Key Takeaways From Charles Schwab’s Q3

by Trefis Team
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Charles Schwab (NYSE: SCHW) announced its Q3 earnings on October 15 and reported another impressive quarter, sustaining its continued momentum from earlier this year. Schwab reported an impressive 19% and 55% jump in its revenue and earnings, respectively, driven by the Fed’s rate hikes, a higher interest earning asset balance, new brokerage accounts and increased trading activity. Interest earning assets continued to be the primary growth driver, aided by the Fed’s interest rate hikes, while trading revenue also saw growth. The company’s asset management segment revenues declined as a result of subpar ETF and mutual fund performance. A rise in trading volumes partially offset the losses the company saw due to a price cut in trading commissions. Operating expenses grew nearly 11% 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. We believe continued momentum from Fed’s rate hike should drive near-term growth for Schwab.

Our price estimate for Charles Schwab’s stands at $57, which is significantly higher than the market price. Below we discuss some of the key factors which impacted the brokerage’s earnings.

 Robust Interest Earning Revenues Continue To Drive Top Line 

Interest earning assets account for just under 56% of Charles Schwab’s revenue. These assets saw over 21% growth along with a 33 basis point increase in yield, resulting in over 41% growth in the segment’s revenues. With the Fed’s indication of more rate hikes in the year ahead, we expect the growth momentum to sustain through the year. As a result of the continued momentum, we expect the revenues from interest earning assets to grow by nearly 24% to slightly over $5.3 billion in 2018. You can modify our forecasts for the asset base and yield on assets in our interactive dashboard to assess their impact on revenues.

Trading Volumes Recovery Offsets Price Cut In Trading Commissions

Trading revenue contributes nearly 7% of Schwab’s overall revenue and saw its revenue grow to $176 million (+ 17% y-o-y) in Q3. Amid falling revenue per trade, which can be primarily attributed to the company’s decision to slash its commissions to $4.95 per trade, recovery in trading volumes (+8% y-o-y), helped offset the losses from the price cut. Further, increased stock market volatility, coupled with improvement in U.S. economic conditions, should result in increased near-term trading volumes – driven by enhanced client activity. As a result of this, we expect the trading commissions to improve marginally and offset the impact of a reduced commission rate.

Mutual Funds and ETFs Slump, Digital Advisory Key To Future Growth

Assets under management generate around 33% of Charles Schwab’s revenue, and the segment saw its revenue decline by around 6%. This decline was largely due to fee reductions and client asset allocation choices. However, robust growth in its advised solutions helped marginally reduce the loss. 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.

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