U.
S. Economy, which is still the largest chunk of our billings. So we'll have to see where that plays out. I would just make the observation that as we look at our June quarter results and billings trends, there's nothing particularly unusual or one time oriented that drove those numbers. I think they're reflective of the core underlying run rate of the business in that quarter in the economic environment.
Terms of when the incremental investments pay off, as we always do when we think about investments, we invest in a range of things that have payoffs from very short to medium term to a few things that have very long term payoffs. When you look at the restructuring charges, there is a very detailed set of plans for the changes we will make and when we will get the benefits and they will be mostly fully played out or mostly in place by the time you get out 12 months from now. If you look at the spend on growth initiatives, when you think about things like the Everyday Card launch and our card acquisition efforts, those will begin to show more of an impact as you get in to the second, 3rd, 4th quarters from when we make those investments. The one long term thing we did is as we've said for quite some time on serve that is a long term proposition for us that we believe in. And this was the first time we've ever really done any media spend on serve.
And I'd remind you that that is an area where we really are trying to in some ways create a new category and we have to help our customers understand how to use that product and how it can really help make their financial life better. That's a longer term prospect. So that's how I would think about the range of investments from close in to medium term to longer term.
Great. Thanks very much.
Okay. Thank you. And the next question, it comes from the line of Bill Karkas of Nomura Securities. Please go ahead.
Thank you. Good evening. I don't want to ask about anything relating specifically to the DOJ case, but I had a broad question surrounding the notion of market power. One of the key points in prior cases involving Amex is that I don't believe you guys have ever been found to have market power. And that's been a key reason why you've been able to avoid direct regulation in places like Australia.
But as we look ahead at the investments that continue to make in the business, the share gains that you've enjoyed since the Great Recession and the anticipated continued growth that should continue as we look ahead. How do you think about the risk that it could just be a matter of time before you're viewed as having market power? And I guess is market power simply an outcome and you'll deal with it if and when the time comes that you're found to have it? Or is it something that you don't anticipate becoming an issue anytime soon because your 2 biggest network competitors have so much more share than you? Maybe if you could just speak broadly to that notion of market power that'd be great.
Bill, I will make just a few very brief comments. Of course, just to be clear as you stated, we there is no finding anywhere that we have market power around the globe. 2, we work really hard every day because of the unique nature of our closed loop network to demonstrate the value we provide to the merchants and the value we provide to our card members, none of whom has to have our product or to have acceptance of our product and we work hard at that every single day. 3rd, I would just make the factual statement that once you leave the U. S.
Market, our market shares are very, very small in other countries around the globe. So I think given as you prefaced your question with the pendency of the DOJ trial, Bill, I probably should limit my comments to those. But these are all issues we of course feel very strongly about.
I appreciate that. Completely understand. Maybe as a follow-up unrelated, can you discuss the rationale underlying the serve initiative at Walmart? I guess I was a little bit confused by it. Just from a high level, I thought that the strategy was that the Bluebird product was going to be kind of the primary platform used at Walmart, but that serve would kind of be used elsewhere.
But it sounds like serve and bluebird are both available at Walmart. Maybe you could speak to that?
Well, I guess I'd make a couple of comments. If you draw an analogy to our card or credit business, we have many different products in all of the countries around the globe in which we do business because they all serve different target segments. And we think there is tremendous value in having the right card for the right customer. And so I think Walmart as they think about what they want to offer to their customers similarly believes that there should be a range of choices and that different products will provide different sets of capabilities and features to customers and that choice is a good thing. And so where both our philosophy and Walmart's philosophy are quite aligned on this, to us it seems very natural to put in the end the consumer in the driver's seat so that they can make a choice.
Thanks very much. Appreciate it.
Okay. Thank you. And the next question is from the line of Mark DeVries of Barclays. Please go ahead.
Yes, thanks. My main question is around expenses. There's a lot of moving parts here. And the first part of it relates to the salaries expense. I think Eric asked about this, but I didn't hear a response to it.
I think you indicated in the supplement that salaries were increased 7% year over year predominantly due to restructuring charges. Were those kind of non recurring severance related expenses? Or are those investments that will lead to continued kind of year over year increase in salaries? And then just the second part of that is your broader 3% sub-three percent annual year over year growth target. I think you indicated, Jeff, that you're now kind of lapping some of the best quarters from expense reductions and you're now kind of growing off of that.
