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Schwab (SCHW) Q3 Earnings: What's in Store for the Stock?

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The Charles Schwab Corporation (SCHW - Free Report) is scheduled to report its third-quarter 2016 results on Oct 17, before the market opens.

This San Francisco-based investment broker delivered in-line earnings in the last quarter. Revenue growth, primarily driven by an increase in equity market volatility, was offset by higher expenses.

Notably, shares of Schwab have gained more than 26% during the third quarter of 2016. Further, the company has a decent earnings surprise history, as evident from the chart below:

SCHWAB(CHAS) Price and EPS Surprise

SCHWAB(CHAS) Price and EPS Surprise | SCHWAB(CHAS) Quote

Will Schwab be able to surpass estimates this time around? Or will a challenging backdrop hurt its financials this earnings season? Let’s see how things have shaped up for this announcement.

Factors to Influence Q3 Results

Diversified Revenue Streams: Schwab has emerged as a big player in the investment market with its wide variety of investment services and online trading system. Also, the company’s expanding focus on exchange-traded funds and management’s aggressive efforts to increase client base in advisory solutions will help it gain market share, thereby boosting top-line growth.

Trading Revenue: Equity market volatility during the quarter should drive Schwab’s daily trading volumes. Also, the company opened 84,000 and 96,000 new brokerage accounts in July and August, respectively (based on monthly reports released by the company), which indicates that investors were interested in entering the market. Hence, trading revenue is likely to have trended upward in the quarter.

Asset Growth: Schwab witnessed an increase in its average interest-earning assets in July and August. Growth in these assets, along with an improvement in LIBOR rates and client margin loan balances should boost net interest income in the quarter. Hence, a modest improvement in net interest margin is also anticipated, on a sequential basis.

Notably, Schwab continues to seek benefit from the Dec 2015 rate hike and will be subjected to limited impact from the pressure at the long end of the curve, as only a fraction of its interest-bearing assets are tied to longer rates.

Deposit Growth: Management expects around $3 billion of incremental deposit growth during the second half of 2016, as a result of the company’s exit from money market funds as a cash sweep option.

Decline in Fee Waivers: Following the Fed’s rate hike in December, Schwab has been witnessing a decline in fee waivers.  We believe the same trend to continue in the third quarter.

Rising Expenses: Operating expenses should increase year over year as Schwab continues to incur costs related to compensation and regulatory spending. Nonetheless, the company will continue to use its flexibility to manage expenses in the second half of the year, in order to adjust to the economic environment.

Earnings Whispers

Our proven model conclusively shows that chances of Schwab beating the Zacks Consensus Estimate in the third quarter is low. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #3 (Hold) or better for this to happen.

Unfortunately, this is not the case here, as elaborated below:

Zacks ESP: The Earnings ESP for Schwab is 0.00%. This is because the Most Accurate Estimate of 33 cents is on par with the Zacks Consensus Estimate.

Zacks Rank: Schwab’s Zacks Rank #2 (Buy) increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of a positive earnings surprise.

Notably, the Zacks Consensus Estimate remained stable at 33 cents per share in the past seven days.

Stocks That Warrant a Look

Here are a few finance stocks that you may want to consider, as they have the right combination of elements to post an earnings beat this quarter, according to our model.

Synovus Financial Corporation (SNV - Free Report) has an Earnings ESP of +2.00% and carries a Zacks Rank #3. It is scheduled to report results on Oct 18.

BlackRock, Inc. (BLK - Free Report) is slated to release results on Oct 18. Ithas an Earnings ESP of +0.40% and carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Raymond James Financial, Inc. (RJF - Free Report) has an Earnings ESP of +2.04% and carries a Zacks Rank #2. The company is slated to release results on Oct 26.

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