Charles Schwab (NYSE:SCHW) reported its Q3 2013 earnings on October 15. Net revenue came in at $1.4 billion, an increase of 15% year-on-year, driven by growth across its major business segments: asset management fees (+11%), net interest revenue (+15%), and trading revenue (+10%). As we had expected, growth in asset management fees and net interest revenue was primarily driven by an increase in assets while trading revenue benefited from the gradual improvement in trading levels (see Schwab Pre-earnings: Asset Growth And Trading Volumes In Focus).
Our current price estimate for Schwab is around $18. We are in the process of updating our model to incorporate the latest results.
Assets are Growing Quickly
Two of Schwab’s major revenue streams – asset management fees and net interest revenue – depend on the level of client assets parked with it. These income streams have been benefiting tremendously from an increase in these assets over the past few years, and the trend seems to have remained strong in Q3 as well. The average balances in Schwab mutual funds and advice solutions increased year-on-year by 14% to reach $616 billion. Similarly, the average balances in interest earnings assets at Schwab increased by 22% in Q3 to reach $133 billion. 
We expect Schwab to continue attracting new client assets at a rapid pace in the next few years. The increased asset levels are likely to further boost the company’s net interest revenue when yields start to rise due to the Fed’s tapering of the bond purchase program.
Trading Volumes Are Also Improving Gradually
Trading volumes have remained low throughout the brokerage industry for some time now, but are beginning to gradually recover. After hitting a bottom in July and August of last year, the daily average revenue trades (DARTs) have remained above the 450,000 mark for all of this year. For the three months of Q3, DARTs (in thousands) were 498.9, 467.3 and 469.2 respectively. We expect Schwab’s overall trading volumes to gradually improve in the coming years as existing clients start trading more often and the company continues to attract new brokerage accounts.Notes: