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Stock Analyst Update

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.

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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.

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Michael Wong does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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