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Weak Trading Performance to Hurt Schwab's (SCHW) Q2 Earnings

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Charles Schwab (SCHW - Free Report) is scheduled to report second-quarter 2021 results on Jul 16, before market open. Its revenues and earnings in the quarter under review are expected to have improved on a year-over-year basis.

In first-quarter 2021, Schwab’s earnings surpassed the Zacks Consensus Estimate. Results reflected solid client asset balances and a rise in new brokerage accounts, which were driven by strong client activity in the pandemic-induced volatile markets.

The company has an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in three and lagged in one of the trailing four quarters, with an average beat of 3.7%.

The Charles Schwab Corporation Price and EPS Surprise

 

The Charles Schwab Corporation Price and EPS Surprise

The Charles Schwab Corporation price-eps-surprise | The Charles Schwab Corporation Quote

Schwab’s activities in the to-be-reported quarter failed to encourage analysts to revise earnings estimates upward. Thus, over the past seven days, the Zacks Consensus Estimate for its second-quarter earnings has been revised 2.7% lower to 73 cents. However, the estimate indicates an increase of 35.2% from the year-ago reported number.

The consensus estimate for second-quarter sales is pegged at $4.48 billion, which suggests an 83% rise from the year-ago quarter’s reported figure.

Now, before we take a look at what our quantitative model predicts, let’s check the factors that are likely to have impacted Schwab’s second-quarter performance.

Key Factors at Play

Unlike the prior five quarters, the second quarter did not record significant market volatility. Moreover, while overall client activity has been decent, Schwab witnessed a decline in new brokerage accounts in April and May, which is expected to have impacted the to-be-reported quarter’s trading performance.

In April, Schwab opened 609,000 new brokerage accounts, down 28% from the prior month. In May, it opened 549,000 accounts, down 10% from the previous month.

Thus, while investors were somewhat interested in entering the markets in the second quarter, Schwab’s trading revenues are not expected to have improved significantly because of reduced volatility and market normalization.

The Zacks Consensus Estimate for second-quarter trading revenues is pegged at $900 million, which suggests a decline of 26% from the previous quarter’s reported number.

Now, the consensus estimate for total client assets of $7.3 trillion indicates 3.7% growth sequentially. Also, the consensus estimate for average interest-earning assets of $528 billion suggests growth of 1.9% from the previous quarter.

Thus, despite the continued low interest rate environment, Schwab’s net interest revenues are likely to have been positively impacted by expected growth in interest-earning assets. The Zacks Consensus Estimate for net interest revenues is pegged at $2 billion, which suggests a rise of 5.1%, sequentially.

The consensus estimate for asset management and administration fees of $1.1 billion also suggests growth of 6%, sequentially.

Coming to expenses, Schwab’s operating expenses have been elevated over the past few quarters. In fact, because of continued regulatory spending as well as the strategic buyouts to drive efficiency, overall expenses are expected to have been high in the to-be-reported quarter.

Notably, Schwab mentioned that it faced a probe by the Securities and Exchange Commission in relation to the digital advisory platform — Schwab Intelligent Portfolios. Because of the robo-advisor probe, it will likely incur a “non-deductible charge of $200 million” in second-quarter 2021.

What the Zacks Model Unveils

According to our quantitative model, the chances of Schwab beating the Zacks Consensus Estimate this time are low. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or better.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Schwab is -5.75%.

Zacks Rank: The company currently carries a Zacks Rank #3.

Stocks Worth a Look

Here are some finance stocks that you may want to consider as these have the right combination of elements to post an earnings beat in their upcoming releases, per our model.

The Bank Of New York Mellon (BK - Free Report) is slated to report quarterly results on Jul 15. The company currently has an Earnings ESP of +1.84 and a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

U.S. Bancorp (USB - Free Report) is scheduled to announce quarterly results on Jul 15. The company has an Earnings ESP of +0.49% and carries a Zacks Rank of 3.

BankUnited, Inc. (BKU - Free Report) is scheduled to release earnings numbers on Jul 22. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +3.07%.