Schwab’s Interest Earning Assets Should Offset Declines In Trading Commissions In Q3
Charles Schwab’s (NYSE:SCHW) performance in the first half of 2017 was strong, and we expect this trend to continue when the company reports its third quarter earnings on October 16. We believe that interest-earning assets and assets under management will be the key drivers of growth. However, trading revenues will likely decline marginally as the company slashed its commissions from February onward. Since trading commissions generate only a small portion of the company’s overall revenue, however, we don’t expect the price cut to have a major impact on revenue and EPS growth in the near term.
Fed’s Rate Hike
The Federal Reserve raised interest rates twice in the last six months, and as a result Schwab’s interest earning assets are growing at a strong rate, with nearly 10% growth year-to-date through August. Consequently, the interest generated on these assets – which contributes around 45% of the company’s overall revenues – is likely to go up significantly.
Impact Of Price Cut In Trading Commission Partially Offset By Growth In Trading Volumes
Amid tough competition from competing full-service and discount brokerages, the company decided to slash its commissions to $4.95 per trade in February. However, the brokerage’s trading volumes for the first two months of the third quarter grew by nearly 20% in comparison to the prior year comparable period, which we believe is due to the improvement in U.S. macro conditions and increased volatility in the stock market. This should partially offset the decline in trading revenue.
See our complete analysis for Charles Schwab.
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