Fed’s Rate Hike Drives Charles Schwab’s Q1 Top Line; Price Cut Leads To Decline In Trading Commissions

by Trefis Team
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Charles Schwab
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Charles Schwab (NYSE:SCHW) reported a strong start to the year, surpassing $2 billion in quarterly revenue for the first time. In line with our expectations, interest earning assets continued to be the primary growth driver, aided by the Fed’s two interest rate hikes in the last 4 months. To counter the competition from discount brokerages, the company focused on its client engagement and advisory services and consequently expanded its customer base. However, a price cut in trading commissions led to a decline in revenue from the segment. Operating expenses grew nearly 12% in comparison to the prior year, due to higher compensation and infrastructure spending to cater to the expanding customer base, and we expect them to remain around same level for the year. Despite that, the company’s pre-tax margin saw growth of over 340 basis points to 40.5%.

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Interest Earning Revenues Continue To Boost Top-line Under Fed’s Guidance

Interest earning assets accounted for nearly 48% of Charles Schwab’s revenue. These assets saw nearly 21% growth along with a 15 bp increase in the yield, resulting in over 30% growth in the segment’s revenues. With the Fed’s indication of a series of rate hikes in the year ahead, we expect the growth trend to sustain through the year.

We expect another 5 basis points of improvement in the yield and nearly similar growth in assets for the entire year.

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Digital Advisory And In-House Products Helped

Assets under management account for around 40% of Charles Schwab’s revenue, and the segment saw over 18% revenue growth. The company 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, with around 22% growth in revenues. In addition, the company’s robo-advisory services have helped attract more investors, given the lack of advisory fees and enhanced customer support for portfolio management. The asset base for this segment has tripled from the previous year’s comparable period.

We expect the asset base to reach $3.5 trillion for the year, which could increase the revenues from these assets by more than 25% in 2017.

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Trading Revenue Declined

The first quarter saw a nearly 18% decline in trading commissions amid falling trading volumes and revenue per trade, which can be primarily attributed to the company’s decision to slash its commissions to $4.95 per trade. During the same period in 2016, economic uncertainty and an oil price rally led to fairly volatile market conditions. Consequently, the brokerage saw a surge in trading volumes.

See our complete analysis for Charles Schwab.

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