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Schwab (SCHW) Beats on Q3 Earnings as Interest Income Rises

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The Charles Schwab Corp.’s (SCHW - Free Report) third-quarter 2017 earnings of 42 cents per share were a penny above the Zacks Consensus Estimate. Also, it increased 20% from the prior-year quarter.

However, Schwab’s shares were down nearly 1.5% in early market trading. Steady fall in trading revenues remains a major concern for Schwab. Notably, the price reaction during the full trading session will provide a better idea about how investors accepted the results.

Revenue growth (driven by a rise in interest income), 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 decrease in trading revenues remained the headwinds.

Net income available to common shareholders was $575 million, up 22% year over year.

Revenue Improvement Offset by Expense Rise

Net revenues were $2.17 billion, climbing 13% year over year, supported by asset management and administration fees (up 8%) and net interest revenues (up 28%). These were partly offset by a 21% fall in trading revenues and 7% decline in other revenues. The reported figure was below the Zacks Consensus Estimate of $2.19 billion.

Total non-interest expenses rose 9% year over year to $1.22 billion. All expense components, except advertising and market development expenses, and communication costs, increased on a year-over-year basis.

Provision for loan losses was nil as against $5 million in the year-ago quarter.

Fee waivers were $1 million, down 98% from the year-ago quarter.

Pre-tax profit margin improved to 43.6% from 41.5% recorded last year.

At the end of the third quarter, Schwab’s average interest-earning assets grew10% year over year to $214.3 billion.

Annualized return on equity as of Sep 30, 2017, came in at 15%, up from 14% a year ago.

Other Business Developments

As of Sep 30, 2017, Schwab had total client assets of $3.18 trillion (up 17% year over year). Also, net new assets — brought by new and existing clients —  jumped 72% from the prior-year quarter to $51.6 billion.

In addition, Schwab added 336,000 new brokerage accounts in the reported quarter. As of Sep 30, 2017, the company had a total of 10.6 million active brokerage accounts, 1.2 million banking accounts and 1.6 million corporate retirement plan participants.

Our Take

Focus on low-cost capital structure will improve Schwab’s performance in the quarters ahead. 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.

The Charles Schwab Corporation Price, Consensus and EPS Surprise

 

The Charles Schwab Corporation Price, Consensus and EPS Surprise | The Charles Schwab Corporation Quote

Currently, Schwab carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Among other investment brokers, we now look forward to E*TRADE Financial Corp. , Raymond James Financial, Inc. (RJF - Free Report) and LPL Financial Holdings Inc. (LPLA - Free Report) , which are expected to report results on Oct 19, Oct 25 and Oct 26, respectively.

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