How Much Growth Will Charles Schwab See In The Near Term?

by Trefis Team
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Upside
41.43
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Trefis
SCHW
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, and we expect this strong growth to continue going forward. The company should see significant growth in its interest earning assets, supported by the Fed’s interest rate hikes. Meanwhile, Schwab’s focus on both innovating customer-centric financial products and supporting customer investment decisions seems to be working well for the company, and will continue to aid the company’s growth in asset management fees. While trading revenues have witnessed some pressure of late, due to declines in revenue per trade amid rising competition from traditional and discount brokerage, we expect a growth in volumes to offset this.

Our price estimate for Charles Schwab’s stock stands at $57, which is above the market price. We expect the company’s overall revenues to grow by slightly under 18% in 2018. Our interactive dashboard shows the historical trends and our expectations for Charles Schwab’s FY’19 top line; you can modify the key value drivers to see how they impact the company’s results.

Interest Earning Revenues To Boost Top Line 

The Fed’s planned rate hikes should continue to contribute to Charles Schwab’s growth, due to its high asset base and moderate current yield on these assets in comparison to competitors like E-Trade and Ameritrade. Additionally, the yield on these assets should also improve, which – coupled with the growth in assets – should result in a more than 20% jump in interest revenues in FY 2019.

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 changing customer preferences. It is among the top 5 ETF providers in the U.S., and with the launch of the Schwab Intelligent Platform in 2015, it was among the first of the established players to enter the robo-advisor space. With minimal fees and enhanced customer support for portfolio management, this segment has attracted a lot of investors, crossing $21 billion in assets for this platform alone in just a few years. The asset base and revenues from the asset management segment have seen over 10% growth annually in recent years, and we expect the efforts undertaken by the company to continue to pay dividends in the future as well.

Pressure On Trading Revenues 

Schwab’s decision to cut its commissions per trade by nearly 40% – due to intense competition, especially from low-cost and zero-fee brokerages – led to substantial declines in trading revenues in 2017. However, we expect improving macro conditions and a wider scope of services and strategies to lead to a boost in trading volumes, helping the brokerage offset its losses.

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