We Plan to Increase Our Schwab Fair Value Estimate
We are incorporating higher interest-rate expectations into our model.
We plan to increase our $70 fair value estimate for wide-moat-rated Charles Schwab SCHW as we incorporate higher interest-rate expectations into our model.
The company reported record net income of $1.58 billion, or $0.76 per diluted share, on a near-record $4.7 billion of net revenue for the final quarter of 2021. Fourth-quarter net revenue was less than 1% below Schwab’s record top-line results from the first quarter of 2021, as solid increases in net interest income and asset-management fees were offset by a more than $300 million decline in trading as well as lower bank deposit account agreement fees with Toronto-Dominion Bank and other revenue.
Interest-rate-related income is the largest contributor to Schwab’s net revenue, and the outlook is much brighter over the next several years. Net interest income, bank deposit account agreement fees, and money market fund fees totaled $2.48 billion, over 50% of net revenue, in the most recent quarter. The market is currently expecting the U.S. Federal Reserve to increase the federal-funds rate by 0.75-1 percentage point by the end of 2022. Given that Charles Schwab’s deposits mainly come from its trading clients, which don’t generally demand large increases on the interest rates being earned on their cash deposits, rising interest rates should contribute meaningfully to the company's earnings. While Schwab did waive $80 million of money market fund fees during the fourth quarter, most of this revenue should come back after the first fed-funds rate increase this year.
Trading revenue and expenses were negative highlights for multiple financial firms that recently reported results, but Charles Schwab was fine on these two fronts. Trading revenue increased 5% sequentially to $1.0 billion (although it was 16% below the first-quarter peak of $1.2 billion). Annualized trades per account were about 46, which is similar to more recent quarters (except for the first quarter, when it was around 66).
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