Charles Schwab Stock Has Outperformed, but Expenses Concern Zacks

The Charles Schwab Corporation (SCHW) is having a good fall, with the stock outperforming the Zacks Investment Brokers industry over the past three months. According to a Zacks research report, that performance is thanks to multiple quarters of "impressive earnings" and rising interest rates.

Furthermore, the stock-picking research firm says that the San Francisco-based discount broker is in a good position to continue to "gain from the rising rate environment" and "initiatives to strengthen trading income." That should support more profitability over the long haul. Shares of Charles Schwab were recently trading down $0.11, or 0.25%, to $44.48. For the year, the stock is up 7%.

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For its third quarter, Schwab reported that it opened 216,000 new retail brokerage accounts, up 29% from a year ago, with total client assets increasing 17% to $3.18 trillion. Core net new assets jumped 72% to $51.6 billion. Earnings per share for the three months ending in September came in at $0.42, and revenue was $2.165 billion. According to Zacks Investment Research, analysts had expected the brokerage firm to report earnings of $0.41 per share and revenue of $2.9 billion.

This week, the discount broker also reported metrics for October, saying that total client assets jumped 21% year over year in the month, coming in at a record $3.26 trillion. At that level, total client assets in October were up 2% from September. Net new assets came in at $35.4 billion for October, while client assets receiving ongoing advisory services also set a record at $1.64 trillion, up 21% from a year ago and up 2% compared with September.  

While Zacks is upbeat about the prospects for Charles Schwab shares, it did express concerns about rising expenses that should continue due to an increase in compensation costs as well as Schwab's "significant dependence" on fee-based revenue. During the quarter ending in September, Schwab said that non-interest expenses were up 9% compared with a year ago, coming in at $1.22 billion.

According to a previous Zacks report, during the third quarter, all of Schwab's expenses – excluding advertising and market development and communications costs – rose on a year-over-year basis. "Focus on low-cost capital structure will improve Schwab's performance in the quarters ahead. Also, initiatives to strengthen market share will likely support its profitability over the long term, despite the expectation of near-term reduction in trading revenues," said Zacks at the time.