Charles Schwab ( SCHW ) announced its Q3 2016 earnings on October 17th, reporting a 20% year-over-year increase in net revenue and 34% year-over-year growth in net income. This impressive growth was mainly driven by jump in net interest revenue and asset management fees. With the possibility of an interest rate hike under improving macroeconomic conditions, interest earning assets have continued to grow at a phenomenal pace. Having forayed into the digital advisory business long before its competitors, the company's assets under management have also increased notably. Additionally, the company has enhanced its client engagement and advisory services with financial consultants providing efficient plans to clients to address their financial goals. However, the growth in revenues was slightly offset by a decline in trading commissions. This is not supposed to be a cause of worry, since a similar decline has been experienced by other brokerages and exchanges. With a continuous increase in brokerage accounts and improving macro conditions in the U.S., daily average revenue trades are likely to show a steady improvement. With a consistent growth in EPS (25% year to year) over the year, Charles Schwab continues to outperform its peers such as Ameritrade and E-Trade.
Our price estimate for Charles Schwab stands at $28.37 , implying nearly 10% discount to the market.
See our complete analysis for Charles Schwab .
Net Interest Revenue Has Grown Phenomenally Under The Likelihood Of An Interest Rate Hike
A rate hike in December 2015, owing to improving macroeconomic conditions in the U.S., had propelled significant growth in interest earning assets in the first half of the year. Improving employment data, coupled with a strengthening of the U.S. dollar, had prompted the Fed to increase the rate. With a high possibility of a rate hike in early 2017, supported due to improving financial conditions in the U.S., we have seen 22% year-over-year growth in the assets and expect them to increase further, thereby driving the brokerage's revenue from the segment.
Effective Advisory and Technologically-Advanced Platform Have Led To Growth In Assets Under Management
The brokerage has continuously provided effective and actionable insights to its clients in order to accomplish financial goals. The company has also been working consistently in order to provide technologically enhanced platforms to the registered investment advisers. The brokerage has steadily attracted clients and assets with a combination of financial products, service and value. With the launch of Schwab Intelligent Platform, assets under management have also grown at a notable pace through the year. With no advisory fee and and enhanced customer support for portfolio management, this segment has attracted a lot of investors, thereby crossing $10 billion in assets under management. Being another major driver of the brokerage's revenue, growth in these assets is likely to boost the asset management fees and hence the overall revenues.
Trading Commissions Decline Notably
Trading volumes have seen a decline in comparison to the previous year. Due to a slowdown in Chinese economy in the same period last year, trading volumes had witnessed a surge in 2015. With the improving financial conditions in the U.S. and continued growth in new brokerage accounts, we expect trading volumes and consequently, trading commissions to pick up soon.
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