Charles Schwab’s Growth Expected From Non-Transaction Revenues

+8.20%
Upside
67.40
Market
72.93
Trefis
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SCHW
Charles Schwab

Charles Schwab (NYSE:SCHW) is one of the largest retail brokerage firms in the U.S. and earns about a sixth of its revenues from trading commissions. Schwab released its monthly figures for the month of July last week, reporting a sequential drop in total client assets as well as daily average revenue trades. In the June quarter, Schwab reported a 10% year-on-year (y-o-y) increase in revenues to $1.5 billion, primarily driven by income from interest-based assets and asset management fees. Transaction-based revenues were 10% lower than the year-ago period due to a corresponding drop in trading activity during the quarter – particularly during the months of May and June. [1]

We have $27 price estimate for the company’s stock, which is in line with the current market price.

See our full analysis for Charles Schwab

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Low Trading Activity Continues

Schwab’s trading commissions were up in the March quarter after low trading volumes in recent years. The company reported a more than 10% y-o-y increase in daily average trades during the first quarter. Although the momentum continued at the beginning of the June quarter, trading volumes have since declined on a y-o-y basis during the months of May (-14%), June (-6%) and July (-8%).

Despite the decline in average volumes in the last few months, the company has continued to add over 75,000 new brokerage accounts on a monthly basis since the start of 2014. However, net new clients added since the beginning of the year has been only around 175,000, which translates to 25,000 net new active accounts per month on an average. This difference is attributable to the higher attrition rate of client accounts, relative to competing brokerages such as TD Ameritrade (NYSE:AMTD), where the attrition rate is much lower. Schwab’s total brokerage accounts stood at 9.27 million at the end of July, up by 1.5% since the beginning of the year. Comparatively, Ameritrade’s net brokerage accounts increased by over 3% since January 2014 to 6.24 million funded accounts. We currently forecast Schwab to continue to add brokerage accounts at a similar rate, while we expect the revenue per trade to remain at just over $12 for the full year.

Top Line Growth To Improve Margins

Charles Schwab has successfully attracted new client accounts at a rapid pace in the last few years, leading to a higher asset base. The company’s total interest earning deposits, loans and securities have increased at a CAGR of 18% over the last three years. The trend continued in the first quarter as well, with interest-earning assets growing by 5% sequentially and almost 9% y-o-y to $137 billion. We forecast the total interest earnings assets to increase by over 10% to $147 billion by the end of the year.

Schwab’s adjusted EBITDA margin dropped from 42% in 2008 to 32% in 2010. It has since recovered to over 35% last year, while it has been over 40% in 2014 thus far. Based on strong performance from non-transaction businesses, we expect the margins to stay at pre-2008 levels of over 42% through the end of our forecast period despite varying trade volumes.

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Notes:
  1. Charles Schwab Monthly Volumes Report, Charles Schwab Investor Relations, August 2014 []