Near-Term Headwinds but Longer-Term Tailwinds for Schwab

The competitive and economic environment for Charles Schwab (SCHW) and other retail brokerages has dramatically changed over the past year. Charles Schwab merged with longtime peer TD Ameritrade, while E-Trade merged with Morgan Stanley (MS) after commissions on many common types of trades were set to $0 in October 2019. In 2020, the global economy went into free-fall as a result of COVID-19, and monetary authorities have cut interest rates to near 0%. The world is likely to be in another extended period of lower interest rates, similar to after the 2008 financial crisis.

Given the precipitous decline in net interest revenue and a triple-digit spike in trading volume, we decided to provide an assessment of whether we've hit bottom for interest-rate-related income and whether current trading volume is sustainable. For net interest income, we believe there's still room to fall from prepayments and the reinvestment risk inherent in Charles Schwab's mortgage-backed securities portfolio. TD Ameritrade's interest-rate-related bank deposit account agreement revenue with Toronto-Dominion Bank TD will also face significant headwinds, but its merger with Charles Schwab has mitigated the earnings impact. Money market fund fee waivers are also likely to double in the following quarters.