Record Client Assets Offset Pressure at Schwab
We don't anticipate on changing our fair value estimate for the wide-moat company, and we assess the shares as undervalued.
Record client assets offset net interest income pressure at wide-moat Charles Schwab (SCHW) during the third quarter, while realization of synergies from the TD Ameritrade transaction will bolster earnings in the medium term. Schwab reported net income to common shareholders of $615 million, or $0.48 per diluted share, on $2.45 billion of net revenue during the quarter. On an adjusted basis, which excludes acquisition costs and amortization of acquired intangibles, the company reported pro forma diluted earnings per share of $0.51. Net revenue was flat sequentially and 10% lower on a year-over-year basis. Almost all of the year-over-year decline was due to lower net interest income, while the firm benefited sequentially from higher asset-management fees (as client assets hit a record $4.4 trillion), helping offset declines in net interest income and trading revenue. We don’t anticipate making a material change to our $45.50 fair value estimate for the combined company (the Schwab-Ameritrade deal closed Oct. 6), and we assess the shares as undervalued at today's prices.
While asset-management revenue increased with a rising market and higher client asset levels, other revenue lines experienced a modest downward trend during the September quarter. Trading revenue declined to $181 million from $193 million in the June quarter and $188 million in the March quarter. Daily average trades were down 10% sequentially from an extremely volatile second-quarter trading environment due to the initial uncertainty of COVID-19. That said, the move to $0 commissions on multiple types of trades has likely permanently increased trading activity, and daily average trades were up more than 100% year over year with trading revenue down 6% because of the pricing change. Net interest income fell 3% sequentially to $1.34 billion, as net interest margin compression of 15 basis points to 1.38% was partially offset by 6% growth in average interest-earning assets to $386 billion.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Michael Wong does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.