Schwab Profit Is Flat but Tops Estimates on Strong Management Fees

Charles Schwab said it had net income of $205 million, or $0.17 a share, for the second quarter of 2010, flat vs. the second quarter of 2009 but up from $6 million for the first quarter of 2010.

Client assets handled by advisor services, or RIAs, topped those of individual investors for the third quarter in a row -- $596.7 billion vs. $568.7 billion. Assets in the advisor-services unit were up 18% from last year, though they fell 4% from the previous quarter.

Net new assets in these RIA-focused accounts were $10.2 billion in the second quarter, up 32% over last year, but down 31% from $14.7 billion in the first quarter.

"Since the fourth quarter we have seen an acceleration in organic growth for many of the advisors we work with," said Bernie Clark, senior vice president and head of Charles Schwab Advisor Services, in a statement. "While the industry average for growth of independent advisors is 5.5%, advisors who work with Schwab are growing at more than 11%."

In terms of net new assets year to day, advisors turning to Schwab for custodial services have brought in $25 billion, Clark says. More than $6 billion of these net new assets, roughly 25%, are from advisors who recently went independent.

"In addition to the organic growth from our existing advisors, we are also continuing to see a steady stream of advisors and assets leaving established firms and entering the independent model," he explained.

Unlike most other stocks, Schwab's shares (SCHW) traded up on Friday, July 16, by more than 4% to close at $15.15 per share after it beat analysts' estimates. And on Monday, July 20, its shares at mid-day were up roughly 0.75% to $1.25 on another down-day for the markets.

"The second quarter of 2010 was a solid quarter for Charles Schwab, in our opinion," wrote Patrick O'Shaughnessy, CFA, an equity analyst with Raymond James & Associates, in a research note.

"The company's EPS of $0.17 was one penny above our estimate and two cents above the Street's. An improvement in net interest margin (NIM), a slight improvement in money market mutual fund fee waivers, and generally strong asset management fees were key positives during the quarter."

In his research note on the company, the Raymond James analyst points out that Schwab clients made some 436,600 trades per day on average in the second quarter, up 5.5% from the first quarter. Average revenue trades per day in the same period was 302,900, up nearly 10%, but below the analyst's estimate of 310,700.

Net new assets were -$37.5 billion in the second quarter of 2010 vs. $23.3 billion in the first quarter. Overall client assets stand at $1.36 billion, a drop of 8.7% from the first quarter, according to O'Shaughnessy.

Net new brokerage accounts were 78,000 in the second quarter vs. 104,000 in the first quarter.

Total brokerage accounts stood at 7,883,000 as of June 30, up from 7,805,000 as of March 31.

The company noted that net new accounts for the quarter totaled roughly 40,000, down 24% year-over-year. Total accounts reached 5.5 million as of June 30, 2010, up 3% year-over-year.

In the second quarter, Schwab launched Schwab Advisor University, an interactive online training program to help registered investment advisors improve operational productivity and performance, the company said in a press release.

Additionally, it announced an agreement with J.P. Morgan to provide Schwab clients access to J.P. Morgan's fixed income offerings, including new-issue and secondary municipal bonds, corporate debt securities and non-convertible preferred securities.

During the quarter, Schwab also reduced the operating expense ratios on six proprietary ETFs to industry lows in their respective categories.

"As we expected, our financial performance rebounded strongly in the second quarter - the company's revenues were up $102 million, or 10%, from the prior quarter, and ongoing expense discipline helped lift our pre-tax profit margin back over 30%," said Chairman Charles Schwab in a press release.

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