Schwab Beats Substantially

Charles Schwab Corporation’s (SCHW) third quarter earnings came in at 18 cents per share, substantially ahead of the Zacks Consensus Estimate of 9 cents. This also compares favorably with the year-ago quarter’s earnings of 17 cents.

Earnings for the reported quarter exclude previously announced charges of $94 million (after-tax) related to money market mutual funds and other expenses. Including these charges, net income for the reported quarter came in at $124 million or 10 cents per share.

Net revenue for the reported quarter was $1,063 million, up 5% from $1,011 million in the prior-year quarter. This also compares favorably with the Zacks Consensus Estimate of $1,059 million. Net revenue increased primarily as a result of higher net interest revenue (up 31%) and asset management and administration fees (up 4%). Trading revenue decreased 24% year over year to $182 million.

Despite a slight decrease in interest rates in the reported quarter, the net interest margin (NIM) remained relatively flat. However, net interest revenue spiked up for the fourth successive quarter, mainly due to higher average interest-earning assets. Schwab’s average interest-earning assets for the reported quarter increased 30% year over year to $81.0 billion.

Total non-interest expenses increased 16% sequentially and 25% year-over-year to $864 million. The expenses for the reported quarter included money market mutual fund charges of $132 million. Also, compensation and benefits (up 3%) and professional services (up 21%) were the factors to increase expenses on a year-over-year basis.

Schwab’s third quarter spending felt short of its operating plan. Pre-tax profit margin deteriorated significantly to 18.7% from 31.3% in the prior quarter and 31.7% in the prior-year quarter.

As of September 30, 2010, Schwab had total client assets of $1.5 trillion (up 8% year-over-year). New client assets were $14.6 billion compared with new client liabilities of $37.5 billion at the end of the prior quarter and new client assets of $19.9 billion at the end of the prior-year quarter. New brokerage accounts were 168,000, down 7% from the year-ago quarter.

As of September 30, 2010, Schwab had a total of 7.9 million total brokerage accounts, 665,000 banking accounts and 1.5 million corporate retirement plan participants.

Annualized return on equity (ROE) for the quarter came in at 8%, down from 17% in the prior-year quarter.

We suspect that Schwab’s results will continue to be impacted by the recently signed financial reform legislation and volatile interest rate environment, while focus on lower-cost capital structure will prop the company in the upcoming quarters. Further, the recently launched ETFs, acquisition of Windward and rating affirmation are also some of the positive catalysts.

Schwab’s close competitor E*TRADE Financial Corporation (ETFC) is scheduled to release its third quarter fiscal 2010 earnings on October 20.

Since the announcement of the results, the share price of SCHW shares are up 2% in Friday trading.

SCHWAB(CHAS) (SCHW): Free Stock Analysis Report

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