Charles Schwab Earnings Preview: Asset Management, Net Interest Revenues To Drive Performance As Trade Volumes Stay Low
Brokerage firm Charles Schwab (NYSE:SCHW) is expected to announce its Q2 earnings on July 16. Schwab’s revenues grew by a modest 3% year-on-year (y-o-y) to $1.5 billion in the March quarter, driven by a 6% annual increase in both asset management fees and net interest revenues, to $644 million and $588 million, respectively. On the other hand, low trading activity through the quarter led transaction-based revenues to decline by 8% y-o-y to $227 million. Although, Schwab’s trade volumes through the June quarter have declined sequentially from Q1 levels, volumes have been higher than the comparable prior year period. A higher realized revenue per trade through the quarter could help the brokerage boost revenue figures for the quarter. Moreover, top line growth is likely to translate directly to healthier margins since most expenses incurred by brokerage firms are fixed in nature.
Charles Schwab’s cash operating expenses in the first 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. However, limited revenue growth in Q1 complemented by higher cash operating expenses through the quarter, led its adjusted EBITDA margin to compress by almost 3 percentage points over the comparable prior year period to 35.3%. With the growing client asset base under management and rising interest rates, the brokerage’s EBITDA margins could improve in the long run.
We have a $27 price estimate for the company’s stock, which is over 15% lower than the current market price. Schwab’s stock price has risen by almost 10% since the beginning of the year.
See our full analysis for Charles Schwab
Asset Management Fees, Net Interest Yield To Sustain Growth
Charles Schwab successfully attracted new client accounts in 2015 thus far, adding about 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. [1] 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 brokerage charges fees on these assets for proprietary and third-party mutual fund offerings and advisory solutions such as equity and bond funds, money market funds, and mutual funds. The implied annualized yield on total client assets in Q1 stayed at 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 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.
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 through the quarter. The average balance in May 2015 improved further to 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.
Trade Volumes Fail To Impress
Charles Schwab observed an average of about 313,000 trades per day in the March quarter, which was about 7% lower than prior year levels. As a result, Schwab’s revenues generated by the trading commission business in Q1 were about 8% lower than the prior year quarter at $227 million. However, trading activity through Q2 improved slightly over the prior year period. Schwab’s daily average revenue trades (DARTs) stood at 277,000 trades per day in April, 260,000 trades per day in May, and about 259,000 trades per day in June. [2] Volumes were about 2-3% higher than the comparable year ago period despite staying lower than Q1 levels.
Comparatively, Schwab started the year with just under 9.40 million active brokerage accounts on its platform, which has risen to about 9.49 million brokerage accounts at the end of Q1. The brokerage 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. We currently forecast Schwab to add nearly 300,000 net new accounts through 2015.
As a result of a rise in the number of accounts, and relatively stagnant DARTs through the quarter, the average implied quarterly trades per account fell from over 2 trades per account in Q1 to about 1.75 trades per account in Q2. If trade volumes stay at current levels through the end of the year, it could lead to the average implied annual trade per account to fall to under 8 trades per account. We currently forecast the average implied annualized trade per account to increase by over 3% y-o-y to just over 8 trades per account through 2015. Subsequently, we expect the number to rise to over 11 trades per account by the end of the decade.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research
- Schwab Monthly Metrics May, Charles Schwab Investor Relations, June 2015 [↩] [↩]
- Charles Schwab Corporation Recent Client Trading Activity Report, Charles Schwab Investor Relations, July 2015 [↩]