Schwab (SCHW) Lags on Q2 Earnings as Revenues Fall, Costs Rise

Charles Schwab’s SCHW second-quarter 2020 adjusted earnings of 54 cents per share lagged the Zacks Consensus Estimate of 55 cents. Also, the bottom line decreased 19% from the prior-year quarter.

Results for the reported quarter excluded acquisition and integration-related costs as well as the amortization of acquired intangibles.

Schwab’s share price declined 1.6% in early market trading. However, a full day’s trading session will reflect a better picture.

Results were primarily hurt by a decline in revenues and higher expenses. However, an increase in net new assets and higher new brokerage accounts — driven by solid client activity in the coronavirus outbreak-induced volatile markets — acted as tailwinds.

After considering non-recurring items, net income available to common shareholders (GAAP basis) was $621 million or 48 cents per share, down from $887 million or 66 cents per share recorded in the year-ago quarter.

Revenues Decline, Expenses Rise

Net revenues were $2.45 billion, down 8.6% year over year. The fall was due to a decline in trading revenues (down 6.8%), net interest revenues (down 13.7%) and other revenues (down 15.2%), partially offset by a 1.9% rise in asset management and administration fees. The reported figure lagged the Zacks Consensus Estimate of $2.49 billion.

Total non-interest expenses rose 8.1% year over year to $1.56 billion. All expense components, except for advertising and market development costs, increased from a year ago.

Pre-tax profit margin declined to 36.2% from 46.1% in the prior-year quarter.

At the end of the second quarter, Schwab’s average interest-earning assets grew 36.6% year over year to $362.9 billion.

Annualized return on equity as of Jun 30, 2020, was 10%, down from 19% at the end of the prior-year quarter.

Other Business Developments

As of Jun 30, 2020, Schwab had total client assets of $4.1 trillion (up 11% year over year). During the reported quarter, net new assets — brought by new and existing clients — were $137.4 billion, up significantly from the year-ago quarter.

Schwab added 1.65 million new brokerage accounts in the reported quarter, reflecting a substantial jump from 386,000 accounts recorded in the year-ago period. As of Jun 30, 2020, the company had 14.1 million active brokerage accounts, 1.5 million banking accounts and 1.7 million corporate retirement plan participants.

Our Take

Schwab’s inorganic growth efforts (including the acquisition of USAA's Investment Management Company and Certain Assets of Motif) are expected to strengthen its position as a leading brokerage player. Notably, the planned acquisition of TD Ameritrade AMTD will likely enhance its profitability over time. Also, the company is trying to strengthen its trading business by offering commission-free trading, which will likely result in higher client assets and brokerage accounts, going forward.

However, a continuous rise in expenses is expected to hurt the bottom line. Moreover, a dismal interest rate scenario might hurt margins.

The Charles Schwab Corporation Price, Consensus and EPS Surprise

The Charles Schwab Corporation Price, Consensus and EPS Surprise

The Charles Schwab Corporation price-consensus-eps-surprise-chart | The Charles Schwab Corporation Quote

Currently, Schwab carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Earnings Release Dates of Other Investment Brokers

We now look forward to the upcoming quarterly results of Interactive Brokers Group, Inc. IBKR, TD Ameritrade and E*TRADE Financial ETFC.  Interactive Brokers and TD Ameritrade are slated to release results for the June-end quarter on Jul 21, E*TRADE will release results on Jul 23.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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