Why Isn’t Charles Schwab’s Stock Benefiting From The Spike In Trading Volumes?

Charles Schwab (NYSE: SCHW) stock has fallen over 33% between 20th February and 18th March – largely tracking similar declines across industries from negative market sentiments over the coronavirus pandemic as well as the oil price war. The decline in Schwab’s stock price was accompanied by a sharp reduction in total client assets and an increase in client cash as a % of client assets in February compared to January. We believe this trend will continue over March, too – hurting the brokerage giant’s top line for the quarter. Although average daily trades have increased considerably over the same period due to higher trading activity, the elimination of trading commissions late last year means that Schwab’s revenues aren’t going to benefit directly from this.

Overall, a sharp drop in total client assets, coupled with the overall negative market sentiment, were the main reasons behind the sell-off in Schwab’s stock.  In this analysis, we have analyzed Charles Schwab on several metrics and compared its performance with its peers TD Ameritrade and E*TRADE. It is to be noted that the Charles Schwab-TD Ameritrade merger would take 18-36 months, and till then, they would be considered as separate companies.

Although Charles Schwab stock has dropped almost 37% between 20th February and 16th March, the downward trend is not limited to Charles Schwab alone – its peers have witnessed a similar trend

E*TRADE (ETFC) is down by 46% over the same period, followed by TD Ameritrade (41%).

Jump in daily average trades implies higher trading activity

• The widespread panic and negative sentiment have triggered a sell-off in the stock market. As a result, Charles Schwab’s daily average trades increased by 23% in February as compared to the January figure.
• The numbers were comparable across its peers, as E*TRADE and TD Ameritrade also witnessed a similar trend (27% each).
• However, all industry players eliminating trading commissions late last year, this spike in trading activity isn’t really going to benefit any of these companies.

Charles Schwab client assets have reduced by 5% in February, as compared to the January figure

• The total client assets have decreased due to net market losses.
• Higher average trades and a steady decline in stock prices across industries point to a further reduction in total client assets in March.
• The same trend resonated across E*TRADE and TD Ameritrade as well, as their client assets dropped by 4% and 5% respectively over the period.

While client assets dropped in February, client cash and deposits increased for each of the three companies.

• This implies that clients are hesitant about reinvesting the proceeds from stock sales back into the equity market due to uncertain market conditions.
• Notably, Charles Schwab’s client cash as a percentage of client assets increased by 70 bps to 12% in February 2020, as compared to the January figure.
• In comparison, E*TRADE and TD Ameritrade’s figure increased by 180 bps and 50 bps respectively over the period.

You can read about the impact of the coronavirus outbreak on the stock of major U.S. companies, including Netflix, Disney, and P&G, among others on the Trefis coronavirus topic page.

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