Charles Schwab’s 2017 In Review
For Charles Schwab (NYSE:SCHW), it has been an impressive year so far. With three quarters reported, the brokerage’s revenue growth year to date has been nearly 16% and the stock is up 30% entering the last week of the year. The company has seen a significant growth in its interest earning assets supported by the Fed’s interest rate hikes. Schwab’s focus on both innovating customer-centric financial products and supporting customer investment decisions seems to be working well for the company, given the 12% growth in asset management fees. However, with the industry-wide decline in trading commissions and the continuing threat from discount brokerages, the company’s trading revenues have suffered.
Our price estimate for Charles Schwab’s stock stands at $42, which is below the market price.
Interest Earning Revenues Continue To Boost Top Line
The Fed’s rate hikes in March and June contributed to a 10% surge in Charles Schwab’s interest earning assets. Additionally, the yield on these assets has gone up by 21 basis points this year. The growth in assets, coupled with the yield increase, has led to 30% jump in interest revenues. With recent hikes and more planned hikes in the near term, we expect the segment to continue contributing to the company’s growth, due to its high asset base and moderate current yield on these assets in comparison to competitors like E-Trade And Ameritrade.
Asset Management Fees See Growth
Over the past couple of years, customer demand for financial expertise has grown. Amid uncertain market conditions, Schwab has paid special attention to its customers with financial advisers assisting them on an individual basis. Additionally, the company continues to develop innovative financial products to suit its customers. It is the among the top 5 ETF providers in the U.S. With the launch of the Schwab Intelligent Platform in 2015, it was among the first of the established players to enter the robo-advisor industry. With no advisory fee and enhanced customer support for portfolio management, this segment has attracted a lot of investors, crossing $21 billion in assets under management from this platform alone in just a few years. The revenues from the asset management segment have seen over 12% growth year to date.
The company’s asset base has increased by 15% in October and November. As the trend is likely to spill over to the current month, we expect a significant growth in this segment’s quarterly revenue.
Trading Revenues Suffered
The company’s decision to cut its commissions per trade by nearly 40% earlier in the year has led to a more than 20% decline in its trading revenues through the third quarter. Increased competition from discount and traditional brokerages led Schwab to reduce its commissions. Improving macro conditions did lead to an 8% surge in trading volumes, helping the company to offset a part of its losses.
Trading volumes have increased by 18% in October and November. We expect the brokerage to sustain its trading volume growth in December, and consequently mitigate the decline in commissions.
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