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Schwab Meets Expectation, Revs Up

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Charles Schwab Corporation’s (SCHW - Free Report) fourth quarter 2012 earnings of 15 cents per share were in line with the Zacks Consensus Estimate. Also, this compares favorably with the year-ago quarter’s earnings of 13 cents.

For 2012, Schwab’s earnings of 69 cents per share were also in line with the Zacks Consensus Estimate. However, this was a penny below the year-ago earnings of 70 cents. The results for the year included a gain of about $44 million relating to the resolution of a vendor dispute and a non-recurring state tax benefit of about $20 million.

Overall, growth in the top-line, lower provision for loan losses and balance sheet restructuring actions were the positives for the quarter. Yet, higher operating expenses as well as a fall in trading revenue dented the results.

Net income available to common shareholders in the fourth quarter totaled $189 million, up 16% from $163 million in the prior-year quarter. For 2012, net income available to common shareholders stood at $883 million increasing 2.2% from the last year.

During the fourth quarter, Schwab completed the acquisition of ThomasPartners, Inc., a growth and dividend income-focused asset management firm with $2.4 billion in assets under management as of Dec 31, 2012.

Behind the Headlines

Net revenues were $1,215 million, up 9% from $1,131 million in the prior-year quarter. Also, this was marginally higher than the Zacks Consensus Estimate of $1,211 million. The rise was largely driven by the higher asset management and administration fees (up 18%) and net interest revenue (up 10%). However, these were partially offset by lower trading revenue (down 13%).

In 2012, net revenues were $4,883 million, rising 4.1% from $4,691 million in the prior-year. Moreover, this was marginally ahead of the Zacks Consensus Estimate of $4,872 million.

As of Dec 31, 2012, Schwab’s average interest-earning assets augmented 14.1% year over year to $108.9 billion.

Total non-interest expense grew 1% year over year to $871 million. The increase was primarily due to higher compensation and benefit expenses.

Further, provision for loan losses was $2 million, down 60% from $5 million in the previous-year quarter.

Pre-tax profit margin improved from 22.6% in the prior year quarter to 28.3% in the reported quarter.

Annualized return on equity (ROE) as of Dec 31, 2012, came in at 11%, down from 12% as of Dec 31, 2011.

Other Business Developments

As of Dec 31, 2012, Schwab had total client assets of $1.95 trillion (up 16% year over year). Core net new assets were $112.4 billion in 2012, up 37% from the prior year.

Further, Schwab added 900,000 new brokerage accounts in 2012. As of Dec 31, 2012, the company had a total of 8.8 million active brokerage accounts, 865,000 banking accounts and 1.6 million corporate retirement plan participants.

In addition, Schwab undertook a few balance sheet restructuring initiatives during the fourth quarter. The company redeemed the remaining $494 million of 4.95% Senior Notes due in 2014. Moreover, it issued $350 million of new 0.85% Senior Notes with maturity date of 2015.

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). Also, considering the fundamentals, we maintain a long-term Neutral recommendation on the shares.

Among Schwab’s peers, TD Ameritrade Holding Corporation (AMTD - Free Report) is scheduled to release its fourth-quarter results on Jan 22, 2013, while E*TRADE Financial Corporation (ETFC - Free Report) will release its fourth-quarter results on Jan 24, 2013.

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