Should we expect some operating expense growth in the back half
of the year? So let me take those one at a time. And I Mark, your question makes me think perhaps we weren't as clear as we should have been. So when you think about the 133 $1,000,000 restructuring charge that we took, that amount will appear in the salaries and benefits line predominantly. There's a very small piece that relates to some facilities, but most of that charge is for a number of cases around the globe where we will be making changes to our operation and it is for severance for several thousand people as we make those changes and get the right people with the right skill sets in the right places to provide great service for our customers.
So that's what drove the salaries and benefits line up this quarter. And that's where as you go out over the course of the next four quarters and we execute on these plans, you will see the savings or benefits if you will of those restructurings in the salaries and benefit line. So hopefully that clarifies that point. In terms of operating expense, you did see a particular low point in last year's Q2. And so that's the only Q1, our operating expenses were actually down a little bit year over year, whereas this quarter they were up 4%.
We are very committed and I think have demonstrated a really good track record of controlling operating expenses. So there's no particular plan in place to sequentially begin to grow operating expenses again as we go into the back half of the year. We remain very committed to hitting that less than 3% target for the full year.
Okay. And then great. And then just one other question if I could. Could you give us some color on where your pipeline is for potential new GNS partnerships? Is there enough there to where you think you might be able to sustain kind of the low to mid teens year over year growth in billings that you've had there?
Well, I think I certainly don't want to comment on specifics of partnership discussions we may be involved in. But I think the more important point is that when you look at the growth that we have consistently shown in GNS, That growth is not necessarily driven by the steady addition of new partners. It's driven by the fact that we have a lot of great existing partners who in fact operate in some of the higher growth markets around the globe and or operate in certain markets like China where our presence is still in, I would call it, its earlier stages and therefore much higher growth. And so the sustainability of that higher growth level, while one element that helps support it is signing new partners, far more important really is the performance of the partners we have around the globe. And we feel very good about that performance and about the continued opportunities for growth.
Got it. Thank you.
Okay. Thank you. And the next question comes from the line of Ken Bruce of Bank of America. Please go ahead.
Thank you. Good evening. My question really relates to the incremental growth initiatives and thank you for providing a little bit of color in terms of how you're using those investments or how you're making those investments. So I think one of the challenges that investors have in terms of some of these gains historically that have been used to support growth is that it's very difficult to really understand where the tangible benefits ultimately are going to come from. And maybe there's a way to help us dimensionalize how we should be thinking about where this is going to materialize, whether it be in terms of just average spending growth or if you think that ultimately it's going to drive cards in force growth first and ultimately will begin to work its way into the billings patterns and what the real kind of timeline we should be expecting these initiatives to ultimately pay us back.
And I recognize that you make a
So that's a Ken a fair and very important question. I'd make a couple of comments. Certainly, we have detailed work and analysis we do here to determine how to prioritize the spending we do on growth initiatives. Let me talk about the efficiency initiatives separately in just a second. So on those growth initiatives, we continue to believe even in the quarter we just finished that as we look at our acquisition efforts, we actually still have more ROI positive opportunities than we're able to fund while still meeting our earnings targets.
We clearly could go further this quarter, but all of those initiatives are closely tracked. We have a quite analytical understanding of what happens those investments. I would note however that the incremental spend in the context of the overall size of our company and the overall size of spending we do is fairly modest. So this did not double our spending for the quarter over the year as a much if you think about this on an annual basis, this is adding 5% or 10% to our spend. So it's you will clearly see it in growth in revenues over time.
Practically, it is hard to break that out at the consolidated level. At a very detailed level, we will be tracking it very closely. When you look at the media spend on the everyday card, which is the largest chunk of the media spend, which should be fairly obvious if you watch TV, hopefully. That is harder to measure. On the other hand, we have a very clear way to measure the success and growth of the everyday card.
And we'll see that we believe, Card and we'll see that we believe and hope grow to be a very sizable and profitable product for us in the coming quarters years. So that's the revenue side of the equation. On the efficiency initiatives, there's a very clear pathway to getting far more benefit than what you would need to justify the restructuring charge. And we will begin to see those benefits fully phased in as you get into 2015. Again, the challenge in you're seeing them from the outside and the P and L is one of scale.
