What To Watch For In Charles Schwab’s Q3 Earnings
Our price estimate for Charles Schwab’s stock stands at $57, which is nearly 11% 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.
Continued Momentum From Fed’s Rate Hike Should Drive Growth
Multiple rate hikes from the Federal Reserve in recent months contributed to an 11% surge in Charles Schwab’s interest earning assets through the first half of 2018. Furthermore, the yield on these assets has gone up by nearly 30 basis points in the first half of 2018. The growth in assets, coupled with the yield increase, has led to a 30% jump in interest revenues. With recent hikes and more planned hikes in the near term, we expect the interest generated on these assets – which contributes around 50% of the company’s overall revenues – to drive near-term growth, due to its high asset base and moderate current yield on these assets in comparison to competitors.
Price Cut In Trading Commissions Partially Offset By Growth In Trading Volumes
As a result of increased competition from discount and traditional brokerages, Schwab decided to cut its commissions per trade by nearly 40% in 2017 and this led to a more than 20% decline in its trading revenues through the year. However, robust growth in trading volumes in the first half of 2018 more than offset the losses from the decline in commissions per trade. Improvement in U.S. macro conditions, coupled with increased volatility in the stock market, should lead to increased trading volumes in near term – driven by enhanced client activity, which in turn should improve trading commissions marginally. This factor should continue to cancel out the negative impact of the reduced commission rate.