Schwab Beats 3Q Estimates on Rising Sales

Though net income declined, revenues grew 5% on strong asset management and administration fees

Charles Schwab released its third-quarter earnings Friday, beating earnings expectations by $0.01. Its shares traded mid-day at $14.36, up 1.9%.

Net income for the company was $124 million, down 38% from $200 million for the third quarter of 2009. Schwab’s third quarter net income was $218 million, before including after-tax charges of $94 million. Earnings per share were $0.10, a decline of 41% from last year.

The company’s third-quarter pre-tax profit margin was 18.7% vs. 31.7% a year ago and 31.3% in the second quarter of 2010.

Revenue, however, grew 5% in the third quarter to $1.06 billion vs. $1.01 billion last year. That was 2% lower than second-quarter sales of $1.08 billion.

“During the third quarter, we demonstrated the operating leverage in our diversified business model as we grew revenue 5% from the year-ago quarter while expanding profits 9% after adjusting for charges,” said Chairman Charles Schwab in a statement.  

“Over $670 billion of the client assets currently at Schwab are either enrolled in one of our advisory offerings or under the guidance of an independent advisor, which represents a compound annual growth rate of 7% over the past 24 mo

nths,” Schwab explained.

Asset management and administration fees before money market mutual fund fee waivers were $561 million, up 6% from last year. When fund fee waivers are accounted for, these asset management and administrative fees totaled $468 million, a year-over-year jump of 4%.  

“Our asset management and administration fees also showed year-over-year improvement in the third quarter – for the first time in two years – through higher client balances in Mutual Fund OneSource and advisory programs such as Schwab Managed Portfolios, as well as further easing in money market fund fee waivers,” said CFO Joe Martinetto in a press release.

“Overall, our third quarter revenue growth represents the first year-over- year increase since the second quarter of 2008,” Martinetto explained.

Advisor Services

Client assets in this unit rose 8% over last year to $610 billion in the third quarter, beating second-quarter assets by 2%. However, net new assets of $8 billion were 28% lower than last year’s $11 billion and 22% lower than second-quarter net new assets of $10 billion.

In the third quarter, assets in the investor-services unit grew 14% over last year to $645 billion. And net new assets in this unit were $2.3 billion.

The company says that client assets in Administrative Trustee Services topped $1 billion. This service allows financial advisors to maintain investment-management responsibilities while working with Schwab as a corporate or directed trustee.

In addition, client assets reached $1.7 billion in Personal Trust Reporting Services, which assists advisors in managing assets when an individual is serving as trustee on an irrevocable trust.

Total client assets at Schwab as of September 30 were $1.47 trillion, an 8% increase over last year and the second quarter. Total net new assets for the period were $14.6 billion, a 27% decline from last year’s $19.9 billion.

The number of active brokerage accounts stands at 7,919,000, and 168,000 new accounts were opened in the third quarter of 2010.

“We believe that no firm meets the needs of a diverse population of investors better than Schwab, as demonstrated by the nearly $400 billion in net new assets brought to the company by clients since the beginning of 2007, excluding significant one-time flows,” said CEO Walt Bettinger in a statement. “Net new assets totaled approximately $15 billion in the third quarter alone, despite ultra-low interest rates and a choppy equity market.

“We ended September serving 7.9 million active brokerage accounts, 665,000 bank accounts, and 1.5 million retirement plan participants,” Bettinger added.

In August, Schwab reported net new assets entering the company by new and existing clients of $4.2 billion. Total client assets were $1.39 trillion, up 6% from August 2009 and down 2% from July 2010.

Look for the cover interview with Bernie Clark, head of Schwab Advisor Services, in the November 2010 issue of Investment Advisor.

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