Schwab Misses by a Penny

| About: The Charles (SCHW)

Charles Schwab Corporation’s (SCHW) first quarter earnings came in at 10 cents per share, a penny short of the Zacks Consensus Estimate of 11 cents. This also compares unfavorably with earnings of 19 cents in the year-ago quarter.

The year-over-year decrease in earnings was due primarily to a 12% decline in net revenue to $978 million. Net revenue decreased primarily as a result of lower trading revenue (down 19%) and asset management & administration fees (down 16.0%). The results were significantly impacted by low short-term rates.

Though short-term rates were lower during the quarter, they finally stopped declining in late January. Thereafter, the rates started rising slightly. As a result, net interest margin increased slightly from the previous quarter. The rate improvement helped Schwab prevent money market fund fee waivers to surpass $125 million in the first quarter. Schwab’s average interest-earning assets for the reported quarter increased 48% year-over-year to $72.3 billion.

With subdued client trading activity compared with the year-ago quarter and reduced online trade pricing since Jan 2010, overall trading revenue decreased during the quarter.

Net income for the quarter decreased 27% sequentially and 45% year-over-year to $119 million. Both decreases were due primarily to lower revenues and higher non-interest expenses.

Total non-interest expense increased 8% sequentially and 3% year-over-year to $780 million. The expenses for the reported quarter include an $11 million pre-tax charge relating to pending litigation involving the Schwab YieldPlus ultra-short bond fund. Though Schwab’s first quarter spending was in line with its operating plan, we view this as a failure of expense reduction initiatives to some extent. Pre-tax profit margin decreased to 20.2% from 27.0% in the prior quarter and 32.0% in the prior-year quarter.

As of Mar 31, 2010, Schwab had total client assets of $1.5 trillion (up approximately 36% year-over-year). However, new client assets decreased 8% to $23.3 billion from $25.3 billion the prior-year period. New brokerage accounts were 230,000, up 11% from the year-ago quarter.

As of March 31, 2010, Schwab had total 7.8 million total brokerage accounts, 768,000 banking accounts and 1.5 million retirement plan participants.

Annualized return on equity for the quarter came in at 9%, down from 13% in the prior quarter and 21% in the prior-year quarter.

We suspect that Schwab will continue to be impacted by the challenging market conditions and volatile interest rate environment, while the stronger client activity resulting from increased market volatility, focus on lower-cost capital structure and management’s aggressive efforts to control cost will provide some support in the upcoming quarters.

In Feb 2010, Schwab moved its stock listing to the New York Stock Exchange (NYSE) from the Nasdaq. Schwab returned to NYSE to join its natural comparative set of household names in financial services. The company had moved from the NYSE to the Nasdaq Stock Market in 2005, when the battle of switch-over listings between the exchanges accelerated.

Schwab closed 0.26% lower on Thursday.