Schwab Beats on Higher Revenue

Jan.18.11 | About: The Charles (SCHW)

Charles Schwab Corporation’s (NYSE:SCHW) fourth quarter earnings came in at 18 cents per share, substantially ahead of the Zacks Consensus Estimate of 10 cents. This also compares favorably with the year-ago quarter’s earnings of 14 cents.

For the fiscal year 2010, the company reported earnings of 65 cents per share ahead of Zacks Consensus Estimate of 39 cents. However, this was slightly behind the prior period earnings of 68 cents.

Schwab’s results for the reported quarter exclude class action litigation and regulatory reserve charges of $99 million (after-tax). Including these charges, net income came in at 119 million or 10 cents per share. For the full year 2010, net income including total charges of $321 million (after-tax) stood at 454 million or 38 cents per share.

The results benefited from improved revenue and increase in interest-earning assets. However, rise in non-interest expenses and decline in trading revenue were the downside.

Details
Net revenue for the reported quarter was $1,127 million, up 14.3% from $986 million in the prior-year quarter. This also compares favorably with the Zacks Consensus Estimate of $1,105 million.

Net revenue for the quarter increased primarily as a result of higher net interest revenue (up 33.5%) and asset management and administration fees (up 14.0%). Trading revenue decreased 8.0% year over year to $206 million.

Net revenue for the full year stood at $4,248 million, up 1.3% from $4,193 million in the prior-year. This also compares favorably with the Zacks Consensus Estimate of $4,225 million.

Schwab’s average interest-earning assets for the reported quarter increased 28.1% year over year to $85.96 billion. For the fiscal year, average interest-earning assets were up 35.6% to $78.9 billion.

For the reported quarter, total non-interest expenses increased 3.9% sequentially and 24.7% year-over-year to $898 million. The expenses for the reported quarter included class action litigation and regulatory reserve charges of $124 million.

Total non-interest expenses for the full year were $3,469 million, up 18.9% from $2,917 million in the prior year and included class action litigation and regulatory reserve charges of $320 million and money market mutual fund charges of 132 million.

Schwab’s pre-tax profit margin in the fourth quarter deteriorated significantly to 20.3% from 27.0% in the prior-year quarter. Similarly, the fiscal year 2010, the company’s pre-tax profit margin fell substantially to 18.3% from 30.4% in 2009.

As of December 31, 2010, Schwab had total client assets of $1.57 trillion (up 11% year-over-year). New client assets were $26.2 billion compared with $14.6 billion at the end of the prior quarter and $24.8 billion at the end of the prior-year quarter. New brokerage accounts were 225,000, up 11.4% from the year-ago quarter.

As of December 31, 2010, Schwab had a total of 8.0 million total brokerage accounts, 690,000 banking accounts and 1.48 million corporate retirement plan participants.

Annualized return on equity (ROE) as of December 31, 2010, came in at 8%, down from 17% in the prior year.

Our Take
While focus on lower-cost capital structure will sustain better results in the upcoming quarters, Schwab’s financials will continue to be impacted by the recently signed financial reform legislation and volatile interest rate environment. However, the recently completed acquisition of Windward and improving revenue will act as positive catalysts for the company.

Schwab’s close competitor E*TRADE Financial Corporation (NASDAQ:ETFC) is scheduled to release its fourth quarter 2010 earnings on January 26.

Schwab currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Also, considering the fundamentals, we are maintaining our long-term ‘Neutral’ recommendation on the shares.