What To Watch For In Charles Schwab’s Q3 Earnings

by Trefis Team
Charles Schwab
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 Charles Schwab (NYSE:SCHW) is scheduled to announce its third quarter results on Monday, October 15. Consensus market estimates call for the company to report revenue of $2.6 billion and adjusted EPS of 65 cents. We expect the brokerage’s interest-earning assets to be the key driver of growth in Q3. Additionally, we expect trading revenues to increase marginally as a result of growth in trading volumes, despite the commission pricing cuts implemented in the first quarter of 2017. 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. Consequently, we expect the brokerage’s 2018 revenue and EPS to grow by 18% and 52%, respectively, and Q3 results will likely be along the same lines.

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.

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