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Schwab Boosts Profits 58%: Q1 Earnings

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Charles Schwab (SCHW) said early Tuesday that its net income soared 58% from last year to $326 million. Its net revenues improved 15% to nearly $1.5 billion.

“Our contemporary full-service investing model continued to resonate with investors during the first quarter,” said CEO Walt Bettinger, in a press release. “We gathered $34.2 billion of net new assets during the quarter, a 6% annualized organic growth rate, and 258,000 new brokerage accounts, up 6% year over year.”

According to Schwab, it now has some $2.3 trillion in client assets. Trading activity improved in early 2014, with the firm making an average of more than 550,000 total trades a day during the first quarter.

“More significantly, however, our work to build awareness of our professional advice capabilities continued during the quarter, and we ended March with approximately half of all client assets receiving some form of ongoing advisory service,” Bettinger explained.

Some $974 billion of client assets are shepherded by independent advisors, and $159 billion are part of the firm’s retail advisory program, up 16% and 17%, respectively, over the first quarter of 2013.

Schwab now serves 9.2 million active brokerage accounts and 933,000 banking accounts, up 4% and 5%, respectively, from year-ago levels.

“Schwab’s unique business model is able to produce solid operating results while enabling clients to invest as they choose,” the CEO noted.

Schwab Advisor Services

Net new client assets for the unit were $17.3 billion in the first quarter, up 9% from 15.9 billion last year and an increase of 18% from $14.6 billion in the fourth quarter of 2013.

The unit has some $1.04 trillion in client assets as of March 31 vs. $895 billion a year ago and $1.01 trillion in the prior quarter.

Average client assets that are managed and administered by the Advisory Services group stand at $158.4 billion, compared to $135.5 billion a year ago. Revenues tied to these managed and administered assets were $199 million in Q1’14 vs. $163 million in Q1’13, and the average fees were 0.51% and 0.49%, respectively.

Analyst’s View

Schwab’s net interest margin of 1.64%, was up 8 basis points sequentially and 7 bps above the expectations of Sterne Agee analyst Jason Weyeneth, CFA, “ despite continued pressure on both ends of the yield curve during the quarter.”

The main force behind this increase, Weyeneth says, is the firm’s held to maturity (HTM) securities bucket.

The firm also generated operating margins of 35.3%, “up 60 bps sequentially and 260 bps above our expectations, he notes. “The upside was driven by well-controlled compensation costs, where the 35.7% compensation to revenue ratio declined 20 bps sequentially despite seasonally higher costs and merit increases.”

“The year is off to a strong start with the margin above the levels communicated in management’s full-year guidance (~34%),” the analyst said. Plus, demand for advice solutions “continues to grow across all of Schwab’s offerings with assets managed by independent advisors or in SCHW’s retail advisory solutions up 16-17% from a year ago,” he explained.


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