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Stock Analyst Update

Client Asset Growth Leads to a Strong Finish for Schwab

We may increase our current $47 fair value estimate by up to 10%.

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Wide-moat Charles Schwab (SCHW) reported a fairly strong finish to a tumultuous 2020, as it closed its merger with TD Ameritrade and equity markets continued to rally. Including the results of Charles Schwab’s merger with TD Ameritrade that closed in October 2020, net revenue for the fourth quarter increased 60% to $4.2 billion and net income to common shareholders increased 31% to $1.05 billion from a year ago. Taking into account the shares issued with the TD Ameritrade merger, GAAP earnings per share in the fourth quarter decreased 8% to $0.57, while adjusted earnings per share that excludes acquisition-related costs and acquired intangible amortization increased 17% to $0.74. Client assets ended the year at $6.7 trillion, up about 12% sequentially on a proforma basis. We anticipate that we may increase our current $47 fair value estimate for Charles Schwab upwards of 10% to account for the rally in equity markets over the past couple of months.

We continue to anticipate some downward pressure in interest rate-related revenue and trading volumes, but strong growth in client assets can partially compensate. Net interest income in the fourth quarter was higher than the third quarter run rate for the combined Charles Schwab-TD Ameritrade due to higher margin loan balances. In the fourth quarter, the combined firm had about $54 billion of margin loans compared with $46 billion in the third quarter. Margin loans are also the company’s highest yielding interest-earning asset and helped boost the company’s overall net interest income. However, the yields of all other interest earning assets were down sequentially. The yield on available-for-sale securities that is the largest contributor to interest income at around 60% of the total decreased to 1.44% from 1.59% in the third quarter. Another significant interest rate-related revenue line is the company’s bank deposit agreement with Toronto-Dominion Bank (TD), and it sequentially decreased to $355 million from $381 million.

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

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