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Schwab's Third Quarter Impresses Investors

The discount brokerage’s earnings beat estimates despite an 18% decline in net interest revenue.

Charles Schwab has had a busy month – and it’s only half over.

The discount brokerage closed on its much-ballyhooed $26 billion acquisition of TD Ameritrade. Then a slew of TD Ameritrade executives reportedly left the firm. Thursday morning, before the market opened, Schwab announced better-than-expected third-quarter earnings.

Schwab’s stock rose 5% in response to close at $39.04. Shares, however, are down 18% year-to-date and have underperformed the Standard & Poor’s 500 index for several years.

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Against a backdrop of a pandemic, an economic meltdown, and rock-bottom interest rates, Schwab earned $698 million, or 51 cents per share, exceeding the 47 cent consensus estimate, according to Zacks Investment Research. A year earlier, Schwab earned 70 cents per share.

Revenue fell 10% to $2.45 billion, matching analyst estimates.

Schwab opened 592,000 new brokerage accounts to end the quarter with 14.4 million accounts, a 19% year-over-year increase.

Daily trades averaged 1.5 million, which was “modestly down from peak activity” in the first half of 2020 but 103% higher from a year earlier.

Total client assets rose 17% to $4.4 trillion while net new assets increased by $51.2 billion of which core net assets accounted for $42.7 billion.

Schwab, which torched the brokerage sector when it dropped commissions to zero last October clearing the way for its TD Ameritrade acquisition, saw net interest revenue sink as it contends with fierce competition from traditional competitors such as Fidelity and less-expensive trading and investment companies like Robinhood, Wealthfront, and Betterment, which are vying for younger investors.  

“The overall decline in both short- and long-term rates, however, driven by the Fed’s monetary policy easing, as well as the related acceleration of mortgage-backed security prepayment speeds within our bank investment portfolio, led to an 18% year-over-year decline to $1.3 billion,” said CFO Peter Crawford in a statement.

Low interest rates exert acute pressure on Schwab given that Schwab Bank has become its main generator of revenues and profits.

Trading volume “showed strength relative to prior years” but trading revenue fell 12% to $181 million. Revenue per trade tumbled 57% year-over-year to $1.94.

In a statement, CEO Walt Bettinger said, “As a result of our watershed acquisition of TD Ameritrade, which closed on October 6, 2020, we have created a company with tremendous reach — approximately $6 trillion in client assets and 28 million brokerage accounts — that will leverage the proud history of both firms by helping individual investors across every phase of their financial journey as well as support the independent advisors who serve them.”

The TD Ameritrade acquisition combines the two largest RIA custodians. Schwab is custodian to more than 7,500 RIAs.

Greg Bartalos (@gregorianchance) is editor of New York City-based RIA Intel.

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