Growth In Interest Revenues, Trading Commissions Drive Charles Schwab’s Q3 Results
Charles Schwab (NYSE:SCHW) announced its third quarter earnings on October 15, reporting a 3% year-on-year increase in net revenues to $1.6 billion. Interest-based revenues and asset management revenues were up by 11% and 2% y-o-y to $635 million and $663 million, respectively, while trading revenues rose by 9% y-o-y to $228 million. [1] In line with our expectations, trading revenues surged after a slow first half to the year driving much of the growth for the quarter.
According to our estimates, Schwab’s adjusted EBITDA margin for the quarter stood 40.2%, which was an improvement of over 360 basis points over the comparable prior year period. Operating margins improved because of a steep fall in compensation and benefits expenses, which were almost 8% lower on a y-o-y basis to $548 million. For the combined nine month period in 2015 thus far, Schwab’s adjusted EBITDA margin stands at about 38.5%, which is about 60 basis points higher than the comparable prior year period. Consequently, Schwab’s net income jumped by 17% y-o-y to $376 million for the quarter, while it was about 6% higher for the combined nine month period at just over $1 billion. A sustained period of high trade volumes through the end of the year could help Schwab realize healthier EBITDA margins for the full year.
We have a $28 price estimate for the company’s stock, which is roughly in line with the current market price. Schwab’s stock has traded between $26 and $35 this year.
See our full analysis for Charles Schwab
Net Interest Revenues Sustain Growth
Charles Schwab ended 2014 with an average interest-bearing asset balance of $138 billion for the full year. The average balance through the third quarter stood at just over $160 billion, which was about 15% higher on a y-o-y basis. ((Charles Schwab Q3 2015 Earnings Press Release, Charles Schwab Press Release, October 2015)) Similarly, Schwab’s average balance for the nine month period combined was about 12% higher on a year-over-year basis at $154 billion. 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 in Q1 last year. Schwab ended 2014 with an average implied yield of 1.64%. However, yields this year have been flattish over 2014 levels at just 1.60%. We expect the net interest yield to begin to increase from 2016 for the the next couple of years, which could boost Schwab’s net interest revenues.
Asset Management With Subdued Revenues
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 $2.4 trillion at the end of September, only about 1% higher on a y-o-y basis. We forecast Schwab’s total client assets to rise modestly to just $2.5 trillion by the end of the year, and over $4 trillion by the end of our forecast period.
The implied annualized yield on total client assets through the quarter stayed around prior year levels of just over 0.10%. Due to flattish yields, Schwab’s asset management and administration revenues rose by only about 2% y-o-y for the September quarter and 4% year-to-date to $663 million and just under $2 billion, respectively. We forecast the yield to stay at current levels through 2015 and subsequently improve to over 0.16% by the end of our forecast period.
Robust Trading Activity Pays Off
Schwab’s revenues generated by the trading commission business in Q3 were about 9% higher than the prior year quarter at $228 million. However, low trade volumes in the first half of the year led trading revenues about 1% lower than the year-ago period at $658 million for the nine month period ended September 2015. Schwab’s daily average revenue trades (DARTs) through the third quarter were about 13% higher than prior year levels at about 267,000 trades per day. ((Charles Schwab Corporation Recent Client Trading Activity Report, Charles Schwab Investor Relations, October 2015)) On the other hand, the average implied revenue per trade stood at $11.70 per trade, which was over 4% lower than the year-ago period, partially offsetting the rise in trade volumes.
In addition to high trade volumes, the company consistently added new brokerage accounts. Schwab started the year with just under 9.4 million active brokerage accounts on its platform, which rose to almost 9.5 million brokerage accounts at the end of Q1. The brokerage continued to attract more trading accounts on its platforms in Q2, with over 9.6 million active accounts at the end of the June quarter. The total number of active brokerage accounts at the end of Q3 stood at just under 9.7 million. We currently forecast Schwab to add over 340,000 net new accounts through 2015.
View Interactive Institutional Research (Powered by Trefis):
Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap
More Trefis Research
- Charles Schwab Q3 2015 Earnings Press Release, Charles Schwab Press Release, October 2015 [↩]