Schwab (SCHW) Meets Q2 Earnings and Revenue Expectations
The Charles Schwab Corp.’s SCHW second-quarter 2017 earnings of 39 cents per share were in line with the Zacks Consensus Estimate. It increased 30% from the prior-year quarter.
Schwab’s shares were down nearly 1.1% in early market trading. Notably, the price reaction during the full trading session will provide a better idea about how the investors accepted the results.
Revenue growth, lower level of fee waivers and no provisions were among the positives. Further, there was an impressive rise in total client assets and new brokerage accounts. However, higher expenses and a decline in trading revenues remained the headwinds.
Net income available to common shareholders was $530 million, up 31% year over year.
Revenue Improvement Offset by Expense Rise
Net revenue was $2.13 billion, climbing 17% year over year, supported by asset management and administration fees (up 12%), other revenues (up 7%) and net interest revenues (up 32%). These were partly offset by a 22% fall in trading revenues. The reported figure was in line with the Zacks Consensus Estimate.
Total non-interest expenses rose 10% year over year to $1.22 billion. All expense components, except communication costs, increased on a year-over-year basis.
Provision for loan losses was nil as against $2 million in the year-ago quarter.
Fee waivers were $1 million, down 98% from the year-ago quarter.
Pre-tax profit margin improved to 42.7% from 39.4% recorded last year.
At the end of the second quarter, Schwab’s average interest-earning assets jumped 17% year over year to $215.76 billion.
Annualized return on equity as of Jun 30, 2017, came in at 15%, up from 13% a year ago.
Other Business Developments
As of Jun 30, 2017, Schwab had total client assets of $3.04 trillion (up 16% year over year). Also, net new assets – bought by new and existing clients – jumped 142% from the prior-year quarter to $64.5 billion.
In addition, Schwab added 357,000 new brokerage accounts in the reported quarter. As of Jun 30, 2017, the company had a total of 10.5 million active brokerage accounts, 1.1 million banking accounts and 1.5 million corporate retirement plan participants.
Our Take
While focus on low-cost capital structure will improve Schwab’s performance in the quarters ahead, current equity market volatility is expected to continue driving its daily trading volumes. Also, initiatives to strengthen market share will likely support its profitability over the long term, despite the expectation of near-term reduction in trading revenues.
However, continuous rise in expenses remains a key concern for Schwab. Further, significant dependence on fee-based revenue streams makes us apprehensive.