Note: - Charles Schwab completed the acquisition of TD Ameritrade in early October 2020, creating a company with almost $8 trillion in client assets across 29 million brokerage accounts.
In Q1 2024, Charles Schwab reported Total Net Revenues of $4.74 billion - 7% lower than the year-ago period, mainly driven by a drop in net interest income and trading revenues.
Charles Schwab acquired TD Ameritrade in Q4 2021. The Q4 results saw positive growth due to it. Further, the positive effect of the acquisition was also visible in the FY2021 and FY2022 results. However, the top line witnessed a 9% drop in FY2023 to $18.84 billion due to lower net interets income and trading revenues.
Below are key drivers of Schwab's value that present opportunities for upside or downside to the current Trefis price estimate:
Charles Schwab is an brokerage firm that allows clients to buy and trade equities, options, and other securities in the market. Charles Schwab also offers money management services to its clients. Schwab charges clients a certain percentage of assets invested as a fee. Clients can invest money in Charles Schwab Proprietary Funds, Schwab Fund, and Laudus Fund or use Charles Schwab OneSource Mutual Fund Services to invest in a select list of third-party mutual funds.
While revenues from trading commissions have continued to decrease over the years, interest income on deposits, loans & securities has increased since 2010, on the back of substantially higher interest-earning assets and improved interest rates.
We expect that net interest income will continue its solid growth over the Trefis forecast period on the back of continued growth in interest-earning assets and interest rates hikes in the future.
Charles Schwab earns interest on client assets awaiting investment by placing those assets into money market instruments. Schwab's investments are funded by brokerage and banking clients, and Charles Schwab, in return, pays interest to the clients. The net amount is the net interest revenue for Schwab.
In 2017, Charles Schwab earned about a 1.97% net interest yield on nearly $218 billion of client assets. In 2018, the company earned about 2.31% net interest yield on nearly $252 billion of client assets. That said, the yield decreased in 2020 to 1.63%, although the client assets increased to $375.7 billion. However, the Federal Reserve initiated the rate hike process in 2022, leading to a net interest yield of 1.8%. We expect the net interest yield to be around 2.15% over our forecast period.
Asset and investment management are becoming of growing part of the brokerage. However, competition in asset management is also growing due to the prevalence of low-cost ETFs that serve as an alternative to managed investment funds and digital advisory. While Schwab is a leader in the ETF space, it has gotten increasingly competitive.
Clients can invest money in Charles Schwab's proprietary funds, Schwab Fund and Laudus Fund, or use Charles Schwab OneSource Mutual Fund Services to invest in a select list of third party mutual funds. Schwab earns a management fee for these services.
Although Schwab's assets under management are much higher than the client assets on which it earns a net interest spread, Schwab earns a fee of only 0.163% of managed assets (as per 2022), which is low compared to the yield the company has traditionally earned on client assets. As a result of this difference, net interest on deposits, loans, and securities is a more valuable business for Schwab than mutual fund & investment fees.
With more than 33.75 million active brokerage accounts, Schwab is one of the leading online brokerage firms. Schwab's revenue per trade has been declining in recent years and stood at about $2.47 per trade in 2022. With stiff competition in the market and a lot of brokerage firms offering free trading, we forecast the commissions to decline in the near term.
