Charles Schwab Q2 Results As Expected: Asset-Based And Net Interest Revenues Drive Growth
Charles Schwab (NYSE:SCHW) announced its second quarter earnings on July 16, reporting a 6% year-on-year increase in net revenues to nearly $1.6 billion. The growth in net revenues was higher than the 3% annual growth witnessed by Schwab in the March quarter. Interest-based revenues and asset management revenues were up by 9% and 6% y-o-y to $612 million and $670 million, respectively, while trading revenues fell by 4% y-o-y to $203million. [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. Since most cash expenses incurred by brokerages are fixed in nature, top line growth is often reflected in healthier margins. This was evident in Q2, with most cash operating expenses remaining flat over the prior year period. As a result, Schwab’s adjusted EBITDA margin expanded by 120 basis points over the year-ago period to 39.7%. For the combined six months period in 2015 thus far, Schwab’s adjusted EBITDA margin stands at about 37.5%, which is a percentage point lower than the comparable prior year period. 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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Low Trading Activity In The First Half Of 2015
Schwab’s revenues generated by the trading commission business in Q2 were about 4% lower than the prior year quarter at $203 million. For the six month period ended June 2015, the company’s trading revenues were over 6% lower than the year-ago period at $430 million. Schwab’s daily average revenue trades (DARTs) through the second quarter were about 3% lower than prior year levels at about 267,000 trades per day. [2] Moreover, the average implied revenue per trade stood at just under $12 per trade, which was about 2% lower than the year-ago period.
Despite lower trading revenues, the company consistently added new brokerage accounts. 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 over 9.60 million active accounts at the end of June. We currently forecast Schwab to add nearly 300,000 net new accounts through 2015.
Asset Management Fees, Interest Revenues Sustain 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 under management stood at $2.54 trillion at the end of June, up from $2.40 trillion in mid 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 implied annualized yield on total client assets through the quarter stayed around prior year levels of just over 0.10%. Similarly, the average implied annualized yield for the six month period ending June also stood at prior year levels of 0.10%. Due to flattish yield, Schwab’s asset management and administration revenues rose by about 6% y-o-y for the June quarter and Q1 and Q2 combined to $670 million and $1.3 billion, respectively. We forecast the yield to stay at current levels through 2015 and subsequently to improve to over 0.15% by the end of our forecast period.
The company’s interest-earning assets in Q2 grew by 12% y-o-y to just under $154 billion, as the brokerage successfully added new trading accounts accounts through the quarter. 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 4 basis points lower than the previous year levels at 1.59%. 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.
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- Charles Schwab Q2 2015 Earnings Press Release, Charles Schwab Press Release, July 2015 [↩]
- Charles Schwab Corporation Recent Client Trading Activity Report, Charles Schwab Investor Relations, July 2015 [↩]