Charles Schwab Reports Sustained Period Of High Trading Activity

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Charles Schwab

Brokerage firm Charles Schwab (NYSE:SCHW) witnessed a strong start to the year, with total daily trades standing at nearly 580,000 through the quarter ended in March. Trade volumes were about 5% higher than the comparable prior year period and 5% higher than the previous quarter. The trend continued in the June quarter, with volumes staying slightly higher than the prior year period period at over 490,000 trades per day through the quarter. However, the daily average revenue trades (DARTs) in Q2 were about 3% lower than prior year levels at about 267,000 trades per day. [1] Schwab’s trade volumes (both revenue trades and total trades) picked up again in Q3 thus far, with the company averaging nearly 558,000 total trades per day for July and August combined. Trade volumes are about 20% higher on a year-over-year basis. Moreover, the company has continued to add to its interest-earning assets at a consistent rate through the year. Below we take a look at some of the key metrics impacting Charles Schwab through August and our full year forecasts for them.

We have a $30 price estimate for the company’s stock, which is in line with the current market price. Schwab’s stock price has fluctuated between $26 and $35 this year.

See our full analysis for Charles Schwab

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High Trade Volumes This Year

Charles Schwab is one of the largest brokerage firms in the U.S. with just over 9.6 million active brokerage accounts on its platform at the start of the year. Schwab has added about 30,000 net new accounts in July and about 40,000 in August. The brokerage has added about 285,000 net new accounts this year taking its total active brokerage accounts to 9.67 million by the end of August. We currently forecast Schwab to end the year at just over 9.7 million accounts.

Schwab observed an average of about 313,000 daily average revenues trades (DARTs) per day out of a total of 580,000 trades per day in the March quarter. Subsequently, the company reported about 267,000 revenue trades per day (out of 490,000 trades per day) in the June quarter. DARTs in Q2 were about 3% lower than the previous year period despite a higher number of total trades through the quarter. [2] Total trade volumes picked up significantly in the third quarter, with over 500,000 trades per day in July and over 600,000 total trades per day in August. Similarly, the company reported about 286,000 DARTs in July, which further picked up to 355,000 DARTs through August. [3] If trade volumes stay at Q3 levels through the end of the year, it could lead to an average implied quarterly trade per account of 2.3. We currently have a conservative forecast for the average implied annualized trade per account for the full year of 8 trades per account.

Interest-Bearing Assets Continue To Increase

Charles Schwab ended 2014 at an average interest-bearing asset balance of $138 billion for the full year. The average balance in August 2015 was significantly higher than the 2014 average at just over $160 billion. [4] Schwab’s average balance through August was about 16% higher on a year-over-year basis. We forecast Schwab’s total interest-earning assets to end the current year at an average balance of about $154 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 last year. Schwab ended 2014 with an average implied yield of 1.64%. However, yields this year have been flat over 2014 levels at around 1.60%. We expect the net interest yield to begin to rise in late 2015 and more steeply in the next couple of years, which could boost Schwab’s net interest revenues.

How Higher Revenues Could Impact Margins

In its most recent earnings, Schwab reported 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 $203 million. [5] With trade volumes picking up in July and August, trade-based revenues are likely to drive revenues in the coming quarters. Since most cash expenses incurred by brokerages are fixed in nature, top line growth is often reflected in healthier margins.

According to our estimates, Schwab’s adjusted EBITDA margin rose from 32.2% in 2010 to 38.2% in 2014. However, limited revenue growth in Q1, complemented by higher cash operating expenses through the quarter, led the EBITDA margin to compress by almost 3 percentage points over the prior year period to 35.3%. Subsequently, most cash operating expenses remained flat over the prior year period in Q2. As a result, Schwab’s adjusted EBITDA margin expanded by 120 basis points over the year-ago period to 39.7%. For the first two quarters of 2015, Schwab’s adjusted EBITDA margin stood at about 37.5%, which is a percentage point lower than the comparable prior year period. Growth in trade volumes could positively impact the brokerage’s EBITDA margins in the coming quarters. We currently forecast Schwab’s adjusted EBITDA margin to stand at 39% for the full year, and gradually rise to about 41% through the end of our forecast period.

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Notes:
  1. Charles Schwab Corporation Recent Client Trading Activity Report, Charles Schwab Investor Relations, July 2015 []
  2. Charles Schwab Corporation Recent Client Trading Activity Report, Charles Schwab Investor Relations, June 2015 []
  3. Charles Schwab Corporation Recent Client Trading Activity Report, Charles Schwab Investor Relations, September 2015 []
  4. Schwab Monthly Metrics for August, Charles Schwab Investor Relations, September 2015 []
  5. Charles Schwab Q2 2015 Earnings Press Release, Charles Schwab Press Release, July 2015 []