Schwab Worth $16: Earnings Fall But The Outlook Improves
Charles Schwab (NYSE:SCHW) reported its first quarter results on Monday, with earnings declining on lower fees while management said that the brokerage’s outlook is improving. [1] Most of the major brokerages, including Charles Schwab, Ameritrade (NASDAQ:AMTD) and E*TRADE (NASDAQ:ETFC), have been pressured by low interest rates over the past few years.
This quarter was no different for Schwab as net interest revenue was down and the company had to waive more than $160 million in money market fees in order to prevent negative returns. [1] However there were some encouraging signs, including significant growth in assets and management’s expectation of improving earnings throughout the rest of the year.
We currently have a $16 price estimate for Schwab’s stock, which is nearly 15% ahead of the market price. We are in the process of revisiting our estimates to reflect these earnings and the company’s short-term outlook.
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Interest Rates Still Hurting Revenues
Near-zero interest rates have pressured Schwab’s net interest revenues, which it earns by investing client assets which are awaiting investment into money market funds. The chart above shows the company’s net interest yield on deposits, loans and securities. While the company’s yield has been less than 2% of interest earning assets over the past two years, we forecast it exceeding 3% by the end of our forecast period as interest rates eventually normalize. However with the Federal Reserve’s recent statement that rates are likely to remain around current levels through 2014 we expect yields to remain relatively depressed over the next two years.
Total Assets Increase Most Since 2008, Outlook Improving
The company added net new assets of nearly $27 billion in the quarter, the most in four years, as total assets reached more than $1.8 trillion. [1] This was much stronger growth than we had expected, and if the company is able to maintain this momentum it should be able to offset minimal interest yields. Management has stated that they believe that interest rates will be increasing slightly going forward, with the low point having been reached in 2011. This should allow earnings to steadily improve on a sequential basis throughout the remainder of 2012.
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- Schwab profit falls but says financials to improve, Reuters, April 16, 2012 [↩] [↩] [↩]