Fed Rate Hike Drives Charles Schwab’s Q2 Top Line, Price Cut Leads To Decline In Trading Commissions
After a phenomenal first quarter, Charles Schwab’s (NYSE:SCHW) strong performance continued in Q2, as the company reported nearly 17% growth in revenue and 27% growth in net income. Interest Earning Assets continued to be the primary growth driver, aided by the Fed’s interest rate hikes. Assets Under Management grew as customer demand for expert financial advice to manage their assets increased. The company’s foray into digital advisory with Schwab Intelligent Platform, and strong position in the ETF market, drove nearly a 12% increase in earnings from this segment. A rise in trading volumes was able to partially offset the losses due to a price cut in trading commissions. Amid all this, Schwab continued to cater to its existing customer base and attract new customers. Operating expenses grew nearly 10% in comparison to the prior year comparable period, 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 50% of Charles Schwab’s revenue. These assets saw nearly 17% growth along with a 28 basis point increase in yield, resulting in over 32% growth in the segment’s revenues. With the Fed’s indication of another rate hike in the year ahead, we expect the growth momentum to sustain through the year.
We expect another 5 basis points of improvement in yield and a similar growth in assets for the entire year.
Digital Advisory And New Products Helped
Assets under management generate around 40% of the Charles Schwab’s revenue, and the segment saw around 12% revenue growth. The company has come up with multiple ETFs over the past few 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, with over $3 trillion in assets under management. 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 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.
Trading Volumes Recovered But Revenues Declined Due To Cut In Commissions
The first quarter saw a nearly 22% decline in trading revenues amid falling revenue per trade, which can be primarily attributed to the company’s decision to slash its commissions to $4.95 per trade. However, the quarter saw a significant recovery in trading volumes (+11% y-o-y), which helped offset a part of the losses from the price cut.
See our complete analysis for Charles Schwab.
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