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Higher Rates, Acquisitions Aid Schwab (SCHW) Amid Cost Concerns
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Charles Schwab’s (SCHW - Free Report) inorganic growth efforts and initiatives to augment trading revenues will likely keep boosting profitability. The company’s capital deployment plan reflects a strong balance sheet position, through which it will keep enhancing shareholder value.
However, elevated operating expenses might hamper the company's bottom-line growth.
Analysts do not seem optimistic regarding the company’s earnings growth potential. The Zacks Consensus Estimate for SCHW’s current-year earnings was revised marginally lower over the last 60 days.
Looking at its fundamentals, while Schwab’s trading revenues declined in 2019 and the first half of 2022, it witnessed a compound annual growth rate (CAGR) of 58.7% over the last five years (2017-2021). The company undertakes initiatives to enhance trading revenues, including lowering its basic online equity and ETF trade commissions to zero and reducing fees for the Schwab market cap-weighted index mutual funds.
The company launched Schwab Stock Slices, through which investors can own shares of any company in the S&P 500 Index starting at $5 each, even though the shares cost more. Also, it launched the Schwab Crypto Thematic ETF, the lowest-cost crypto-related ETF available to investors.
These efforts, aimed at building its client base, along with the acquisition of TD Ameritrade (October 2021), are likely to lead to further improvement in trading income.
Schwab continues to benefit from the aggressive efforts to increase its client base in advisory solutions. Its advice solution revenues saw a four-year (2018-2021) CAGR of 20.5%.
The acquisitions of USAA’s Investment Management Company, Wasmer, Schroeder & Company, LLC, and the buyout of Motif’s technology and intellectual property further strengthened Schwab's position and helped diversify revenues.
After slashing interest rates thrice in 2019, the central bank cut rates to near-zero in March 2020 (to cushion the U.S. economy from the coronavirus-induced mayhem), which hurt SCHW’s margins. Schwab’s NIM declined from 2.41% in 2019 to 1.62% in 2020 and 1.45% in 2021.
Nevertheless, with the Federal Reserve having already raised interest rates a few times this year, along with expectations of more such rate hikes in 2022, the company’s margins are expected to no longer be under pressure. In the first six months of 2022, margins improved on a year-over-year basis.
However, SCHW’s expenses witnessed a CAGR of 19.2% over the last six years (2016-2021) mainly due to a rise in compensation and benefit costs, and acquisitions. The upward trend persisted in the first six months of 2022. Increased costs associated with compensation and regulatory spending, as well as strategic buyouts, are expected to keep total expenses elevated in the upcoming quarters.
Stocks to Consider
A couple of stocks from the finance space worth a look at are S&T Bancorp, Inc. (STBA - Free Report) and Arrow Financial Corporation (AROW - Free Report) .
The consensus estimate for S&T Bancorp and Arrow Financial’s current-year earnings has been revised upward over the past 60 days.
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Higher Rates, Acquisitions Aid Schwab (SCHW) Amid Cost Concerns
Charles Schwab’s (SCHW - Free Report) inorganic growth efforts and initiatives to augment trading revenues will likely keep boosting profitability. The company’s capital deployment plan reflects a strong balance sheet position, through which it will keep enhancing shareholder value.
However, elevated operating expenses might hamper the company's bottom-line growth.
Analysts do not seem optimistic regarding the company’s earnings growth potential. The Zacks Consensus Estimate for SCHW’s current-year earnings was revised marginally lower over the last 60 days.
Looking at its fundamentals, while Schwab’s trading revenues declined in 2019 and the first half of 2022, it witnessed a compound annual growth rate (CAGR) of 58.7% over the last five years (2017-2021). The company undertakes initiatives to enhance trading revenues, including lowering its basic online equity and ETF trade commissions to zero and reducing fees for the Schwab market cap-weighted index mutual funds.
The company launched Schwab Stock Slices, through which investors can own shares of any company in the S&P 500 Index starting at $5 each, even though the shares cost more. Also, it launched the Schwab Crypto Thematic ETF, the lowest-cost crypto-related ETF available to investors.
These efforts, aimed at building its client base, along with the acquisition of TD Ameritrade (October 2021), are likely to lead to further improvement in trading income.
Schwab continues to benefit from the aggressive efforts to increase its client base in advisory solutions. Its advice solution revenues saw a four-year (2018-2021) CAGR of 20.5%.
The acquisitions of USAA’s Investment Management Company, Wasmer, Schroeder & Company, LLC, and the buyout of Motif’s technology and intellectual property further strengthened Schwab's position and helped diversify revenues.
After slashing interest rates thrice in 2019, the central bank cut rates to near-zero in March 2020 (to cushion the U.S. economy from the coronavirus-induced mayhem), which hurt SCHW’s margins. Schwab’s NIM declined from 2.41% in 2019 to 1.62% in 2020 and 1.45% in 2021.
Nevertheless, with the Federal Reserve having already raised interest rates a few times this year, along with expectations of more such rate hikes in 2022, the company’s margins are expected to no longer be under pressure. In the first six months of 2022, margins improved on a year-over-year basis.
However, SCHW’s expenses witnessed a CAGR of 19.2% over the last six years (2016-2021) mainly due to a rise in compensation and benefit costs, and acquisitions. The upward trend persisted in the first six months of 2022. Increased costs associated with compensation and regulatory spending, as well as strategic buyouts, are expected to keep total expenses elevated in the upcoming quarters.
Stocks to Consider
A couple of stocks from the finance space worth a look at are S&T Bancorp, Inc. (STBA - Free Report) and Arrow Financial Corporation (AROW - Free Report) .
The consensus estimate for S&T Bancorp and Arrow Financial’s current-year earnings has been revised upward over the past 60 days.