Schwab's Q1 Earnings Miss On Higher Costs, Revenues Up

The Charles Schwab Corp.’s (SCHW - Analyst Report) first-quarter 2015 earnings of 22 cents per share missed the Zacks Consensus Estimate of 24 cents. Further, the bottom line was down 8% from the year-ago quarter.

The results were primarily impacted by an increase in expenses higher than what the company expected. The provision was another disadvantage during the quarter. However, improved revenue partly offset the negatives. Further, a rise in total client assets and new brokerage accounts acted as tailwind.

Net income available to common shareholders for the reported quarter totaled $291 million, down 8% year over year.

Performance in Detail

Net revenue was $1,526 million, up 3% from the prior-year quarter. The increase was largely attributable to asset management and administration fees (up 5%) and net interest revenues (up 6%). However, lower trading income (down 7%) partially hampered revenue growth. The reported figure lagged the Zacks Consensus Estimate of $1,541 million.

Total non-interest expense increased 9% from the year-ago quarter to $1,042 million. All expense components rose year over year. Notably, the company stated that due to earlier timing of certain compensation expenses, it was not able to achieve the projected figures.

As per management, overall expense is anticipated to grow at a modest pace of roughly 4% for 2015.

Further, provision for loan losses was $4 million, compared with a benefit of $1 million in the year-ago quarter.

Pre-tax profit margin deteriorated to 31.7% from 35.3% recorded in the prior-year quarter.

As of Mar 31, 2015, Schwab’s average interest-earning assets rose nearly 9% year over year to $149.4 billion.

Annualized return on equity (“ROE”) as of Mar 31, 2015, came in at 10%, down from 13% as of Mar 31, 2014.

Other Business Developments

As of Mar 31, 2015, Schwab had total client assets of $2.52 trillion (up 9% year over year). Net new assets – bought by new and existing clients – were $34.2 billion during the first quarter.

Also, Schwab added 274,000 new brokerage accounts in the first quarter. As of Mar 31, 2015, the company had a total of 9.5 million active brokerage accounts, 986,000 banking accounts and 1.5 million corporate retirement plan participants.

Our Viewpoint

While focus on low-cost capital structure will improve Schwab’s financial performance in the quarters ahead, we believe the company’s financials will likely remain under pressure owing to a low interest rate environment. However, the company has undertaken several initiatives to reduce its dependency on interest rates. Further, we believe that a stable capital position will boost its financials to some extent.

Currently, Schwab has a Zacks Rank #3 (Hold).

Among other investment brokers, Interactive Brokers Group, Inc. (IBKR - Analyst Report) will report on Apr 21, E*TRADE Financial Corp. (ETFC - Analyst Report) is slated to report on Apr 23, while KCG Holdings, Inc. (KCG - Snapshot Report) is scheduled to report on May 1.

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