VALUATION HIGHLIGHTS
- Interest on Deposits, Loans & Securities constitute 51% of the Trefis price estimate for Charles Schwab's stock.
- Asset Management Fees constitute 30% of the Trefis price estimate for Charles Schwab's stock.
- Trading Commissions constitute 12% of the Trefis price estimate for Charles Schwab's stock.
WHAT HAS CHANGED?
Latest Earnings
Charles Schwab reported a better-than-expected set of Q4 2024 results. Total Net Revenues rose 20% to $$5.33 billion, while earnings per share jumped to $1.01 compared with $0.68 per share a year earlier. Growth was driven by an increase in asset management fees.
Below are key drivers of Schwab's value that present opportunities for upside or downside to the current Trefis price estimate:
Interest on Deposits, Loans & Securities
- Net Interest Income Rate on Deposits, Loans, and Securities Analysis: Schwab's structure ties its income to market interest rates. As a result of the low-interest-rate environment, net interest rates decreased to 1.63% in 2020. However, it increased to 1.80% in 2022 due to interest rate hikes by the Fed. The metric stood at 2.15% in 2024.
We forecast this yield to reach around 2.40% by the end of the Trefis forecast period. However, if the interest rate rises to about 2.8% during the same timeframe, there would be an upside of around 8% to our price estimate
- Interest Earning Deposits, Loans, and Securities : Schwab's interest-earning assets have been growing significantly in the last few years, reaching over $375.7 billion in 2020. This metric grew further to about $594 billion in 2022 although it declined to about $425 billion in 2024. We currently forecast these assets to grow steadily through the end of the Trefis forecast period, eventually approaching $800 billion. Notably, the acquisition of TD Ameritrade in 2020 is the main reason behind the jump in the numbers. However, should the growth be slower than expected - due to intense competition and any further need to deleverage the balance sheet - and these assets grow only to around $600 billion, in the long run, there would be a potential downside of 10% to our price estimate.
BUSINESS SUMMARY
Charles Schwab is a 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.
SOURCES OF VALUE
While revenues from trading commissions have continued to decrease over the years, interest income on deposits, loans & securities has been rising, on the back of 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 rate hikes in the future.
Higher net interest yield going forward
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 2020, Charles Schwab earned a yield of 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%. The metric rose to 2.15% in 2024. We expect the net interest yield to rise to around 2.4% over our forecast period.
Asset management becoming increasingly valuable
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.
Low mutual fund fees
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 0.168% of managed assets (as of 2024), 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.
KEY TRENDS
Declining trading commissions
With more than 36 million active brokerage accounts, Schwab is one of the leading online brokerage firms. Schwab's revenue per trade has been declining in recent years 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.
