Things were looking up for Charles Schwab in August, with new client assets, brokerage account openings and daily average trading up versus July. But the firm is bracing itself for a few bumps in the road.
Total clients assets sat at $1.3 trillion at the end of August. The figure represents a 6 percent decline versus the year ago period, but a 3 percent gain versus July 2009, with $23.9 billion in market related gains for the month, and $8.5 billion in net new client inflows. Meanwhile, brokerage accounts at Schwab were up 5 percent from July levels at 61,000. “We remain encouraged by investor engagement and our core client metrics,” said Chief financial officer, Joe Martinetto, in a release. “This sustained engagement helps keep the company positioned for stronger financial performance when the environment improves.”
And yet, declining yields in the company’s proprietary money market mutual funds, due to low interest rates, is leading to increased management fee waivers. (In an effort to keep clients’ money market accounts from turning negative or losing their principal value due to low interest rates, Schwab has been waiving fees on some of its money market funds since January.)
FBR Capital Markets analysts Matthew Snowling and Bill Jackson say the monthly report was an attempt by the firm to manage expectations as low interest rates continue to put pressure on revenues.
Schwab says the fee waivers will reach approximately $80 million for the third quarter, up from $30 million in the prior quarter, and will lead to a decline in asset management and administration fees of as much as 8 to 10 percent. Charles Schwab generated revenue of $1.09 billion in the second quarter, down 17 percent versus the prior year. Asset management and administration fees account for about half of the firm’s revenues.
The FBR analysts says the $80 million impact on the third quarter suggests the 2010 full-year impact could be about $400 million. “The expected drop in net interest income despite the growth in earning assets suggest a more significant amount of margin compression is occurring. Without the reprieve of higher interest rates, earnings momentum will be difficult to muster,” the analysts write.
“Client metrics overall were consistent with competitors E*TRADE and TD Ameritrade, as client activity bounced back strongly from a soft July,” the FBR analysts continue. Daily average revenue trades at Schwab were up 15 percent from July and climbed 24 percent from a year ago, while TD Ameritrade's client trades increased 16 percent from last month. E*Trade reported an increase of 18 percent in August.
