What To Watch For In Charles Schwab’s Q1 Earnings
Charles Schwab (NYSE:SCHW) has performed impressively over the past couple of years, with over 16% and 25% annual growth in revenue and EPS, respectively. We expect the brokerage’s 2018 revenue and EPS to grow by 19% and 53%, respectively, and Q1 results will likely be along the same line. 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 2017 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 $51, which is in-line with the market price. We have also created an interactive dashboard which shows the forecast trends; you can modify the key value drivers to see how they impact the company’s revenues and bottom line.
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, June, and December contributed to a 14% surge in Charles Schwab’s interest earning assets through 2017. Additionally, the yield on these assets has gone up by 23 basis points. The growth in assets, coupled with the yield increase, has led to a 32% jump in interest revenues. The first two months of Q1 saw an 11% 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.
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 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 11% growth in 2017.
The company’s asset base has increased by 15% in January and February. As the trend is likely to spill over to the current month, we expect a significant growth in this segment’s quarterly revenue.
Impact Of Price Cut In Trading Commission Partially Offset By Growth In Trading Volumes
The company’s decision to cut its commissions per trade by nearly 40% earlier in 2017 has led to a more than 20% decline in its trading revenues through the year. Increased competition from discount and traditional brokerages led Schwab to reduce its commissions. However, the brokerage’s trading volumes for the first two months of the fourth quarter grew by nearly 45% 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.
