Charles Schwab’s Year In Review: Asset Management, Interest Revenues, Trading In Focus
Charles Schwab (NYSE:SCHW) is one of the largest brokerage firms in the U.S. with over 9 million brokerage accounts on its platform and nearly $2.5 trillion worth of net client assets under management. The brokerage added almost 250,000 net new trading accounts this year and added over $300 billion client assets under management during the year. Schwab’s net revenues in the first three quarters of the year have grown by almost 13% over the prior year period to $4.5 billion. Additionally, its net income rose by 30% y-o-y to just under $1 billion in the same period. Below we take a look at how the brokerage fared during the year, and highlight our forecasts for some of Schwab’s key growth drivers.
We have a $27 price estimate for the company’s stock, which is about 10% lower than the current market price. Schwab’s stock price has risen by almost 20% since the company announced its Q3 earnings at the end of October.
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Asset Management Fees, Net Interest Yield Witness Solid Growth
Charles Schwab was successful in attracting new client accounts during the year at a rapid pace of over 80,000 gross new accounts every month, maintaining the trend seen in the last few years. However, the company added only about 23,000 net new accounts per month on average through the year. As a result, the total active brokerage accounts at the end of November stood at almost 9.4 million accounts, up from just 9.1 million accounts at the beginning of the year. [1] Consequently, Schwab’s total client assets under management were nearly $2.5 trillion at the end of November, up from $2.2 trillion at the beginning of the year. The company charges a fee on these assets for its proprietary and third-party mutual fund offerings and advisory solutions such as equity and bond funds, money market funds and mutual funds. In the first three quarters of 2014, the company’s asset management fees grew by 11% over the year-ago period to almost $1.9 billion, with growth driven by solutions such as separately managed accounts, customized personal advice for tailored portfolios and full-time portfolio management.
The yield on total client assets under management declined from 0.21% in 2008 to 0.10% in 2013. However, the trend has reversed so far this year, with the yield on these assets increasing to around 0.11% for the period from January through September. We expect the yield to stay at around 0.11% levels through the end of 2014 and subsequently increase in the coming years.
Schwab’s total interest on deposits, loans and securities increased at a CAGR of 18% over the last three years. The growth in net interest-bearing assets continued in 2014, albeit at a slower pace than the last few years. Total interest earning assets including deposits, loans and securities increased at an annual rate of under 8% y-o-y from January through November this year. The average balance of interest earning assets during this period has been just over $138 billion. [1] We forecast Schwab’s total interest earning assets to end the year at an average balance of $139 billion for 2014, and subsequently expect average interest-earning assets to grow at 10% annually for the next few years.
After a steady decline in net interest yield on deposits, securities and loans from 4.6% in 2007 to about 1.5% in 2013, the yield picked up in 2014. The decline in the last few years can be attributed to Fed policies such as the quantitative easing program. However, the yield on these assets started increasing from Q1 this year. We currently forecast Schwab to end the year at an average implied yield of over 1.7% for the full year.
Trading Activity Flat Over 2013 Despite Late Rally
Schwab’s trading commissions picked up in Q1 after a slump in recent years. The daily average revenue trades (DARTSs) in Q1 were up to 330,000 trades per day, a 13% year-over-year increase. After the surge in trade volumes at the beginning of the year, trading activity was subdued through Q2 and Q3, with a 9% y-o-y decline in trading volumes to 274,000 trades per day in the quarter ending June. Similarly, trading volumes were lower than the prior year period in July (-8%) and August (-2%) before recovering in September. As a result, Q3 DARTs were about 5% lower than the prior year quarter at 269,000 trades per day. As a result, Schwab’s DARTs through first three quarters were flat over the comparable 2013 period at 293,000 trades per day. [2] We currently forecast Schwab to end the year at just over 300,000 trades per day. The brokerage nearly 9.4 million trading accounts on its platform, which implies roughly 8 trades per active account per year. With the increase in DARTs, we expect the annual average number of trades per account to gradually increase to over 11 through the end of the decade.
Healthy Margins Due To Minimal Rise In Expenses
Most of Schwab’s year-to-date operating expenses, including advertising, occupancy and communication expenses, have stayed at prior year levels through the first three quarters at a combined $845 million. However, compensation and professional services expenses have both risen by almost 9% y-o-y to $1.6 billion and $335 million. As a result, the company’s total operating expenses increased by only 7% to $2.8 billion in 2014 year-to-date. Comparatively, net revenues generated by the brokerage have grown by 13% to $4.5 billion from January through September. As a result, Schwab’s net income has increased by nearly 30% to $971 million. According to our estimates, Schwab’s adjusted EBITDA margin rose from 32.2% in 2010 to 35.1% in 2013. This has further improved in 2014 thus far. With the growing client asset base under management and rising interest rates, the brokerage’s EBITDA margins could continue to improve in the long run. 
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- Charles Schwab Monthly Report, Charles Schwab Investor Relations, December 2014 [↩] [↩]
- Charles Schwab 10-Q, SEC, December 2014 [↩]