Charles Schwab ‘s ( SCHW ) performance in Q1 was strong, and we expect this trend to continue when the company reports its second quarter earnings on July 18. We believe that interest-earning assets and assets under management will be the key drivers of growth. However, trading revenues will likely decline marginally as the company slashed its commissions from February onward. Since trading commissions generate only a small portion of the company’s overall revenue, however, we don’t expect the price cut to have a major impact on revenue and EPS growth in the near term.
Fed’s Rate Hike
The Federal Reserve raised interest rates three times in the last 6 months, and as a result Schwab’s interest earning assets are growing at a very strong rate, with nearly 22% growth year-to-date through May. Consequently, the interest generated on these assets – which contributes around 45% of the company’s overall revenues – is likely to go up significantly.
Impact Of Price Cut In Trading Commission Partially Offset By Growth In Trading Volumes
Amid tough competition from competing full-service and discount brokerages, the company decided to slash its commissions to $4.95 per trade in February. However, the brokerage’s trading volumes for the first two months of the second quarter grew by over 15% in comparison to the prior year comparable period, which we believe is due to the improvement in U.S. macro conditions and increased volatility in the stock market. This should partially offset the decline in trading revenue.
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