To continually find ways to be more efficient, so that we can achieve the kind of control of our operating expenses that you've seen us achieve over the last couple of years. This is a piece of that and you should see it in continued strong performance on the operating expense line. So I realize that may not be as specific to these initiatives. And I will make a note here and we should think a little bit about how we in future quarters try to take some of our own ability at more of a micro level to think about how these initiatives doing and give you a little bit of color into them.
Thanks. That would be appreciated. One follow-up fine tuning or maybe 2 fine tuning questions. There was a reference to a Community Reinvestment Act portfolio fair value adjustment or valuation adjustment. I assume that was an impairment.
Can you give us what the size of that was if it was material? And then secondarily, if there's any way to give us some sense as to how the Wells Fargo rollout is going?
Well, let me take those maybe in reverse order. So on Wells Fargo, we're certainly very pleased with our broader relationship with Wells Fargo and it's a growing relationship. But it's very early days in terms of the GNS launch. What I would say is we certainly are pleased though to see some of the comments that John Stumpf made just a few weeks ago about the partnership. And gosh, rather than me comment on it, I love the fact that John came out and said they're very pleased and see the partnership with us as being off to a very, very good start.
So I suppose he's a better judge in some ways than we are and so we're thrilled to see that. On the Community Reinvestment Act, as with many accounting issues, we are constantly ensuring that we have the best methodologies for estimation. And this is one where we have a revised approach to how we estimate what we should be booking and that's what we switched to this quarter and it did drive an incremental expense amount that you see called out in the releases we made today.
Great. Thank you for your comments.
Thank you. And the next question comes from the line of Sanjay Sakhrani of KBW. Please go ahead.
Thank you. I got a couple of questions. 1 on the revenue yields. When we think about the net interest yield going forward that dropped pretty significantly sequentially. I'm not sure if that was seasonal or something, but how should we think about its progression going forward?
Same thing with the discount rate. I know you addressed it, but maybe you could just talk about the migration going forward. Will there be stability in that discount rate going forward? And then second question around the $0.05 gain that you guys recognize this quarter. When we think about how you guys assess yourselves relative to your targets, I assume that will be inclusive of that $0.05 Thank you.
So a
couple of comments. Let me take those one at a time. First on the net interest yield, you are actually correct Sanjay in one of your comments, which is there is some seasonality. And when if you go back and look at the slides we have, you actually see that year over year, the net interest yield is up a little bit. And that of course is predominantly driven by the continued steady averaging down of our interest expense rates given the rate environment.
And so there's no in terms of the sequential trend, I wouldn't focus on that. I'd stay more focused on the year over year trends. On the discount rate, as I said in my remarks, we had a number of timing items that actually impacted both the Q1, making the Q1 essentially flat year over year, making it in essence some things that would have caused it to go down a little bit in the Q1 slipped into the Q2 and you saw a 4 basis point decline. More broadly, we've said for a number of years that you should expect to see discount rate decline 2 to 3 basis points a year and that's because of our continued focus on driving more everyday spend. It's a function of location.
It's a function of our merchants growing and hitting volume based triggers steadily. Over time, it's a function of a very competitive environment and it's a function of evolving mix. So all of those things, those are the long term trends that have been in place for many, many years. And you can look at the trend over the last 5, 6 years and see how we've done historically in the base of all of those trends at managing the discount rate. So when you look at the year to date numbers, we're pretty much in line with the trend.
You just have to take that noise out of having the Q1 look unusually good year over year and the Q2 look unusually bad. That's the first and the second comment. I think your third question was how we think about the $0.05 of EPS. Is that
Yes, that's right. When we think about the targets that you guys have outlined in terms of long term targets, will that $0.05 be included in
that? Well, of course, we never provide guidance. We're very public about our long term targets being out there at 12% to 15 percent. And our goal Sanjay is to drive our earnings in the second half as much as we can. What I would say is that you heard me mention in my earlier remarks that there are some transaction related costs that are going to lag into the 3rd Q4.
