What To Watch For In Charles Schwab’s Q2 Earnings

by Trefis Team
Charles Schwab
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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. The company continued its strong performance in Q1, with over 15% y-o-y growth in the top line. We expect the brokerage’s 2018 revenue and EPS to grow by 21% and 28%, respectively, and Q2 results will likely be along the same lines. We expect the brokerage’s interest-earning assets and assets under management to 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 $57, which is 14% above 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,2017 contributed to a 14% surge in Charles Schwab’s interest earning assets through 2017 and Q1 2018. Additionally, the yield on these assets has gone up by 25 basis points in Q1. The growth in assets, coupled with the yield increase, has led to a 26% jump in interest revenues. The first two months of Q2 saw over 13% 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 few 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. 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 saw over 4% growth in Q1.

The company’s asset base increased by 13% in April and May. 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 2017. However, a strong growth in volumes in Q1 2018 more than offset the losses from the decline in commissions per trade. Increased competition from discount and traditional brokerages led Schwab to reduce its commissions. The brokerage’s trading volumes for the first two months of the fourth quarter grew significantly 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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