Charles Schwab Earnings Preview: Client Assets Edge Higher While Trading Activity Remains Subdued

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Charles Schwab

Charles Schwab (NYSE:SCHW) is scheduled to announce its third quarter earnings on October 15. Schwab’s revenues grew by over 10% year-on-year (y-o-y) to nearly $1.5 billion in the second quarter. The brokerage witnessed a 19% and 10% annual increase in net interest revenues and asset management and administration fees, respectively, in the previous quarter. On the other hand, transaction-based revenues were down by 10% y-o-y to $212 million during the quarter due to a slump in trading activity.

We expect growth from interest revenues and asset management fees in the third quarter, while trading revenues could largely remain flat. Schwab has continued to add more brokerage accounts and its client asset base under management has consistently grown over the last few months. We have a $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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Asset Management Fees, Interest Yield To Continue Growth

Schwab’s asset management revenues include the fees that the brokerage charges for its proprietary and third-party mutual fund offerings and advisory solutions such as equity and bond funds, money market funds and mutual funds. The yield on total client assets has declined from 0.21% in 2008 to 0.10% in 2012 and has stayed at around that level since. We forecast the yield to stay under 0.11% in the near term, but to rise more significantly in the long term. Meanwhile, Schwab’s client base continues to grow at a strong pace. Total client assets under management neared the $2.5 trillion mark in August – an increase of over 13% since the start of 2014.  With total client assets growing nearly 20% y-o-y in Q3 and a nearly flat yield over the prior-year period, we expect the company to post another double-digit revenue increase in the September quarter.

Schwab has successfully attracted new client accounts at a rapid pace over 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 half of 2014 as well, with interest-earning assets growing by 8% 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.

Growth In Accounts, Trading Activity Remains Low

Schwab’s trading commissions business picked up in the March quarter this year after a slump in recent years. The company reported a nearly 14% y-o-y increase in daily average trades during the first quarter. Trading volumes continued to rise in April as well. However, trading volumes declined in May (-14%), June (-6%), July (-8%) and August (-2%) on a year-on-year basis. Although volumes could pick up in September, it is likely that average trades for the full quarter remain subdued. Despite the decline in average volumes in Q3, the company has consistently added new brokerage accounts. The company ended the June quarter at around 9.2 million brokerage accounts, which increased to nearly 9.3 million active brokerage accounts at the end of August. [1]

As the brokerage adds more active accounts to its platforms, the total trading volume is likely to rise, even though the average number of trades executed per account remains subdued. Consequently, our estimate for the implied number of annual trades per account is expected to fall from 8.13 trades per account in 2013 to under 8.1 for the full year. You can modify the interactive charts to gauge the impact of each driver on our price estimate for the company.

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Notes:
  1. Charles Schwab Monthly Metrics For August, Charles Schwab Investor Relations, September 2014 []