Charles Schwab’s Profitability Hindered By Sluggish Trade Volumes, Low Yields
Charles Schwab (NYSE:SCHW) announced its first quarter earnings on April 15, reporting a mild 3% year-on-year increase in net revenues to over $1.5 billion. The growth in net revenues was much lower than 9% annual growth witnessed by Schwab in 2014. Interest-based revenues and asset management revenues were both up by 6% y-o-y to $644 million and $588 million, respectively, while trading revenues fell by 8% y-o-y to $227 million. [1]
According to our estimates, Schwab’s adjusted EBITDA margin rose from 32.2% in 2010 to 35.1% in 2013, which further improved to 38.2% in 2014. Although the total client asset base under management and interest-earning assets increased through the March quarter, flattish yields on the assets limited revenue growth. Additionally, the decline in trading commissions meant that net revenues were up by only about 3% on a y-o-y basis. Furthermore, Schwab’s cash operating expenses for the quarter grew by about 9% over the year-ago period to $988 million, with compensation and benefits expenses rising by 10% y-0-y to $588 million. Most other expenses remained nearly flat over the prior year levels. As a result of a rise in operating expenses and relatively lower revenue growth, Schwab’s adjusted EBITDA margin for the quarter compressed by a over 3 percentage points compared to Q1’14 to 35.3%. Schwab’s net income of $302 million for the quarter was over 7% lower than prior year quarter. A rise in interest rates and a growth in trade volumes could positively impact the brokerage’s EBITDA margins in the coming quarters.
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Asset Management Fees, Interest Revenues Witness Modest Growth
Charles 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. Schwab’s total client assets crossed the $2.5 trillion mark during the quarter, which was a 9% rise over the year-ago level. The implied annualized yield on total client assets stayed around prior year levels of just over 0.10%. As a result, Schwab’s asset management and administration revenues rose by only about 6% y-o-y to $644 million. We forecast Schwab’s total client assets to rise to over $4 trillion by the end of the decade, and the yield to improve to over 0.15% in the same period.
The company’s interest-earning assets in Q1 grew by almost 9% y-o-y to $149 billion, as the brokerage successfully added new trading accounts accounts through the quarter. Schwab ended the 2014 with just under 9.4 million brokerage accounts, which increased to almost 9.5 million accounts by the end of March. We forecast the total-interest earning assets to increase by 8-9% in the coming years to over $200 billion by the end of the decade. The implied net interest yield on these assets during the quarter was about 7 basis points lower than the previous year levels at 1.57%. We expect the net interest yield to begin to rise in the latter half of 2015 and more steeply in the next couple of years, which could boost Schwab’s net interest revenues.
Low Trading Activity Through Q1’15
Schwab’s revenues generated by the trading commission business in Q1 were about 8% lower than the prior year quarter at $227 million. Schwab’s daily average revenue trades (DARTs) for the quarter were about 7% lower than prior year levels at about 313,000 trades per day. Despite lower trading revenues for the full year, the company consistently added new brokerage accounts. The company ended the quarter at nearly 9.5 million active brokerage accounts, up from about 9.4 million active accounts at the end of last year. This translates to an average of about 8.3 trades per active account for the full year, which is about 3% higher than 2014 levels. We currently forecast Schwab to continue to grow its customer base to over 12 million brokerage accounts through the end of our forecast period. Correspondingly, we expect trading activity to rise and the average annualized trades per account to increase to over 10 trades per account per year through the end of our forecast period.
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- Charles Schwab Q1 2015 Earnings Press Release, Charles Schwab Press Release, April 2015 [↩]