Charles Schwab Kicks Off 2015 With High Trade Volumes

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Charles Schwab

Charles Schwab (NYSE:SCHW), one of the largest brokerage firms in the U.S. with over 9.4 million brokerage accounts on its platform, ended 2014 at just under 300,000 daily average revenue trades (DARTs), which was only about 1% higher than 2013 levels. However, trading activity has picked up this year, averaging over 320,000 trades per day through January and February. On the other hand, the brokerage added over $200 billion worth of client assets during the year, which contributed significantly to its asset-based revenues. Below we take a look at some of Schwab’s key trading and operating metrics and our forecasts for them.

We have a $25 price estimate for the company’s stock, which is over 10% lower than the current market price. Schwab’s stock price has risen by almost 15% since the company announced its Q4 earnings at the end of January.

See our full analysis for Charles Schwab

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Rise In Trading Activity After Flat 2013 Volumes

Charles Schwab ended 2014 with a daily average of 299,000 revenue trades conducted on its platform. As a result, trading revenues for the full year were slightly lower than 2013 at $907 million. This was partially attributable to a 2% decline in the average revenue realized per trade to $12.11 through the year. However, Schwab has witnessed healthy trading activity in the months of January and February with DARTs of about 330,000 and 320,000, respectively. [1] The brokerage ended 2014 with nearly 9.4 million trading accounts on its platform – over 3% higher than the previous year. The brokerage further added 84,000 new accounts in January this year. We forecast Schwab to add nearly 300,000 net new accounts in 2015.

With the increase in number of accounts, Schwab’s annual average implied number of trades per account fell by about 2% to 8 per account. We currently forecast the annual average number of trades per account to increase to about 8.3 in 2015 and gradually rise to over 11 through the end of the decade.

Asset Management Fees And Net Interest Yield

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. The company has kept up the trend and added 84,000 gross new accounts in January this year. Consequently, Schwab’s total client assets under management were $2.46 trillion at the end of January, up from $2.21 trillion at the beginning of the 2014 . Despite roughly flat yields over the previous year, Schwab’s asset management fees grew by almost 10% to $2.5 billion in 2014. We forecast Schwab’s total client assets to rise to $2.7 trillion in 2015 and further to over $4 trillion by the end of the decade.

The yield on total client assets under management declined from 0.21% in 2008 to 0.10% in 2013. However, the trend has reversed in 2014, with the yield on these assets staying flat over the previous year at 0.11%. We expect the yield to gradually rise to about 0.11% in 2015 and subsequently increase to over 0.15% through the end of our forecast period.

Schwab’s total interest on deposits, loans and securities increased at a CAGR of 18% from 2010 to 2013. 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 grew by 7% y-o-y in 2014 to just over $138 billion. We forecast Schwab’s total interest earning assets to end the year at an average balance of just under $150 billion for 2015, 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 to 1.64%. 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 2014. We currently forecast Schwab to end the year at an average implied yield of over 2.5% for the full year.

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Notes:
  1. Charles Schwab Corporation Recent Client Trading Activity Report, Charles Schwab Investor Relations, February 2015 []