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Charles Schwab Corporation’s (SCHW - Analyst Report) first-quarter 2013 earnings of 15 cents per share missed the Zacks Consensus Estimate by a penny. This was in line with the year-ago quarter earnings.

Marginally lower-than-expected results were attributable to higher operating expenses and a rise in provision for loan losses, partially offset by growth in the top-line. However, improvement in client assets and rise in new brokerage accounts were the tailwinds for the quarter.

Net income available to common shareholders in the first quarter totaled $198 million, up 2% from $195 million in the prior-year quarter.

Quarterly Performance

Net revenues were $1,290 million, up 8% from $1,189 million in the prior-year quarter. Moreover, this was higher than the Zacks Consensus Estimate of $1,260 million.

The increase in net revenues was largely driven by the higher asset management and administration fees (up 14%) and net interest revenue (up 8%). However, these were partially offset by lower trading revenue (down 8%).

As of Mar 31, 2013, Schwab’s average interest-earning assets augmented nearly 21% year over year to $126.3 billion.

Total non-interest expense grew 9% year over year to $959 million. The increase was primarily due to higher compensation and benefit expenses. Further, provision for loan losses was $6 million compared with nil in the previous-year quarter.

Pre-tax profit margin improved from 25.7% in the prior-year quarter to 26.3% in the reported quarter.

Annualized return on equity (ROE) as of Mar 31, 2013, came in at 9%, down from 10% as of Mar 31, 2012.

Other Business Developments

As of Mar 31, 2013, Schwab had total client assets of $2.08 trillion (up 14% year over year). Core net new assets were $43.4 billion in 2012, up 9% from the prior year.

Further, Schwab added 244,000 new brokerage accounts in the first quarter. As of Mar 31, 2013, the company had a total of 8.9 million active brokerage accounts, 888,000 banking accounts and 1.6 million corporate retirement plan participants.


Given its diversified revenue streams and ongoing expense discipline, Schwab anticipates pre-tax profit margin of 30% and earnings in the range of mid-70 cents per share in 2013.

Our Viewpoint

While focusing on low-cost capital structure will help improve results in the upcoming quarters, Schwab’s financials will continue to be hampered by lower trading activities, weaker equity markets and reduced interest rate yields.

Moreover, we remain concerned about Schwab’s low capital intensity relative to its peers. Nevertheless, we believe that the synergies from the acquisitions and stable capital position will boost the company’s financials to some extent.

Schwab currently retains a Zacks Rank #3 (Hold).

Among other investment brokers, TD Ameritrade Holding Corporation (AMTD - Analyst Report) and Interactive Brokers Group, Inc. (IBKR - Analyst Report) are scheduled to report on Apr 16 and E*TRADE Financial Corporation (ETFC - Analyst Report) on Apr 18.

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