Charles Schwab Reports Q2 In Line, Up From 2010

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Charles Schwab Corporation’s (NYSE:SCHW) second quarter 2011 earnings came in at 20 cents per share, in line with the Zacks Consensus Estimate. However, this compares favorably with the year-ago quarter’s earnings of 17 cents.

Charles Schwab’s net income for the reported quarter came in at $238 million, up 16% from $205 million in the prior-year quarter.

Charles Schwab’s results benefited from improved net interest revenue and lower impairment losses on securities. However, lower trading revenue and higher non-interest expenses were the downside.

Quarter in Detail

Net revenue for the reported quarter was $1,190 million, down 1% from $1,207 million in the prior quarter but up10% from $1,080 million in the prior-year quarter. This also compares favorably with the Zacks Consensus Estimate of $1,188 million. The substantial year-over-year increase was primarily attributable to growth in net interest revenue as well as asset management and administration fees.

Charles Schwab’s average interest-earning assets for the reported quarter increased 21% year over year to $91.9 billion.

Total non-interest expense dipped 1% sequentially but increased 8% year over year to $804 million. The year-over-year increase was primarily a result of higher compensation and benefits, professional services fee and class action litigation charge.

Charles Schwab’s pre-tax profit margin improved significantly to 32.4% from 31.3% in the prior-year quarter.

As of June 30, 2011, Charles Schwab had total client assets of $1.66 trillion (up 1% sequentially and 22% year over year). New client assets decreased 33% sequentially to $15.4 billion. New brokerage accounts were 205,000, down 8% sequentially.

As of June 30, 2011, Charles Schwab had a total of 8.1 million active brokerage accounts, 745,000 banking accounts and 1.43 million corporate retirement plan participants.

Annualized return on equity (ROE) as of June 30, 2011, came in at 14%, down from 15% in the prior-quarter and flat year over year.

Our Viewpoint

While a focus on lower-cost capital structure will boost results in the upcoming quarters, the company’s financials will continue to be impacted by lower trading activity and volatile interest rates. However, after the completion of the optionsXpress acquisition, the company’s top line is expected to benefit from increased trading in derivatives.

Charles Schwab currently retains a Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating. However, Charles Schwab’s competitor Raymond James Financial Inc. (NYSE:RJF) retains a Zacks #4 Rank (a short-term ‘Sell’ rating).