Charles Schwab Corporation‘s (SCHW) second-quarter earnings came in at 17 cents per share, slightly ahead of the Zacks Consensus Estimate of 15 cents. However, the result was a penny below last year’s 18 cents.
Net revenue was $1,080 million, an increase of 10% compared with the prior quarter and flat with the prior-year quarter. Net revenue increased primarily as a result of higher trading revenue (up 11%) and asset management and administration fees (up 4%).
With a slight increase in short-term interest rates in the second quarter and a robust performance by the credit portfolios, the net interest margin (NIM) increased to 201 basis points (bps) from 183 bps in the prior quarter. In addition, net interest income (NII) spiked up for the third successive quarter to $382 million, due mainly to higher levels of interest-bearing assets and improved NIM.
Improvement in short-term rates also helped Schwab to lessen the fee waivers for its money market funds to $113 million from $125 million in the prior quarter. Schwab’s average interest-earnings assets for the reported quarter increased 36% year over year to $76.2 billion.
Net income of $205 million was a substantial increase from the prior quarter and flat compared with the year-ago quarter.
Total non-interest expense decreased 23% sequentially and 1% year-over-year to $742 million. The expenses for the prior quarter had included $196 million of Class action litigation reserve relating to the Schwab YieldPlus ultra-short bond fund. Though Schwab’s first quarter spending was in line with its operating plan, we view this as a partial failure to reduce costs to some extent. Pre-tax profit margin improved significantly to 31.3% from 1.3% in the prior quarter and 30.9% in the prior-year quarter.
As of June 30, 2010, Schwab had total client assets of $1.3 trillion (up approximately 11% year-over-year). However, new client liabilities were $37.5 billion, compared to new client assets of $23.3 billion in the prior quarter and new client assets of $17.3 billion in the prior-year period. New brokerage accounts were 206,000, up 5% from the year-ago quarter.
As of June 30, 2010, Schwab had a total of 7.9 million total brokerage accounts, 803,000 banking accounts and 1.5 million retirement plan participants.
Annualized return on equity (ROE) for the quarter came in at 14%, down from 18% in the prior-year quarter.
We suspect that Schwab will be further impacted by the challenging market conditions and volatile interest rate environment, while focus on lower-cost capital structure and aggressive cost control efforts will brace the company in the upcoming quarters.
Schwab’s close competitor E*TRADE Financial Corporation (ETFC) will release its second quarter fiscal 2010 earnings on July 22.
Read the full analyst report on “SCHW”
Read the full analyst report on “ETFC”
Zacks Investment Research
