Interest Earning Assets And Assets Under Management Drive Schwab’s Q4 And Full Year Earnings
Charles Schwab’s (NYSE:SCHW) strong performance continued in Q4 2016, as the company reported nearly 17% growth in revenue and 30% growth in net income for the full year. Interest Earning Assets continued to be the primary growth driver, aided by the Fed’s interest rate hikes at the end of 2015 and 2016. Assets Under Management grew as the customer demand for expert financial advice to manage their assets increased. The company’s foray into digital advisory with Schwab Intelligent Platform and focus on newer investment products including the launch of 16 new ETFs in the year drove nearly 15% increase in earnings from this segment. The market volatility was relatively high from the beginning of 2016 due to concerns over Chinese economy, the Brexit vote, and the U.S. presidential elections. Amid all this, Schwab continued to cater to its existing customer base and attract new customers as well with the financial advisers assisting them personally. Operating expenses grew nearly 10% in 2016 in comparison to the prior year, due to higher compensation and infrastructure spending to cater to the expanding customer base.
Fed’s Decision Boosted Interest Earning Assets
Interest earning assets account for nearly 46% of Charles Schwab’s revenue. These assets saw nearly 23% growth along with 11 bps increase in the yield, resulting in over 30% growth in the segment’s revenues for the year. With the Fed’s indication of a series of rate hikes in the year ahead, 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.
Digital Advisory And New Products Helped
Assets under management generate around 40% of the Charles Schwab’s revenue, and the segment saw over 15% growth in 2016. The company has come up with multiple ETFs over the past couple of years and is 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, the company’s robo-advisor services has helped attract more investors, given the lack of advisory fees and enhanced customer support for portfolio management.
The company has focused on its client engagement and advisory services and consequently expanded its customer base. We expect this to boost its asset management division.
Trading Volumes Recovered But Commissions Declined Due To Falling Revenue Per Trade
The year 2016 saw nearly 5% decline in trading commissions amid falling trading volumes and revenue per trade, which can be attributed to decreased volatility in the market for most of the year and increased competition from discount brokerages. However, the past two months saw a significant recovery in the trading volumes, which we believe is due the improvement in the U.S. macro conditions such as GDP and employment rates, and increased volatility from the recently concluded presidential elections.
We expect 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, likely in a more rational pricing environment.
See our complete analysis for Charles Schwab.
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