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Stock Analyst Update

Charles Schwab Reports Record Third-Quarter Net Income

Asset-related fees climbed while expenses remained well managed. We don’t anticipate a change to our fair value estimate.


Wide-moat Charles Schwab (SCHW) booked record net income in the third quarter of 2021, as asset-related fees climbed while expenses remained well managed. The company reported net income of $1.41 billion, or $0.74 pder diluted share, on $4.57 billion of net revenue. Net income was 1% higher than the prior record of $1.39 billion in the first quarter of 2021. Net revenue in the quarter was 3% lower than the first quarter of 2021 peak, as a 6% increase in net interest income to $2.03 billion and an 8% increase in asset management fees to $1.1 billion weren’t enough to offset a 21% decline in trading revenue to $964 million. We don’t anticipate making a material change to our $70 fair value estimate for Charles Schwab.

The positive trends in asset-related fees and expenses are more important for Charles Schwab’s valuation than any slowdown in trading revenue. In contrast to some other retail investment services firms, Charles Schwab’s business model is primarily driven by client asset levels and fees related to client assets and not trading revenue. Trading has garnered outsized attention over the previous several years due to most brokerage firms reducing trading commissions to $0 and then the subsequent renewed interest in stocks that correlated with COVID-19. Annualized trades per account at Schwab increased to about 25-30 trades from 15 trades before Schwab’s merger with Ameritrade. After the merger, trading activity peaked in the first quarter of 2021 at nearly 70 annualized trades per account and in the recent quarter trades per account were closer to 40. While there was a massive increase and then fall in trades per account, trading revenue is only about 20% of Charles Schwab’s total revenue, and we believe its proportion of total revenue is likely to decrease over time, barring any potential initiatives like a push for more international business or cryptocurrency trading.

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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.