Lower Market Volatility To Be A Drag On Schwab’s Q2 Results

by Trefis Team
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Charles Schwab (NYSE: SCHW) is scheduled to release its second quarter results on Tuesday, July 16th, and Trefis expects lower trading activity and a decline in interest-earning assets to affect its Q2 earnings. In the Trefis interactive dashboard, What To Expect From Schwab’s Q2 Results? you can observe recent trends in Schwab’s operational metrics, and compare it with quarterly trends in revenues and expenses. Additionally, you can find more of our Financial Services data here.

A Quick Look at Schwab’s Revenue Sources

Charles Schwab reported $10.1 billion in Total Revenues for full-year 2018. This included four revenue streams:

  • Net Interest Revenue: $5.8 billion in FY2018 (57% of Total Revenues). It is the interest earned on loans and margin receivables, net of interest expense on funding sources.
  • Asset Management and Administration Fees: $3.2 billion in FY2018 (32% of Total Revenues). The company earns fees from managing proprietary money market mutual funds and ETFs, as well as from advisory services and third-party funds.
  • Trading Revenue: $763 million in FY2018 (8% of Total Revenues). A trading commission is charged for executing trades in stocks, bonds, options, futures, etc.
  • Other Revenues: $317 million in FY2018 (3% of Total Revenues). It includes order flow income, service fees, software fees, and exchange processing fees.

A brief look at the previous quarter performance

  • In Q1, Schwab reported $2.7 billion in net revenues, growing 14% (y-o-y) and remaining nearly flat sequentially.
  • Revenue increases were primarily driven by an uptick in interest-earning assets
  • Asset management revenues declined 11% (y-o-y) and remained flat sequentially.
  • Schwab’s asset management revenues have been declining despite an overall increase in client assets, primarily due to a reduction of management fees on Schwab’s equity and bond ETFs.

 What to expect from the second quarter results?

  • Per the operational metrics released by Schwab for April and May, client assets have tracked the market trend, interest-earning assets have shrunk steadily, and DARTs have been drifting downwards.
  • After hitting a high last October, the S&P 500 index went through a turbulent phase with the VIX jumping to 30 in December.
  • Schwab’s average revenue trades (DARTs) increased by 22% in Q4 2018 and subsequently fell by 10% in Q1 2019.
  • With VIX in the moderate range over the last three months, we expect Schwab to report lower interest-earning assets and a sequential decline of net revenues in its second quarter results.

We expect Charles Schwab to report an EPS figure of $2.84 for FY 2019. This EPS figure coupled with our P/E multiple of 17x works out to a price estimate of $48 for Charles Schwab’s stock – a figure 20% ahead of the current market price.

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