We have reaffirmed our long-term 'Neutral' recommendation on
Charles Schwab Corporation
), based on its third quarter results, synergies from the
acquisitions and a stable capital position. However, we remain
concerned about the company's financials, which continue to be
impacted by lower trading activities, unstable equity markets and
volatile interest rates.
E TRADE FINL CP (ETFC): Free Stock Analysis
SCHWAB(CHAS) (SCHW): Free Stock Analysis
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Schwab's third quarter 2012 earnings were slightly ahead of the
Zacks Consensus Estimate. Growth in asset management and
administration fees along with balance sheet restructuring
actions was among the positives. Yet, higher operating expenses,
increased provision for loan losses, lower net interest income
and subdued trading revenue were the primary dampeners.
Diversified revenue streams remain Schwab's foremost strength. In
October 2012, the company further diversified its revenue base by
announcing a deal to acquire ThomasPartners, a dividend
income-focused asset management firm. We believe the company's
results would continue to benefit from management's aggressive
efforts to increase clients in advisory solutions.
Further, Schwab has been making significant efforts to become
less dependent on interest rates. As part of this effort, the
company has announced the launch of certain initiatives, which
would help augment revenue going forward, with or without a Fed
rate hike. We believe that the success of these programs will
enable Schwab to strengthen its position in institutional and
On the flip side, though Schwab is taking initiatives to
strengthen its client-advisor relationship, it is experiencing a
pressure on DARTs (Daily Average Revenue Trades) as a result of a
disengagement of retail traders, almost similar to its peer
E*TRADE Financial Corporation
). We anticipate a declining trend in DARTs to linger in the
near-to-mid term mainly due to lower trading activity and
flattish market performance.
Moreover, Schwab's business model is highly sensitive to interest
rates. Low rates have been a drag on the company's revenue. Until
the economic recovery gains momentum and interest rates
significantly improve, the company will continue to experience
pressure on its net interest margin and top line.
Currently, Schwab retains a Zacks #3 Rank, which translates into
a short-term Hold rating.