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On Sep 3, 2013, we reaffirmed our Neutral recommendation on The Charles Schwab Corporation (SCHW - Analyst Report). Though the company reported lower-than-expected second-quarter results, the initiatives to improve capital ratios and effective capital deployment activities are impressive.

Why Neutral?

On Jul 16, Schwab reported second-quarter 2013 earnings per share of 19 cents, missing the Zacks Consensus Estimate by a penny. Higher operating expenses were primarily responsible for the miss, but top-line improvement partially offset it.

The Zacks Consensus Estimate for 2013 decreased 1.4% to 73 cents per share over the last 60 days. However, for 2014, the Zacks Consensus Estimate increased 1.2% to 87 cents per share over the same time period. As a result, Schwab currently carries a Zacks Rank #3 (Hold).

Schwab is an asset for yield-seeking investors. The company presently targets its cash dividend to be in the range of 20%–30% of net income. Also, consistent focus on low cost capital structure will likely improve its results in the upcoming quarters. Moreover, synergies from acquisitions and stable capital position will boost the company’s financials going forward.  

On the flip side, Schwab is experiencing pressure on Daily Average Trades (DATs) due to the disengagement of retail traders. We expect the declining trend in DATs to continue in the near to mid-term, on account of lower trading activity and flattish market performance.

Moreover, the company’s business model is very sensitive to interest rate. Until the economy recovers significantly and interest rates improve decently, the company’s net interest margin and revenues will remain under pressure.

Other Stocks Worth Considering

Some better performing banks include GAIN Capital Holdings, Inc. (GCAP - Snapshot Report), TD Ameritrade Holding Corp. (AMTD - Analyst Report) and BGC Partners, Inc. (BGCP - Snapshot Report). While both GAIN Capital Holdings and Ameritrade Holding Corporation carry a Zacks Rank #1 (Strong Buy), BGC Partners has a Zacks Rank #2 (Buy).

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