Charles Schwab Corporation’s (SCHW) third quarter earnings of 17 cents per share were only a penny short of the Zacks Consensus Estimate. However, this compares unfavorably with earnings of 26 cents per share in the year-ago quarter.

The year-over-year decrease in earnings was due primarily to a 19.2% decline in net revenue to $1.0 billion. Net revenue decreased primarily as a result of lower net interest revenue (down 34.2%) and asset management & administration fees (down 24.3%), partly offset by noncredit portion of loss recognized in other comprehensive income of $41 million.

Falling interest rates and lower equity market valuations significantly impacted the revenue during the quarter. However, these have been partially offset by cost containment measures.

Client trading activity slowed modestly from the prior-year levels, leading to a 4.4% drop in trading revenue to $241 million.

Net income for the quarter decreased 2.4% sequentially and 34.2% year-over-year to $200 million.

Total non-interest expense decreased 7.9% sequentially and 8.1% year-over-year to $691 million as a result of expense reduction initiatives. This implies that the company is on track to achieve its target expense reduction of 7%–8% year-over-year in the fiscal year 2009. The expense reduction initiatives have enabled the company to achieve a pre-tax profit margin of 31.7%.

As of Sept. 30, 2009, Charles Schwab had total client assets of $1.4 trillion (down approximately 4.5% year-over-year). New client assets decreased 18.4% to $19.9 billion compared to $24.4 billion the prior-year period.

Net new accounts under Investor Services increased 41.0% year-over-year to approximately 29,000. As of Sept. 30, total accounts were up 3% year-over-year, reaching 5.3 million.

Annualized return on equity for the quarter came in at 17%, down from 18% in the prior quarter and 31% in the prior-year quarter.

We suspect that results will continue to be impacted by the challenging market conditions and weakening economy, while the stronger client activity resulting from increased market volatility will provide some support during the upcoming quarters. As such, the shares of Charles Schwab carry a Neutral recommendation from us.
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