And so as we think about the full year, the incremental costs that are going to lag into the back half of the year are going to offset some portion still to be determined precisely of that $0.05 So yes, I guess as we think about the full year, we are likely to think about the $1.43 because the full year impact of all the elements of the JV are likely to be more of a wash.
All right. I got it. Thank you.
Okay. Thank you. The next question comes from the line of Marcia Orenbuch of Credit Suisse. Please go ahead.
Great. Thanks. I guess the first question I had was the it seems like if you take the gain and you ex out the kind of one time items, you have about $300,000,000 left that you reinvested. And it also seems like starting in Q3, you'll have roughly $200,000,000 less in revenue from the travel joint venture from the accounting for the travel joint venture. So how long do you think it would take before that those 300 dollars 1,000,000 of extra investments were able to replace kind of that
$200,000,000 revenue? Well, remember Moshe, we also lose $200,000,000 of expense related to the travel business.
Right. But just thinking
about the revenue growth. Right. So when you think about the kind of things we're investing in, as you get into as I said earlier, quarters 2 through 6 is when you should really see the card related spend on everyday and the other acquisition efforts begin to have a material impact. Now of course, our bottom line goal here is to drive earnings for the company not necessarily to dollar for dollar replace the revenue of the travel business. But that's probably the framework I would use for thinking about it.
Right. And the second the kind of the follow-up, a couple merchant discount. And has that been a factor? Is that because that's been an area in merchant discount. And has that been a factor?
Is that because that's been an area in which cash back rewards has kind of grown as an industry issue. Could you talk about that a little bit?
Yes. So it's probably worth clarifying Moshe exactly what's in what numbers. So the discount rate that we provide is a calculated discount rate meant to represent what we get for economics from merchants where we are the acquirer. And so that calculation, which we do and then report out on every quarter is the one that went down 4 basis points this quarter. There are other people who do a very simple calculation.
They look at our GAAP financial statement and they divide discount revenue into billings and that gives you a discount rate that is significantly lower. And there are two main reasons that it's lower. Number 1, the GNS partners billings are included in the billings number, but they of course don't generate discount revenue. We have other arrangements with them. And so we pull that out as we do the calculated rate.
The other big difference is around to your point, the cash back cards, which show up as a contra revenue as well as certain incentives that we pay to corporate clients. Neither of those things is reflective of the economics we're getting at the merchants, which is why we pull them out of our calculated number. But it is why you see growth in the difference between our calculated discount rate that we report and the simple calculation that you get when you divide up the GAAP income statement discount revenue into billings. All that said, you are correct that the cash back products have been very strong products for us and that's a very good thing. It does drive up cash back rewards costs at a little higher rate than revenue growth.
And since it's a contra revenue, it has the effect I just described. So hopefully that clarifies for you the way these pieces fit together. Mostly though, because but you had said that the I thought you had said that the
that your discount rate included some of the payments to merchants for contract signings. And now you just said that some of those are not included?
No, it's not. I didn't mean to say that. So what's not included in our calculated discount rate to come back to it is the economics we have with GNS Partners, which we pull out and the cash back rewards costs and the example would be that we're constantly every day out there competing for the business of our merchants. And as with particularly with some of the larger merchants and in any B2B negotiations, sometimes you might have a contract that expires in 1 quarter, but you don't get around to actually finishing the renegotiation until the next quarter, you'll make the contract retroactive to the prior quarter when the prior contract expired. That would be an example of where you're going to get a timing impact as you look at the discount rate quarter to quarter that's not reflective of the ongoing rate.
Got it. Thanks.
Okay. Thank you. And the next question comes from the line of Bob Napoli of William Blair. Please go ahead.
Thank you. And I beat a dead horse I guess on the incremental growth initiatives. It's a little confusing as to you have so many opportunities. Why would you spend it all in the incremental cost in 1 quarter? I mean, why I mean, are you under investing versus your opportunities overall?
And so therefore, I mean, you have more you should be driving more expense through the year and forget about this year's earnings growth target to drive long term value for investors? Or should that investment have why wouldn't you have been spread that out over a couple of different quarters to support growth. And so I'm just a little confused by why all those incremental investments are in this quarter. And if you have so many additional positive ROI growth initiatives, why you're not spending more longer not only this quarter, but the next several quarters?
