On Wednesday, Charles Schwab Corp. ( SCHW ) released its Activity Report for November 2011. Concurrently, the company has provided an updated outlook for the fourth quarter of 2011.
The 4Q Guidance
Schwab expects its fourth quarter results to decline sequentially. Lower net interest margin ( NIM ), volatile global equity market and slow client trading activity will be the chief reasons behind this drop.
Schwab anticipates continued acceleration in prepayments of agency issued mortgage-backed securities held in the company's investment portfolio due to lower interest rates. This rise in prepayments will likely add pressure to the bottom-line.
Schwab also stated that higher prepayments will expectedly lead to higher-than-expected amortization of related purchase premiums. This in turn may result in a dip in NIM. Now, the company is anticipating the fourth quarter NIM to be below 1.65%, which it had previously forecasted.
Furthermore, based on the current operating environment, Schwab anticipates the fourth quarter earnings to be 12-14 cents per share.
Monthly Performance Metrics
Schwab's Daily Average Revenue Trades (DARTs) fell 15% from October 2011, but grew 5% from November 2010 to 433,500 in November 2011. A continued decline in client trading activities and pressurized asset values led to lower DARTs for the month under review.
Schwab registered a rise in new assets, with net inflow of $6.0 billion in November 2011 as against $5.0 billion in October 2011. However, new assets declined from $8.0 billion recorded in the prior-year month.
Further, Schwab's total client assets stood at $1.67 trillion as of November end, relatively flat from the prior month and up 10% from the prior-year comparable period. The company opened 64,000 brokerage accounts in November 2011, in line with October 2011, but down 3% from 66,000 in November 2010.
At the end of the reported month, Schwab's active brokerage accounts totaled 8.534 million; flat sequentially but up 7% year over year. Similarly, clients' banking accounts were at par sequentially but increased 14% year over year to 777,000 for November. However, the number of corporate retirement plan participants was 1,478 million, up 1% from both October 2011 and November 2010.
On the same day, E*TRADE Financial Corporation ( ETFC ) recorded sequential as well as year-over-year drop in average U.S. trades due to high market volatility. The company's DARTs were 141,361 for the month under review, down 10% sequentially and 11% year over year.
Similarly, last week, TD Ameritrade Holding Corporation ( AMTD ) recorded a sequential as well as year-over-year fall in average U.S. trades for November 2011. The company's DARTs were 377,000, down 7% sequentially and 4% year over year.
As money market funds are less profitable than stock market funds, we expect that an increase in the former will likely hurt Schwab financially. Moreover, a drastically low interest rate environment would further compel the company to waive fees. With continued volatility in equity markets and slowing global economy, the company is expected to face a drop in DARTs in the coming months.
However, with the integration of optionsXpress Holdings Inc., Schwab's top line is expected to benefit from increased derivative trading. Moreover, revenue will also get enhanced due to capital spending initiatives.
Schwab currently retains a Zacks # 4 Rank, which translates into a short-term 'Sell' rating. However, considering the fundamentals, we maintain a long-term "Neutral" recommendation on the stock.