Charles Schwab (NYSE:SCHW) is increasing its focus on asset management and advisory services as its struggles with a low interest rate environment, declining trading volumes and tepid investor confidence that have had an adverse effect on the company’s trading revenue. Chuck reported earnings for the third quarter of 2012 on Monday, 15th October, with total revenues in-line with those observed during the same period last year. A $20 million non-recurring state tax benefit led to a 12% increase in the company’s net income during the three months ending September. Although trading revenue fell 18%, year-on-year, its impact was offset by a 12% increase in asset management and administration fees.
We believe Charles Schwab is well poised to handle the difficult macro-economic environment and has laid the right foundation for sustainable growth as the global economy improves. Our current price estimate for Schwab is $14, in-line with the market price. We will shortly update our model to account for the latest earnings reported by the company.
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DARTs All Over The Place
Uncertainty over the U.S. economy and the prolonged European sovereign debt crisis has had a huge impact on trading volumes. Revenue generating daily average trades, also known as DARTs, fell 19% over the prior year. There were some optimistic signs in September as the declining trend observed through the first eight months of 2012 was reversed. DARTs increased 17% over August to 441, but the figure was still 5% below that observed in the same month last year.
Despite the trading slump, Schwab was able to open 198,000 new brokerage accounts during the three months ending September, ending the quarter with 8.7 million active brokerage accounts. The company’s ability to attract new clients will help it in the long-term as more customers will eventually lead to higher trading volumes and revenues. Trading commissions currently account for 17% of our price estimate.
Fee Hikes And Waivers
Chuck offers advisory and account management services and earns fees based on daily balances of client assets. These fees account for 28% of the total asset management and administration fees charged by the company. Schwab has increased its average fee from 0.47% to 0.49% of the average client assets. Coupled with an 11% increase in client assets, the revised fee lead to a 15% increase in advice solutions revenue consequently increasing the asset management and administration fees revenue.
The company also cut fee waivers on money market funds by 15%, leading to a 42% increase in money market fund revenue. This revenue accounts for 16% of the total asset management and administration fees revenue.
The company continues to attract new client assets as total client assets at the end of the quarter were up 20% over the prior year. We believe that increased assets as well as effective fee and waiver management will put Schwab in a comfortable position while it battles low interest rates and trading volume over the next couple of quarters.