Schwab sign photo taken by Bloomberg (Photo: Bloomberg)

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.

Q2 Performance

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. 

Asset Growth

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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