Well, boy, those are great questions, Bob. Let me maybe take it in 2 parts. If you think about over the medium to long term how we manage the company, we're trying to balance lots of different things. We're trying to balance achieving the steady consistent financial performance that I think all of our shareholders have come to expect from us with the reality of the competitive world we live in that makes it challenging to get to our near term financial next quarter. So as we try to balance all of those things, you are correct that one of the things we are trying to maximize is making sure we achieve that steady financial performance.
And that does force us to prioritize how we make investment choices and when we make those investments. And it does cause us at times to defer going down the path on certain growth to defer going down the path on certain growth initiatives to a future date, because we think that's the right balance between that steady financial performance, short term investments and longer term investments. That's the longer term view. If you think about this quarter, I guess what I would point out is in many ways you had a confluence here of the reality that we have been on a reengineering journey for several years and it was very logical for us to take the moves that drove the restructuring charge this quarter. We'll actually enact those over the course of the next year, but we think it just made sense to pair it up with the gain.
Similarly, it just was a nice coincidence that we launched the Everyday card at the end of March early April. So it coincided very nicely to do a big blitz of spend on every day right at the time of the second quarter. Again, somewhat similar, we just relaunched Serve late last year and felt this was a good time to do the first ever really media blitz we've done. Lastly, I'd just remind you that the business travel transaction is one we have been working on for a very long time. We knew well in advance the timing of when it was likely to happen and that really allowed us to be thoughtful and planful in all of our marketing and operational plans this year to take advantage of the timing.
So we don't think we sub optimize how we use that gain. We actually think that it's it allows us to in a very planful way do a lot of things that we have had on our plate for a while and it will pay off for our shareholders in the coming quarters.
Great. And just a follow-up question, thank you for that, is on the travel joint venture, Is there a new strategy that's being embarked upon? And I mean you still have a $1,000,000,000 nearly $1,000,000,000 of value in that business and it is still I think important to American Express. Is there a new acceleration of growth strategy? I mean, are you look is it looking to be to compete in a different area of travel to I mean, is it the idea here to accelerate growth?
And then how does American Express still benefit from that business?
To be very clear, we created this joint venture because we are excited about the prospects for it to grow and to use the capital that is now in the business and the focus that is now in the business to create better products, to grow faster, to use to create better technology, to improve customer service. And of course, we will continue to work very closely from a business perspective with the joint venture to serve our mutual customers in a coordinated and combined way. I would remind you it will be called American Express Travel still. So we are all in and very excited about the fact that we think this is not just a good transaction in the short term for our shareholders, but is actually a transaction that will lead to a much stronger travel company in the coming years and we will benefit in many ways from that.
Great. Thank you.
Okay. So I think operator we have time for one last question.
Okay. And the final question then comes from the line of Chris Donat of Sandler O'Neill. Please go ahead.
Hey, thanks for taking my question, Jeff. Just one quick clarification on the accelerated spend in marketing. With the recognition of that, is it the case that say for something like the production of television ads or radio ads that you might be recognizing expenses in the second quarter, but then the ads might not air for subsequent quarters, so you've kind of front loaded the spending as much as those who watch television actually see the ads? No. I think the reality of how we do our accrual accounting is we have put into our 2nd quarter P and L what we ran during the Q2 P and L and going forward, we will you will see running through our P and L whatever we run going forward.
So we think we were able to get a really strong start for the everyday card and give a strong boost to serve and our job going forward will be to build upon that. Okay. And then just quick clarification on the your comments about the revenue and expenses for the joint venture. You did say that was using operating expenses not total expenses, right, the the 11% number? Yes, absolutely.
So if you take and then we're using 2013 as a baseline to help you with modeling about 11% of operating expenses and about 80% of the travel commissions and fees line. Got it. Okay. Thanks very much.
Okay. Thank you. Well,
let me thank you all then for joining tonight's call and participating in the Q and A. I think we to close the call believe while there's some complexity in our results and I think the questions demonstrated that from the joint venture transaction we feel good about the underlying performance of the company. And with that, I will wish you all a good evening.
Okay. Thank you. And that concludes our conference for today. Thank you for your participation and for using AT and T Executive Teleconference Service. You may now disconnect.