Key Takeaways From Charles Schwab’s Q4

by Trefis Team
Charles Schwab
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In line with its robust performance over the first three quarters of 2018, Charles Schwab (NYSE:SCHW) reported another impressive quarter to end the year on a high note. The brokerage reported an impressive 19% and 59% 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 record trading activity helped boost trading revenues. Schwab’s asset management revenues declined by nearly 5% as a result of below-par money market funds and lower fees, partially offset by robust performance from its digital advisory arm. Operating expenses grew by just over 13% in comparison to the prior year comparable period, due to higher compensation, advertising, infrastructure spending and additional client-facing employees to cater to the expanding customer base. However, the 19% revenue growth outpaced the growth in expenses, leading to an improvement in operating margins.
Our price estimate for Charles Schwab’s stock stands at $55, which is significantly above the market price. We are in the process of updating our model to reflect the new guidance provided by the company. We have also created an interactive dashboard – which outlines what to expect from SCHW in 2019. 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.

Interest Earning Revenues Continue To Boost Top Line 

Net Interest revenues account for just under 57% of Charles Schwab’s revenue, and grew by nearly 36% y-o-y to just over $5.8 billion in 2018. The robust growth was largely due to multiple rate hikes, which resulted in a 16% y-0-y increase in interest-earning assets, coupled with a 32 basis point increase in yield. With the expectation of further rate hikes in the year ahead – though the magnitude and frequency are in some doubt of late – we expect the growth momentum to sustain through 2019, albeit at a slower pace. As a result of the continued momentum, we expect Schwab’s revenues from interest-earning assets to grow by nearly 20% to slightly over $6.9 billion in 2019.

Growth In Trading Volumes Drove Trading Commissions

Trading revenue contributes to just over 7% of Schwab’s overall revenue and saw its revenue grow to $763 million (+ 17% y-o-y) in 2018. Despite Schwab slashing its commissions per trade by nearly 40% to just under $5, owing to intense competition from discount and traditional brokerages, record growth in trading volumes in 2018 (+20% y-o-y) more than offset the losses from the price cut. In addition, enhanced stock market volatility, coupled with improvement in U.S. GDP, 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 by nearly 12% to about $850 million in 2019.

Digital Advisory Key To Future Growth

Assets under management generate around 32% of brokerage’s revenue, and the segment saw its revenue decline by around 5%. This decline was largely due to fee reductions and client asset allocation choices – including lower-than-expected money market funds. However, robust growth in its advised solutions helped marginally offset that loss. In addition, the company’s robo-advisory services have helped attract more investors, given the low fees as well as 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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