What To Watch For In Charles Schwab’s Q4 Earnings
Charles Schwab (NYSE:SCHW) has had an impressive year so far. With three quarters reported, the brokerage’s revenue growth year to date has been nearly 16% and we expect this trend to continue when the company reports its fourth quarter earnings on January 17. We believe that the brokerage’s 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 2016 onward. With that said, since trading commissions generate only a small portion of the company’s overall revenue, we don’t expect the price cut to have a major impact on its revenue and EPS growth in the near term.
Our price estimate for Charles Schwab’s stock stands at $42, which is below the market price. Below we discuss some of the key factors that are likely to impact the brokerage’s earnings.
Fed’s Rate Hike
The Fed’s rate hikes in March and June contributed to a 15% surge in Charles Schwab’s interest earning assets through Q3. Additionally, the yield on these assets has gone up by 21 basis points. The growth in assets, coupled with the yield increase, has led to a 30% jump in interest revenues through Q3. The first two months of Q4 saw an 8% growth in interest earning assets. With recent hikes and more planned hikes in the near term, we expect the interest generated on these assets – which contributes around 45% of the company’s overall revenues – to drive growth, due to its high asset base and moderate current yield on these assets in comparison to competitors like E-Trade And Ameritrade.
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 in February 2016. However, the brokerage’s trading volumes for the first two months of the fourth 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 price cuts.
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