Charles Schwab Corporation (NYSE:SCHW) announced its Q3 earnings on Monday. The company reported net income of $220 million, up 77% compared to $124 million last year, and revenues increased 11% to $1.18 billion.^[1] In Q2, the company posted net income of $238 million and $1.19 billion in revenues. Increased trading revenue as a result of market volatility helped total revenues remain about flat sequentially. The stock price declined after the earnings were released primarily as a result of the weak outlook. Competitors E-Trade (NASDAQ:ETFC) and Ameritrade (NYSE:AMTD) will also release their earnings in the next week.

We have updated our price estimate for Charles Schwab to $15, which is still over 20% above the market price, to reflect current economic conditions and the low interest rate environment.

See our complete analysis of Charles Schwab here

Revenues boosted through increased trading activity

Revenues remained about flat relative to Q2 primarily due to a 21% rise in trading revenues. Market volatility caused by the downgrade of the U.S. credit rating and uncertainty related to the European debt situation resulted in high trading volume in the quarter. Additionally, new brokerage accounts more than doubled in Q3 to 506,000 accounts, in comparison with Q2.

Asset management and administration fees were $466 million, down 7% compared to last quarter. The low interest rate environment led to an increase in money market fund fee waivers to $160 million (the company waives fees on money market accounts when rates are low so as to avoid negative yields for clients. These waivers, along with the weak financial markets, reduced revenue from proprietary funds. Total client assets for Q3 were $1,576.4 billion.

Focus on expense management to offset slower growth

Going forward the company plans to focus on expense discipline in order to improve margins. We detailed the importance of improving profit margins for Schwab in a separate note earlier. The company also intends to expand its non-rate-sensitive revenues and grow its client base further to combat the effects of macroeconomic weakness.

To arrive at our revised price estimate of $15, we have adjusted our forecasts to account for the persisting low interest rate environment, a decline in client assets due to weakness in the equity markets, continued growth in brokerage accounts backed by higher trading volumes, and improved EBITDA margins based on the company’s planned expense regulation.

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