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Schwab (SCHW) Beats Earnings on Revenue Strength

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Robust top-line growth drove The Charles Schwab Corp.’s (SCHW - Free Report) second-quarter earnings of 23 cents per share surpassing the Zacks Consensus Estimate of 22 cents. Also, this was up 28% from 18 cents earned in the year-ago quarter.

Our quantitative model had conclusively projected that Schwab would beat the Zacks Consensus Estimate, as it had the right combination of two key components – a positive Earnings ESP and a Zacks Rank #3 (Hold).

Better-than-expected results were attributable to strong revenue growth, in spite of a decline in trading revenues. However, these were partially offset by a marginal rise in operating expenses and higher provision for loan losses. A rise in total client assets as well as new brokerage accounts acted as tailwinds.

Net income available to common shareholders totaled $302 million, up 30% year over year.

Performance in Detail

Net revenue was $1,478 million, up 11% from the prior-year quarter. The rise was largely driven by higher asset management and administration fees (up 10%), net interest revenues (up 19%) and other revenues (up 10%), partially offset by a fall in trading income (down 10%). The reported figure also came ahead of the Zacks Consensus Estimate of $1,470 million.

As of Jun 30, 2014, Schwab’s average interest-earning assets rose nearly 7% year over year to $136.9 billion.

Total non-interest expense increased 1% year-over-year to $957 million. The rise was due to higher compensation and benefits, professional services, occupancy and equipment, and communications costs. It was, however, partly offset by lower depreciation and amortization as well as advertising and market development expenses.

Further, provision for loan losses was $7 million, up from $1 million in the year-ago quarter.

Pre-tax profit margin improved to 35.3% from 30.8% in the prior-year quarter.

Annualized return on equity (ROE) as of Jun 30, 2014, came in at 12%, up from 10% as of Jun 30, 2013.

Other Business Developments

As of Jun 30, 2014, Schwab had total client assets of $2.40 trillion (up 17% year over year). Net new assets – bought by new and existing clients – were $22.7 billion compared with net asset outflows of $21.7 billion in the prior-year quarter.

Further, Schwab added 242,000 new brokerage accounts in the second quarter. As of Jun 30, 2014, the company had a total of 9.25 million active brokerage accounts, 950,000 banking accounts and 1.34 million corporate retirement plan participants.

Our Viewpoint

While the focus on low-cost capital structure will improve results in the upcoming quarters, Schwab’s financials will likely remain pressurized due to a low interest rate environment. However, the company has undertaken several initiatives to reduce its dependency on interest rates. Further, we believe that synergies from the acquisitions and a stable capital position will boost the company’s financials to some extent.

Among other major investment brokers, TD Ameritrade Holding Corp. (AMTD - Free Report) is scheduled to report third-quarter fiscal 2014 results on Jul 22 whereas E*TRADE Financial Corp. (ETFC - Free Report) and GFI Group Inc. are slated to announce second-quarter results on Jul 23 and 24, respectively.

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