Charles Schwab’s Q3 Earnings Hurt by Trading Revenue Decline, Expenses

Charles Schwab Corp. (SCHW) may have beaten Wall Street’s consensus for its third-quarter earnings on a per share basis, but the decline in trading revenue has some investors worried. After all, the more trades customers make, the more money the San Francisco-based discount broker stands to earn.

For the three month period ended in September, Charles Schwab said on Monday trading revenue declined 21% to $151 million. It marks the third quarter in a row in which trading revenue dipped on a year-over-year basis. For the second quarter, it fell 22% to $157 million, due in large part to the full effect of reductions in commissions that were instituted in February. Meanwhile, in the first quarter, trading revenue was down 17% to $192 million compared to the first quarter of 2016.  

On top of decreasing trading revenue, the online broker reported higher expenses, which also weighed on shares. Non-interest expenses for the quarter were up 9% compared to a year ago, coming in at $1.22 billion. According to Zacks, during the third quarter all of the company’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 in a research report looking at the results at Schwab. “However, [the] continuous rise in expenses remains a key concern for Schwab. Further, significant dependence on fee-based revenue streams makes us apprehensive.”

For the September-ending quarter, Schwab reported earnings per share of $0.42 and revenue of $2.165 billion. Analysts, according to Zacks, had expected the San Francisco-based brokerage firm to report earnings of $0.41 a share and revenue of $2.9 billion. Had it delivered on the revenue front it would have represented a 14% year-over-year increase.

While investors punished the stock in trading Monday there was a bit of a recovery going on in Tuesday morning trading. Recently shares were up 0.13% or $0.06 to $44.53. Investors could be applauding some of the positive aspects of Charles Schwab’s third quarter such as the increase in customers, an uptick in revenue and the EPS beat. Revenue came in shy of Wall Street expectations, but it was up 13% compared to last year's third quarter at $2.17 billion. Revenue was lifted in part by a rise in interest income. That bodes well for Schwab if the Federal Reserve moves to raise interest rates later in the the year. An environment where rates are rising means brokerage firms can earn more interest income from uninvested cash in their customers' accounts. Investment activity also tends to pick up when rates are on the rise.

Another revenue driver during the quarter was asset management and administration fees. During the third quarter, Charles Schwab said net interest revenue increased 28% to $1.08 billion while revenue from asset management fees jumped 8% to $861 million. Schwab was also able to open 216,000 new retail brokerage accounts, which is up 29% from last year’s third quarter. Meanwhile, total client assets increased 17% to $3.18 trillion and core net new assets jumped 72% to $51.6 billion.