Wednesday, July 13, 2011

Charles Schwab Corp. (NYSE: SCHW): Q2 Earnings Preview 2011

Charles Schwab Corp. (NYSE: SCHW), the largest independent broker by client assets, is scheduled to release its second quarter earnings on Monday, July 18, 2011. Analysts, on average, expect the company to report earnings of 20 cents per share on revenue of $1.20 billion. In the year ago quarter, the company reported earnings of 17 cents per share on revenue of $1.08 billion.

The Charles Schwab Corporation, through its subsidiaries, provides securities brokerage, banking, and related financial services to individuals and institutional clients. As of February 28, 2011, Charles Schwab had total client assets of $1.6 trillion.

In the preceding fiscal first quarter, the San Francisco, California-based company's net income was $243 million, or 20 cents per share, compared with a profit of $6 million, or 10 cents per share, in the year-ago quarter. Total net revenues for the quarter grew 23 percent to $1.21 billion from $978 million in the same quarter last year. Analysts, on average, expected the company to report earnings of 18 cents per share on revenue of $1.18 billion. 

Online brokerages like Charles Schwab Corporation rely significantly on net interest income as a source of value. As interest rates fall, the net interest earned by assets falls as the company earns a lower interest rate on assets in its possession. For the past couple of years, as a result of low interest rates and declining trading volumes Charles Schwab has been struggling to retain its growth momentum. Reduced trade volumes and low interest rates have adversely affected several companies in the investment brokerage industry. As a result, some companies are shifting their business model to adjust to the current nature of the market. The industry is also at odds with regards to the changes some are making in regard to exchange-traded funds. As a result of these low rates, the discount brokers have had to waive fees on their money market funds in order to ensure that their clients don't lose money just by putting it into those investments. 

Schwab's ability to effectively keep its costs low while growing revenue in this difficult environment has put the company in an extremely strong position as the economy continues to recover. Interest rates won't remain near 0% forever. Recent rate hikes in Europe, and continuous hikes in China, have only put more pressure on the Federal Reserve to tighten the reins a bit. Rate hikes will naturally improve Schwab's net interest revenue, and finally cut down on the fee waivers that have troubled the entire industry over the last several years.

However, lackluster equity markets and a cloudy economic outlook have sent many individual investors to the sidelines, leaving retail trading volume in a slump. While volume traditionally decreases headed into the summer months, analysts at Sandler O'Neill expect daily trades in the second quarter to post double-digit percentage declines. The Investment Brokerage sector has become more competitive during the past few years as more and more companies have begun to start fighting for clients. New internet companies are also diluting the market and making asset growth more difficult. Trading volumes have been diminished since the flash crash last year as investors remain somewhat wary of the financial system. Despite this, a recent survey release by Charles Schwab Corp. showed that active traders are actually generally bullish on the prospects of the markets. While this would logically suggest an uptick in trading volumes is on the way, Charles Schwab actually posted a client asset outflow in April.

Recently, the company announced a new service allowing its customers to invest directly in foreign stock markets using local currencies, further showing how global investing is going mainstream.Schwab hopes to launch its system in the first quarter of next year. When ready, customers will be able to buy and sell shares of companies that trade in 12 markets in eight local currencies.

Another area of focus has been the mobile market where the sector is working to improve the customer experience and increase trading. While the trading volume done via mobile devices is still small in relation to other platforms, there is hope that providing a superior service will give companies a competitive advantage over their adversaries as the platform becomes more universally adopted.

Full Disclosure: None.
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