Charles Schwab just posted mixed results for the second quarter, prompting some analysts to suggest the news could signal future challenges — at least for a time.
The firm’s earnings “will be depressed by the interest-rate environment and messier than normal due to acquisitions in the near to medium term,” said Michael Wong, Morningstar’s director of equity research, financial services, in a recent note.
Still, Schwab’s “long-term competitive position and value will be enhanced by its more recent acquisition activity,” which includes adding USAA’s investment unit in Q2’20 and TD Ameritrade by year-end, explained Wong, CFA and CPA.
The company plans to review its recent results in more detail on an investor call early Tuesday.
The brokerage firm’s adjusted net income fell 21% from last year to $742 million, while its adjusted earnings dropped 19% to $0.54 a share; the adjustments included charges of about $0.06 tied to recent acquisitions.
The brokerage firm had revenue of $2.45 billion, down 9% from last year, despite the fact that its daily average trades soared 126% to about 1.62 million from 720,000.
However, the average revenue per trade dropped by nearly 60% to $1.89 from $4.59. The firm eliminated commissions for most online trades in October.
Its net interest income — which accounts for 57% of its total revenue — dropped 14% year over year to about $1.4 billion. (Bank of America’s wealth and investment unit had the same level of NII in Q2’20, down 15% from Q2’19).
“Both short- and long-term interest rates are at multi-year lows and are likely to remain low for years, in our view,” Wong pointed out.
Schwab’s asset management and administrative fees rose 2% to $801 million, while trading revenue declined 7% to $193 million.
Overall, its pretax margin stood at 36.2% in Q2’20 vs. 46.1% in Q2’19. The company has some 21,800 employees, up from 20,500 a year ago.
With $4.1 trillion on its platforms as of June 30 — up 11% from last year — Schwab is likely to have more than $5 trillion on its books after its purchase of TD Ameritrade wraps up this year.
About $2.2 trillion of these client assets are tied to DIY investors, while $1.9 trillion is associated with RIA clients today.
Schwab is poised to surpass Merrill Lynch Wealth Management’s $2.5 trillion in advisory assets this year and could top Morgan Stanley’s $2.7 trillion.
In Q2’20, DIY investors opened between 550,000 and 600,000 new accounts with Schwab versus 386,000 in the year-ago quarter.
“Organic account growth, along with almost 1.1 million accounts added through the USAA acquisition, led to 18% year-over-year account growth,” according to Chris Shutler, CFA, of William Blair.
As for Schwab’s net new assets, they were $24.7 billion for the RIA business vs. $19.3 billion in Q2’19 and $37.9 billion in Q1’20.
DIY clients brought in about $22 billion of assets in the second quarter, in addition to the roughly $80 billion that moved to Schwab from USAA and some $11 billion added from a mutual fund clearing client.
“While interest rate headwinds remain substantial, and we worry about the magnitude and speed of the market rebound, … the [TD Ameritrade] deal provides a synergy self-help story, and we believe it enhances Schwab’s competitive positioning and long-term growth rate,” Shutler explained in a report.
The risks facing Schwab include “interest rates, markets, execution/distraction related to deal integration, and a rapidly evolving competitive landscape,” he added.
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