Schwab Earnings: Asset-Based Revenues Drive Strong Results
Charles Schwab (NYSE:SCHW) announced its fourth quarter earnings on January 19, reporting a 9% year on year (y-o-y) increase in net revenues to $1.7 billion and 19% annual growth in net income to $416 million. In line with our expectations, the growth in revenues was driven by asset management fees and net interest revenues, which were up 5% and 18% y-o-y, respectively. On the other hand, trading revenues registered a decline of 13% to $208 million.
On the bottom line front, Schwab restricted the rise in its expenses to 4% y-o-y for the full year, although operating expenses in the fourth quarter were somewhat on the higher side at $1 billion. The continued fiscal prudence helped improve adjusted EBITDA margins by 100 basis points to 39.2%. As a result, net income was up 10% y-o-y to $1.4 billion for the year. With the recovery in the U.S. and the expected subsequent improvement in the company’s top line, we expect EBITDA margins to improve further in the future.
We have a $28 price estimate for the Schwab, which is over 10% higher than the current market price.
See our full analysis for Charles Schwab
Sustained Growth In Interest-Bearing Assets
Schwab’s average balance of interest earning assets grew 18% y-o-y to $168 billion through the fourth quarter. Correspondingly, the average balances for the full year rose nearly 14% y-o-y to $158 billion. [1] Despite a low interest rate environment, the consistent strength in asset gathering activity helped the brokerage increase its net interest revenues by over 10% y-o-y to $2.5 billion for the full year. Since more attractive returns are anticipated in the future, we expect growth in interest earning assets to continue at a compound annual growth rate (CAGR) of 10% over the next five-six years.
Following a slight improvement in 2014 to 1.64%, average yields remained stagnant throughout 2015 at around 1.60%. This could be attributed to the Fed’s decision to postpone the interest rate increase. However, with the hike (0.25%-0.50%) being implemented at the end of December 2015, we expect net yields to begin rising in 2016 and gain momentum in the next couple of years. Consequently, net interest revenues could also get a considerable boost going forward. ((At Last, Money-Fund Yields Should Rise Within Days, Wall Street Journal, December 2015))
Asset Management Division Witnesses Record 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. The total client assets under management with Schwab grew by just 2% y-o-y to $2.5 trillion at the end of December 2015. [1] However, owing to the improvement in the macroeconomic outlook and enhancements to its product offerings, we expect Schwab’s total client assets to increase at a relatively higher rate in 2016.
The implied annualized yield on total client assets through the year stayed around prior year levels of just over 0.10%. Despite flattish yields, Schwab’s asset management and administration revenues rose by a record 5% y-o-y to $0.67 billion for the fourth quarter and by 4.6% y-o-y to $2.65 billion for the full year. We expect the yields to begin to improve in 2016 and rise to over 0.16% over the next five-six years.
Subdued Trading Activity
Daily average revenue trades (DARTs) in Q4 were approximately 10% lower than prior year period at 285,000 trades per day. Even the average implied revenue per trade fell by approximately the same percentage to $11.73. These two factors, coupled with a weak global environment, led to a 13% y-o-y decline in trading revenue to $208 million in Q4. [1] Looking ahead, we expect revenue per trade to not grow significantly in the coming years owing to the intensifying competition.
Despite low 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. In the final quarter of fiscal 2015, the brokerage added 262,000 new brokerage accounts. The 4% y-o-y growth in the metric resulted in 9.7 million end of the year active brokerage accounts. We currently forecast Schwab to continue attracting new accounts through 2016.
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- Schwab Reports Record Quarterly Net Income, Schwab Investor Relations, January 2016 [↩] [↩] [↩]