Skip to Content
Stock Analyst Update

Record Earnings Year Expected for Schwab

We think the wide-moat firm has buffers to its earnings in the event of a market correction.


Wide-moat-rated  Charles Schwab (SCHW) reported record net income for the first quarter, and its earnings should prove resilient even in a market correction. Operating income grew 19% from the previous year to $1.4 billion, and diluted earnings per share grew 41% to $0.55. The high EPS growth can be attributed to two factors: operating leverage and tax reform. Of the $317 million increase in net revenue, $174 million, on an adjusted basis excluding margin loan losses, fell to the operating income line. This translates to a 55% incremental margin. Additionally, Schwab's effective tax rate was 22% during the quarter compared with 33% a year ago, which alone increased net income by about 17%. Given our belief that U.S. interest rates will continue to gradually rise and that corporate tax reform is settled for the foreseeable future, we expect Schwab to have a record year of earnings in 2018. We are maintaining our $57 fair value estimate.

Schwab’s earnings have two buffers in the event of a market correction. The first is the company’s net new asset growth rate. Excluding the effect of outflows from a mutual fund clearing client in the first quarter, Schwab had annualized net new asset growth of 7.8%. In the past three years, average net new assets increased over 5% on average. In our view, net new asset growth should serve to balance out much of a decrease in assets and revenue during a normal market correction. The second buffer the company has right now is growth in net interest income. Even if interest rates remain at current levels, we forecast that Schwab is likely to increase its balance sheet upward of $30 billion through the end of the year. Assuming a 2% net interest spread, this would be roughly equivalent to the revenue yield on an additional $200 billion of client assets. Combining these two buffers, Schwab could see an 11% decrease in client assets and still keep earnings relatively flat, in our view.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.

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

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.