Key Takeaways From Charles Schwab’s Q1
In continuation with its strong performance over the prior few years, Charles Schwab (NYSE:SCHW) reported another impressive quarter to start the year on a high note. Interest earning assets continued to be the primary growth driver, aided by the Fed’s interest rate hikes, while assets under management also saw growth. The company’s digital advisory arm, Schwab Intelligent Platform, and strong position in the ETF market drove a nearly 4% increase in earnings from the segment. A rise in trading volumes partially offset the losses the company saw due to a price cut in trading commissions. Operating expenses grew nearly 13% in comparison to the prior year comparable period, due to higher compensation and infrastructure spending to cater to the expanding customer base. However, an even stronger 15% revenue growth led to an improvement in operating margins.
Our price estimate for Charles Schwab’s stock stands at $50, which is below the market price. Below we discuss some of the key factors which impacted the brokerage’s earnings.
Interest Earning Revenues Continue To Boost Top Line
Interest earning assets account for nearly half of Charles Schwab’s revenue. These assets saw over 10% growth along with a 25 basis point increase in yield, resulting in over 26% growth in the segment’s revenues. With the Fed’s indication of rate hikes in the year ahead, we expect the growth momentum to sustain through the year. You can modify our forecasts for the asset base and yield on assets in our interactive dashboard to assess their impact on revenues.
Digital Advisory, New Products Helped
Assets under management generate around 40% of Charles Schwab’s revenue, and the segment saw around 4% revenue growth. The company has introduced many ETFs over the past few years and is among the top ETF providers in the U.S. In addition, the company’s robo-advisory services have 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, which bodes well for its future growth.
Trading Volumes Recovered But Revenues Declined Due To Cut In Commissions
The quarter saw a 5% growth 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, a significant recovery in trading volumes (+40% y-o-y), which helped offset the losses from the price cut.
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