Schwab posts flat 2Q earnings as it waives money market fees, but results top expectations

Schwab posts flat 2Q earnings, but beats estimates

DES MOINES, Iowa — Retail brokerage Charles Schwab Corp. on Friday reported flat second-quarter net income as waivers of clients’ money market fees amid low interest rates continued to crimp revenue growth. Results ticked higher from the first quarter, however, and the company forecast continuing improvement in the second half of the year.

Revenue slipped $500,000 to $1.08 billion as the discount broker trimmed asset management fees on its exchange-traded and money-market funds. Low interest rates have depressed client returns on bonds and other investments. But short-term interest rates rose a bit further from the first to second quarters, allowing the company to reduce fee waivers on its money market funds to $113 million and helping lift asset management fees sequentially for the first time in eight quarters.

Chairman Charles Schwab said second-quarter revenue rose 10 percent from the first quarter and expense controls helped boost pretax profit margin. He expects the brokerage will improve on its second-quarter financial performance for the rest of the year.

“The economy is starting to find its footing, and short-term interest rates have either stabilized or improved,” Schwab said in a statement. “In addition, despite ongoing equity market volatility, valuations continue to reflect a recovery from the lows of the financial crisis.”

The San Francisco company reported net income of $205 million, or 17 cents per share, compared with $205 million, or 18 cents a year ago. The results beat the average estimates of analysts surveyed by Thomson Reuters, who had forecast earnings of 15 cents per share on revenue of $1.06 billion.

Shares rose 89 cents, or 6.1 percent, to $15.43 in afternoon trading.

Asset management and administration fees fell 10 percent to $437 million and trading revenue was down 14 percent to $233 million, however, trading revenue rose from the first quarter driven by the surge in client activity during the historic May 6 “flash crash.”

Net interest revenue climbed 26 percent to $382 million, helped by increased short-term interest rates. Losses on securities dropped 38 percent to $8 million from $13 million.

Chief Financial Officer Joe Martinetto said improved interest margin and higher levels of interest-bearing assets driven by client growth helped net interest income rise for the third consecutive quarter. Net new assets totaled $14 billion in the second quarter, excluding outflows relating to a single mutual fund clearing client.

“Chuck is back,” said FBR Capital Markets analyst Matt Snowling in a note to clients Friday. He backed an “Outperform” rating on the stock and $20 price target.

He said the results underscore his view that operating earnings can continue to grow despite a difficult environment. He cited a growing client asset base and lower cost of funds among other factors. He cautioned, however, that lower trading activity could challenge earnings growth.

Raymond James analyst Patrick O’Shaughnessy noted that the increase in asset valuations led to solid asset management growth. But he said the company’s low trading commissions — which it has maintained to better compete with online trading rivals — and weak June trading activity doesn’t bode well for other online brokerages such as TD Ameritrade and E-Trade, which report results over the next two weeks.

Schwab ended the quarter with client assets of $1.36 trillion, up 11 percent year-over year. Active brokerage accounts increased 4 percent to 7.9 million and banking accounts grew 35 percent to 803,000. The company’s workforce grew 3 percent from the year-ago period to 12,500 employees, but dipped by about 1,000 from the end of the first quarter.