Schwab Lags Q3 Earnings on Higher Expenses, Revenues Up - Analyst Blog

The Charles Schwab Corp.'s (SCHW) third-quarter earnings of 24 cents per share missed the Zacks Consensus Estimate by a penny owing to a rise in expenses. However, this was up 9% from 22 cents earned in the year-ago quarter.

Notably, Schwab's results included a net insurance recovery of around $45 million and a charge amounting to $68 million related to future changes in the company's geographic footprint. These two items lowered the pre-tax income by nearly $23 million or 1 cent per share. Hence, after-tax impact of these two items will be immaterial.

Lower-than-expected results reflected the impact of higher operating expenses. However, this was partially offset by strong revenue growth and lower provision for loan losses. A rise in total client assets as well as new brokerage accounts acted as tailwinds.

Net income available to common shareholders totaled $312 million, up 11% year over year.

Performance in Detail

Net revenue was $1,551 million, up 13% from the prior-year quarter. The increase was largely attributable to asset management and administration fees (up 11%) and net interest revenues (up 13%). Also, other revenues increased significantly owing to the inclusion of the above-mentioned net insurance recovery. These were, however, partially offset by a 7% fall in trading income. Moreover, the reported figure came ahead of the Zacks Consensus Estimate of $1,491 million.

Total non-interest expense increased 14% from the year-ago quarter to $1,033 million and included the afore-mentioned charge of $68 million. All expense components except depreciation and amortization, and other costs, witnessed a year over year rise.

Further, provision for loan losses was $1 million, down 75% from the year-ago quarter.

Adjusted pre-tax profit margin improved to 35.9% from 33.8% recorded in the prior-year quarter.

As of Sep 30, 2014, Schwab's average interest-earning assets rose nearly 7% year over year to $138.9 billion.

Annualized return on equity (ROE) as of Sep 30, 2014, came in at 12%, down from 13% as of Sep 30, 2013.

Other Business Developments

As of Sep 30, 2014, Schwab had total client assets of $2.40 trillion (up 12% year over year). Net new assets – bought by new and existing clients – were $34.7 billion, up 92% from the prior-year quarter.

Further, Schwab added 229,000 new brokerage accounts in the third quarter. As of Sep 30, 2014, the company had a total of 9.31 million active brokerage accounts, 970,000 banking accounts and 1.41 million corporate retirement plan participants.

Our Viewpoint

While the focus on low-cost capital structure will improve results in the quarters ahead, we believe that Schwab's financials will likely remain under pressure owing to a low interest rate environment. However, the company has undertaken several initiatives to reduce its dependency on interest rates. Further, we believe that synergies from acquisitions and a stable capital position will boost the company's financials to some extent.

Currently, Schwab holds a Zacks Rank #3 (Hold).

Among other investment brokers, E*TRADE Financial Corp. (ETFC) and Interactive Brokers Group, Inc. (IBKR) are slated to report results on Oct 21, while KCG Holdings, Inc. (KCG) is scheduled to report on Oct 30.