Why We Reduced Our Price Estimate For Schwab's Stock To $41

After cutting trading commissions to zero at the beginning of the month, Charles Schwab (NYSE: SCHW) published better-than-expected third quarter results last week. As we pointed out earlier, trading commissions have historically formed a small part of Schwab’s revenues with the top line being driven primarily by its net interest income figure. Trefis takes a closer look at the trends in net interest margin and the federal funds rate over recent quarters in the interactive dashboard Schwab’s Earnings: Performance and 2019 outlook.

A Quick Look at Schwab’s Revenues

Charles Schwab reported $10.1 billion in Total Revenues for full-year 2018. This included four revenue streams:

  • Net Interest Revenue: $5.8 billion in FY2018 (57% of Total Revenues). It is the interest earned on loans and margin receivables net of interest expense on funding sources.
  • Asset Management and Administration Fees: $3.2 billion in FY2018 (32% of Total Revenues). The company earns fees from managing proprietary money market mutual funds, ETFs, and advisory services, in addition to some third-party funds.
  • Trading Revenue: $763 million in FY2018 (8% of Total Revenues). A trading commission is charged for executing trades in stocks, bonds, options, futures, etc.
  • Other Revenues: $317 million in FY2018 (3% of Total Revenues). It includes order flow income, service fees, software fees, and exchange processing fees.

Rate Cuts To Hamper Schwab’s Earnings In 2020

  • Considering the low short-term interest rate environment and fierce competition for market share, we have revised our price estimate for Schwab downwards by 12% to $41 per share.
  • In 2018, the company benefited from the sequential rate hikes by the Fed and subsequently reported a 36% surge in net interest revenues.
  • Details about how changes in Schwab’s net interest margin compare with movements in the Federal Funds rate is available in our interactive dashboard
  • Consistent with the company’s NIM guidance figure for 2019 and a downward trend in interest rates, we expect Schwab net-interest margin to match the level seen in early 2018 over 2020.
  • Schwab’s interest-earning assets have been bolstered by the expanding client receivables in the last six quarters, as a result of increased market volatility.
  • We expect the interest-earning assets to continue growing at a strong pace until the presidential elections next year and stabilize as the new government assumes office.
  • Despite expectations of further rate cuts, the interest income is likely to grow in 2020 supported by Schwab’s large asset base.
  • The company’s management awaits Fed’s economic projections for revenue guidance, but we expect Schwab to post single-digit revenue declines and earnings erosion in 2020, as flatter interest income and lower asset management fees compound the impact of eliminated trading commissions on the top line.

What’s behind Trefis? See How it’s Powering New Collaboration and What-Ifs
For CFOs and Finance Teams | Product, R&D, and Marketing Teams
More Trefis Data
Like our charts? Explore example interactive dashboards and create your own

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

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.