Marginal Growth In Trade Volumes In November For Charles Schwab

+0.81%
Upside
72.34
Market
72.93
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Charles Schwab

After a strong Q3, Charles Schwab (NYSE:SCHW) experienced constrained trade volumes in October, with the total trades on its platforms down by about 14% year over year to 515,000 trades per day and the daily average revenue trades (DARTs) down by 18% year over year to 273,000. The drop in trade volumes was mainly on account of tough comparisons with October last year, when high trading activity was seen due to rampant speculation on the subject of Fed’s rate hike. However, Schwab observed a slight reversal in this trend in November as the brokerage marginally increased its DARTs both sequentially and annually to 283,000 trades a day. [1] Below we take a look at some of the key metrics impacting Charles Schwab through November and our full year forecasts for them.

We have a $28 price estimate for the company’s stock, which is about 20% lower than the current market price. Charles Schwab’s stock price has fluctuated between $26 and $35 this year.

See our full analysis for Charles Schwab

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Trading Metrics Marginally Improve

Schwab added about 21,000 net new brokerage accounts in October and about 19,000 net new accounts in November. As a result, the total number of active brokerage accounts stood at 9.73 million at the end of November, which is about 4% higher than the year-ago period. [2] We currently forecast the total number of brokerage accounts to continue to increase at 4-5% over the next few years.

After reporting a dip in trade volumes in the first month of Q4, Schwab witnessed a 6% annual increase in total trade volumes in November. However, revenue trade volumes (which were responsible for 57% of total trades) were up marginally in November compared to prior year period. If trade volumes stay at November levels, it could lead to an implied average of just under 2 trades per account per quarter. We forecast the full year average implied annualized trade per account to stay roughly flat over the previous year at about 8 trades per account.

Growth In Assets Under Management

The total assets under management at Schwab fell at the end of Q3 and hit a low of $2.42 trillion at the end of September from $2.56 trillion at the end of July. Since then, total assets grew by approximately 5% sequentially to $2.54 trillion in October. Subsequently, total client assets increased to $2.56 trillion by the end of November – a 3% annual rise. [2]

On a related note, the yield on assets under management has remained stagnant at 0.10% over the past few years, . But with the all-important signal from Fed regarding the interest rates, we expect a gradual escalation in client yields Starting next year.

Rise In Interest Earning Assets

This week, the Federal Reserve Bank, made an announcement that will likely creates ripples all over the financial world. Pushed forward on 16th December by FOMC, this rate hike, is expected to have particularly favorable consequences for the finance industry. [3] It would not only boost the yield earned on interest earning assets by Schwab, but also enable the company to attract more and more assets for investment purposes. Subsequently, the net interest revenues of the company should also see substantial improvement in 2016. We expect the yields to begin their ascent as 2015 comes to an end and 2016 dawns the era of “new normal” for the economy of U.S. [4]

The brokerage has been successfully adding to its interest earning asset balances through the year 2015. In October, total interest earning assets on Schwab’s balance sheet grew by as much as 17% year over year, bringing the average to $165 billion. The figure further rose in November by 18% year over year to $167 billion. We expect the total interest-earning assets to grow at CAGR of about 10% for the next few years.

Impact On Margins

As the economic condition in the U.S. improves, opportunity cost of keeping cash in hand will increase for people, resulting in increased investment in interest earning assets and assets under management for the brokerage. Higher assets under management and interest-earning assets at the brokerage coupled with improving yields on these assets should help boost top line figures in the coming years. Since most expenses incurred by a financial service firm are fixed in nature, higher revenues would mean expanding margins for Schwab. We currently forecast adjusted EBITDA margin to grow by 90 basis points to 39.1% in 2015, and subsequently to increase to over 40% 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, December 2015 []
  2. Schwab Monthly Metrics for November, Charles Schwab Investor Relations, December 2015 [] []
  3. At Last, Money-Fund Yields Should Rise Within Days, Wall Street Journal, December 2015 []
  4. The Fed’s New Normal, Bloomberg View, December 2015 []