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Charles Schwab Earnings Preview: Growing Client Asset Base And Yield Rate To Drive Quarter

By: Trefis
Posted: 4/16/2014 1:45:00 PM
Referenced Stocks: SCHW;ETFC;AMTD

Charles Schwab ( SCHW ) is expected to announce its first quarter earnings on April 15. Last quarter the company reported an 18% year-on-year (y-o-y) increase in revenues, which drove an 11% increase in its full year revenues compared to 2012 figures. Although all three of the company's divisions witnessed growth in Q4, the most significant among them was net interest on deposits, securities and loans - the company's most valuable division - which grew by 23% y-o-y. Asset management fees and transaction-based revenues grew by 13% and 14% for the quarter, respectively. As Charles Schwab continues to attract more clients, evidenced by an increase in the total client assets under management, we expect its revenues to grow in Q1 as well.

We have $25 price estimate for the company's stock , which is about in line with the current market price.

See our full analysis for Charles Schwab

Net Interest Revenues And Asset Management Fees Likely To Continue Strong Growth

Charles Schwab has been successful in attracting more client accounts and assets at a rapid pace in the last few years, with the trend continuing in Q4 as well. Most notable was the 34% increase in securities available for sale and securities held to maturity, from about $55 billion in 2012 to $74 billion last year. Securities available for sale consist of U.S. agency and non-agency mortgage-backed securities, asset-backed securities, certificates of deposit, corporate debt securities and U.S. agency notes. Going forward we expect the company's total interest earning assets to increase from $130 billion in 2013 to over $150 billion this year - a 17% increase, with growth coming mostly in securities, as the company's loans to banking clients, receivables from brokerage clients and other investments have remained largely stagnant in the last couple of years. The company's total interest earning deposits, loans and securities have increased at a CAGR of 18% over the last three years, which we expect to continue over the next few years, before slowing down to the low teens by the end of our forecast period.

Charles Schwab's net interest yield on deposits, securities and loans has declined steadily from 4.6% in 2007 to about 1.5% in 2013. The decline in the last few years can be attributed to Fed policies such as the QE program. Looking ahead we expect the yield percentage to increase substantially in 2014 and 2015 due to the tapering initiatives by the Fed.

Trading Volumes On The Rise

Schwab's trading commissions business has struggled with low trading volumes over the last few years. The increase in brokerage accounts in the last few quarters has been a strong positive for the company. Daily average trading volumes were up by 10% and 17% y-o-y in the months of January and February, respectively. As more clients open new accounts, the total trading volume on Schwab's platform is likely to increase, even though the average number of trades executed by a typical client remains subdued. In 2013, the total number brokerage accounts on Schwab's platform increased by 3.5% to reach 9.1 million. We expect the company to continue to add brokerage accounts at a similar rate, while we expect the revenue per trade to remain around $12.

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