Charles Schwab Corporation’s (SCHW) third quarter 2011 earnings came in at 18 cents per share, just a penny below the Zacks Consensus Estimate. However, this compares favorably with the year-ago quarter’s earnings of 10 cents.
Net income for the reported quarter came in at $220 million, up 77% from $124 million in the prior-year quarter. The year-ago net income included certain charges relating to its money market mutual funds and affinity credit card program. Excluding these, the company earned $218 million in the third quarter of 2010.
Improved net interest revenue and trading revenue as well as lower non-interest expenses were among the quarter’s positives. However, higher impairment losses on securities and increased provision for loan losses were the headwinds.
Quarter in Detail
Net revenue for the reported quarter was $1,181 million, up 11% from $1,063 million in the prior-year quarter. This, however, compares unfavorably with the Zacks Consensus Estimate of $1,194 million. The substantial year-over-year increase was primarily attributable to growth in net interest revenue as well as trading revenue.
Charles Schwab’s average interest-earning assets for the reported quarter increased 19% year over year to $96.8 billion.
Total non-interest expense increased 2% sequentially but dropped 5% year over year to $821 million. The year-over-year decrease was primarily attributable to the absence of money market mutual fund charges.
Charles Schwab’s pre-tax profit margin improved significantly to 30.5% from 18.7% in the prior-year quarter.
As of September 30, 2011, Charles Schwab had total client assets of $1.58 trillion (down 5% sequentially but up 7% year over year). Total new assets increased to $86.0 billion from $15.4 billion in the prior quarter and $14.6 billion in the year-ago quarter. New brokerage accounts were 506,000, up from 205,000 in the prior quarter and 168,000 in the year-ago quarter.
As of September 30, 2011, Charles Schwab had a total of 8.5 million active brokerage accounts, 769,000 banking accounts and 1.46 million corporate retirement plan participants.
Annualized return on equity (ROE) as of September 30, 2011, came in at 12%, down from 14% in the prior-quarter but up from 8% in the prior-year quarter.
Our Viewpoint
We expect the top line to significantly benefit from increased trading in derivatives as the company has completed the acquisition of optionsXpress. Also, management’s aggressive efforts to increase clients in advisory solutions will help build client assets. However, volatile interest rates and higher expenses related to client base growth will continue to weigh on the company’s financials.
Charles Schwab currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. Charles Schwab’s competitor Raymond James Financial Inc. (RJF) also retains a Zacks #3 Rank.
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