Fitch Affirms Schwab's Ratings at 'A/F1'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed the long-term and short-term Issuer Default Ratings (IDRs) for The Charles Schwab Corporation (SCHW) at 'A/F1'. The Rating Outlook is Stable. A full list of ratings is provided at the end of this release.

Today's rating action is reflective of SCHW's improved profitability despite a challenging interest rate environment and elevated stress in equity markets. Specifically, SCHW's return on equity improved to 12% in 2011, up from 7.8% in 2010. This was due to 10% revenue growth on the year as well as continued expense discipline, which pushed the company's full year margin up to 29.7% at year-end (YE) 2011.

Fitch notes that this is significant as the company continues to have approximately $165 million per quarter of money market mutual fund fee waivers impacting its results, and continues to experience some volatility in its clients' daily average trades. On the latter, the company's daily average trades were up 16% at YE2011 compared to YE2010, but down 3% in the fourth quarter of 2011 (4Q'11) from the sequential quarter due to market turmoil in the latter half of last year. Revenue per trade, however, held relatively steady over the course of the year, despite elevated price competition on trading commissions.

The company continues to add net new assets to its asset management business, generating $10.5 billion of new assets in December 2011, and an additional $7.1 billion in January 2012, and total client assets amount to $1.74 trillion at the end of January 2012. On balance, SCHW has experienced flows out of equity funds and into bond funds, including its large suite of money market funds.

Fitch does note that SCHW has some exposure to European financial institutions via its money market funds, which it has identified at 12.7% of its total net asset value (NAV) as of February 2012. More than half of this exposure is concentrated in the United Kingdom and Sweden, and Fitch does note that the company's funds do not have any direct exposure to European sovereign debt nor does it have exposure to financial institutions in Greece, Italy, Spain, Ireland, or Portugal.

Charles Schwab Bank (SB) continues to grow, and become a bigger component of the company's balance sheet and earnings profile. Net interest income (NII) represented 36.7% of total revenue at YE2011, and SB now has over $60 billion in deposits after recently completing a large balance sheet transfer program for certain accounts from brokerage credit balances to a bank sweep deposit product.

Loans are primarily mortgage related and amount to $9.8 billion, and credit quality on these loans has been good. SCHW's net interest margin (NIM) was 1.57% for 4Q2011, which was impacted by elevated levels of mortgage prepayments.

Fitch expects SB to continue to grow, albeit at a slower rate than in the last year, with another component of the balance sheet transfer program nearing completion in 2012. Nevertheless the company recently raised $400 million of preferred stock, and plans to downstream a large proportion of this capital into SB to support continued growth. While the performance of SB has been good, Fitch does note that the growing size of SB could increase SCHW's overall risk profile.

SCHW's leverage as measured by adjusted debt-to-EBITDA remains on the higher side for SCHW at approximately 1.27 times (x), but inline with leverage measures of similarly rated entities. Fitch notes that it has adjusted SCHW's leverage ratio for the aforementioned preferred stock issuance, giving 50% equity credit to the $400 million issuance with the remainder being treated as debt.

Fitch notes that SCHW's overall business model is very scalable, and could show meaningful earnings growth with improved financial market and interest rate environments. However, from a credit perspective this elevated sensitivity to stock market trends and interest rates constrains longer-term upwards ratings potential.

Ratings could come under pressure if SCHW were to lose significant clients from poor investment performance or operational errors, or if overall credit metrics--including those at SB--were to begin to meaningfully deteriorate. Additionally, should the loan portfolio mix at the bank become less conservative, ratings could be impacted.

SCHW and its subsidiaries provide securities brokerage and related financial services to individuals and institutional clients. The two primary operating entities include Charles Schwab & Co., Inc., a securities broker-dealer and Charles Schwab Bank, which offers mortgage loan and deposit services to clients.

Fitch has affirmed the following ratings:

The Charles Schwab Corporation

--Long-term Issuer Default Rating (IDR) at 'A';

--Short-term IDR at 'F1';

--Senior unsecured notes at 'A';

--Short-term debt at 'F1';

--Preferred stock at 'BB+';

--Support at '5';

--Support floor at 'NF'.

Schwab Capital Trust I

--Preferred stock at 'BBB-'.

The Rating Outlook is Stable.

Additional information is available at www.fitchratings.com. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Global Financial Institutions Rating Criteria', Aug. 16, 2011;

--'Securities Firms Criteria', Aug. 16, 2011;

--'Rating Bank Regulatory Capital and Similar Securities', Dec. 15, 2011;

--'Treatment of Hybrids in Bank Capital Analysis', July 11, 2011.

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649171

Securities Firms Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=649173

Rating Bank Regulatory Capital and Similar Securities

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656371

Treatment of Hybrids in Bank Capital Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=641269

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