Growing Asset Base Could Offset Sluggish Trade Volumes For Charles Schwab In The Long Run
Brokerage firm Charles Schwab (NYSE:SCHW) witnessed a strong start to the year, with total daily trades standing at nearly 580,000 through the March quarter. Trade volumes were about 5% higher than the comparable prior year period and 5% higher than the previous quarter. However, volumes have fallen to under 490,000 trades per day through Q2’15 thus far, roughly flat over the prior year period.
In its most recent earnings, Schwab reported a mild 3% year-on-year increase in net revenues to over $1.5 billion. The growth in net revenues was much lower than the 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 despite rise in trade volumes. Below we take a look at some of Schwab’s key trading and operating metrics for May and our full year forecasts.
We have a $27 price estimate for the company’s stock, which is over 10% lower than the current market price. Schwab’s stock price has risen by around 10% since the beginning of the year.
See our full analysis for Charles Schwab
Trade Volumes Subside After Surge In Q1
Schwab is one of the largest brokerage firms in the U.S. with just under 9.40 million active brokerage accounts on its platform at the start of the year. The company added about 107,000 net new accounts through the March quarter to take its total active count to 9.49 million brokerage accounts. Schwab has continued to attract more trading accounts on its platforms in Q2 thus far, with a total of 9.57 million active accounts at the end of May. [1] We currently forecast Schwab to add nearly 300,000 net new accounts through 2015.
Charles Schwab observed an average of about 313,000 daily average revenues trades (DARTs) per day in the March quarter. Subsequently, the company reported about 277,000 trades per day in April, which has further fallen to 260,000 trades per day in May. Schwab DARTs currently stand at just under 270,000 in Q2’15 thus far, which is roughly flat over the comparable prior year period. [2] If trade volumes stay at current levels through the end of the June quarter, it could lead to an average implied quarterly trade per account to fall to under 2 trades per account. We currently forecast the average implied annualized trade per account to increase by over 3% y-o-y to 8.3 trades per account in 2015.
Asset Management Fees
Schwab has added 186,000 gross new accounts through May this year. As a result, Schwab’s total client assets under management stood at $2.57 trillion at the end of May, up from $2.46 trillion at the end of 2014. We forecast Schwab’s total client assets to rise to $2.69 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 changed 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 stay at around 0.11% in 2015 and subsequently increase to over 0.15% through the end of our forecast period.
Net Interest Revenues
Charles Schwab ended 2014 at an average interest-bearing asset balance of just over $138 billion for the full year. The average balance in May 2015 was significantly higher than the 2014 average at about $153 billion. [1] We forecast Schwab’s total interest-earning assets to end the current year at an average balance of just over $153 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 decline in the last few years can be attributed to Fed policies such as the quantitative easing program. However, the trend reversed in 2014, as the yield on these assets started increasing from Q1 2014. Schwab ended the year with an average implied yield of 1.64%. We currently forecast Schwab to see an average implied yield of about 1.84% for the full year.
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- Schwab Monthly Metrics May, Charles Schwab Investor Relations, June 2015 [↩] [↩]
- Charles Schwab Corporation Recent Client Trading Activity Report, Charles Schwab Investor Relations, June 2015 [↩]