Strong Outlook For Asset Management And Interest-Based Revenues For Charles Schwab

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Charles Schwab

Brokerage firm Charles Schwab (NYSE:SCHW) witnessed a solid start to 2015, with daily average revenue trades (DARTs) standing at over 322,000 in January. This was almost 8% higher than the average daily trades in 2014. However, trading activity has slowed since January, with an average of 317,000 trades in February and under 300,000 trader per day through the first two weeks of March. Schwab is one of the largest brokerage firms in the U.S. with over 9.4 million active brokerage accounts on its platform, and total client assets of over $2.5 trillion. The brokerage added over $200 billion worth of client assets last year and has kept up the momentum in 2015 thus far. Below we take a look at some of Schwab’s key trading and operating metrics for February and our forecasts for them.

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

See our full analysis for Charles Schwab

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Asset Management Fees

Schwab added over 80,000 gross new accounts every month last year, maintaining the trend seen over the last few years. The brokerage has kept up the trend in 2015 and added 84,000 and 80,000 gross new accounts in January and February, respectively. As a result, Schwab’s total client assets under management stood at $2.53 trillion at the end of January, up from $2.46 trillion at the end of 2014. [1] We forecast Schwab’s total client assets to rise to $2.7 trillion by the end of the year, and 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%. Despite roughly flat yields over the previous year, Schwab’s asset management fees grew by almost 10% to $2.5 billion in 2014 – mainly due to the growth in the total assets under management. 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. As a result, we expect resulting revenues to be around the $3 billion mark for the full year.

Net Interest Revenues

Schwab’s total interest on deposits, loans and securities increased at a CAGR of 19% from 2009 to 2014. However, the growth in net interest-bearing assets was lower than previous years as the company could only manage a 7% growth in total interest earning assets including deposits, loans and securities. Schwab ended the year at an average interest-bearing asset balance of just over $138 billion. The average balance through January and February has been significantly higher than the 2014 average at over $148 billion.((Schwab Monthly Metrics February, Charles Schwab Investor Relations, March 2015)) We forecast Schwab’s total interest-earning assets to end the current year at an average balance of just about $150 billion, and subsequently expect average interest-earning assets to grow at 10% annually for the next few years.

The net interest yield on deposits, securities and loans witnessed a steady decline from 4.61% in 2007 to 1.52% in 2013. The trend reversed in 2014, as the yield picked up to about 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.

Trading Activity Subdued After Hitting Peak In January

Charles Schwab observed an average of about 322,000 trades per day in January, 317,000 revenue trades per day in February and just under 300,000 trades per day through the first half of March. Schwab DARTs currently stand at about 318,000 in Q1’15 thus far, which is about 4% lower than the comparable prior year period but about 6% higher than the 2014 average. [2] The brokerage ended February with 9.44 million active trading accounts on its platform – up from 9.39 million at the end of December 2014. We forecast Schwab to add nearly 300,000 net new accounts in 2015.

With the increase in the number of accounts in 2014, 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.

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