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Stock Analyst Update

Schwab Shows Signs of Modest Slowdown

Though it has a positive medium- and long-term growth trajectory.


Wide-moat Charles Schwab's (SCHW) second quarter showed a modest sequential decline in revenue, but there are many positive growth drivers for earnings ahead. Schwab reported net income to common shareholders of $1.12 billion, or $0.59 per diluted share, on $4.53 billion of net revenue for the second quarter of 2021. Net revenue sequentially declined 4%, and pretax operating income declined 12%. Excluding $200 million of charges related to an investigation into disclosures for the company’s robo-advisor, pretax operating income declined only 2% sequentially. We don’t anticipate making a material change to our $56 fair value estimate.

The second quarter showed multiple signs of Charles Schwab’s long-term growth story, but also that the first quarter’s exceptional results were probably an aberration. The sequential decline in revenue was mainly from trading revenue that decreased 21%, to $955 million from $1.2 billion. Daily average trades decreased 28%, to 6 million from 8.4 million, and annualized trades per account for the quarter decreased to about 47 from 67. Annualized trades per account in the fourth quarter of 2020 were about 49, according to our calculations, so the 67 from the first quarter of 2021 seems to be the anomaly.

While there was a sequential retracement in trading volume, net interest income and asset-based revenue grew in the quarter. Net interest income grew 2% to $1.95 billion from mainly margin loan interest, but also some contribution from bank loans and securities. Asset-management and administration fees grew 3% to $1.05 billion, as client assets reached a quarterly record of $7.6 trillion. Over the next several years, we expect net interest income, asset-based fees, and expense synergies from the TD Ameritrade integration to be significant drivers of earnings growth.

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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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