All Of Schwab’s Businesses Expected To Perform Impressively In 2017
Charles Schwab (NYSE:SCHW) had a stellar performance in 2016 and we believe that all of its business lines will grow in 2017, including trading, asset management and interest on assets. To counter the competition from discount brokerages, the company focused on its client engagement and advisory services and consequently expanded its customer base. We expect this to boost its asset management division. The rate hike in December 2015 fueled the growth in interest earning assets throughout 2016. Considering a strong possibility of a series of hikes in 2017, we expect the growth in the assets and revenues to pick up. The stock market has recently witnessed increased volatility, which was reflected in a jump in the brokerage’s trading volumes. We expect the volatility to continue and believe that trading revenues will grow moderately. Acquisition has become the go-to strategy for brokerages to grow, In fact, competitor brokerages such as E-Trade and Ameritrade have already made acquisitions in 2016. Schwab’s possible acquisition of LPL Financials is something to watch out for. We believe that it might be a prudent move and could help it maintain its market leadership and reduce the heat from pricing competition.
Revenue From Interest Earning Assets Could Grow By 25%
Charles Schwab generates more than 40% of its revenues from interest earning assets. The previous year saw over 30% growth in these assets and related revenue, primarily due to the rate hike in December 2015, which led to higher yields and, consequently, higher demand for these assets. With the recent hike and expectations of a series of hikes in 2017, we expect the momentum of 2016 to spill over in 2017. We expect nearly 20 basis points of improvement in the yield and 15% growth in assets, which could increase the revenues from these assets by more than 25% in 2017.
However, if the expected rate hikes do not happen, yields will remain flat and asset growth will be a mere 5%, which would consequently translate into only 5% growth in revenue from this segment. This would also likely affect the growth in assets under management and restrict its surge.
Assets Under Management To Be Influenced By Digital Advisory And New Products
There has been increasing demand for financial expertise from customers and the brokerages have been cashing in on this demand. As a resukt, growth in asset management fees has been impressive, with over $ 2.7 billion in total client assets through November 2016. We expect this to continue. We also expect there to be continued efforts to develop innovative financial products to suit customer needs. The company has come up with multiple ETFs over the past couple of years and is now among the top five ETF providers in the U.S. This asset class has gathered a lot of customer attention due to lower risk and higher cost effectiveness. In addition, having offered robo-advisor services way before its competitors, the company has a lead in this segment that will help attract more investors, given the lack of advisory fees and enhanced customer support for portfolio management.
Trading Revenues To Grow From Improving Market Conditions And Possible Acquisition
The year 2016 did not see too much growth in trading commissions, which can be attributed to decreased volatility in the market for most of the year and increased competition from discount brokerages. However, we believe the current year could be different. With the improvement in the U.S. GDP and employment rates, and increased volatility from the recently concluded presidential elections, the trading volumes have started gaining momentum. We believe the growth in trading volumes is likely to continue, thereby driving growth in trading commissions. If the rumors around possible acquisition of LPL Financials come true, it will help Charles Schwab in maintaining its market leadership and reduce pricing war. This could be accretive to its margins. However, if the acquisition does not succeed, it will be difficult for the brokerage to grow its topline amid falling revenue per trade and trades per brokerage account.
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