Schwab's Growing Cash Absorbs Interest-Rate Impact
October 15 2019 - 2:19PM
Dow Jones News
By Lisa Beilfuss
Charles Schwab Corp. reported record third-quarter earnings that
topped expectations, as growing cash balances helped the e-broker
offset the impact of falling interest rates.
During the three months ended Sept. 30, Schwab earned 70 cents a
share, up from 65 cents a year earlier. Revenue increased 5% to
$2.71 billion. Analysts expected Schwab to report 64 cents a share
on $2.64 billion in revenue.
A darkening economic outlook has weighed on e-brokers this year,
and the recent decisions to scrap trading commissions sent their
stocks reeling in recent weeks. Investors cheered Schwab's results
Tuesday, sending its stock up 5.4%. Shares in rivals TD Ameritrade
Holding Corp. and E*Trade Financial Corp. also rose, gaining 3% and
2%, respectively.
In response to tougher economic conditions, Schwab during the
quarter cut 3% of its workforce.
Schwab's third quarter highlights its resilience so far in the
face of declining interest rates. The Federal Reserve cut rates
twice during the period, pinching revenue at banks that profit from
lending and investing client cash. Schwab and other e-brokers make
a significant portion of their profits by sweeping cash daily from
customers' brokerage accounts into the firms' banking arms. For
Schwab, net interest revenue made up 60% of overall revenue during
the September quarter.
"The results highlight that [the e-brokers] have a couple of
levers at their disposal," making it easier to absorb at least the
first couple of interest rate cuts, said Devin Ryan, a brokerage
analyst at JMP Securities LLC.
One such lever is in rising cash balances, which help make up
for less lucrative yields on investments and loans during the
quarter. Prompted by growing concerns over the economic outlook,
clients moved a bigger share of their portfolios to cash. As a
percentage of total client assets, cash rose to 11.4% -- the
highest since February -- as customers pared equity holdings.
"The pendulum still has more room to swing back," Mr. Ryan said
of clients' shift from investments to cash.
At the same time, Schwab continued to attract new clients who
helped boost cash piles. Net new assets rose 7% from a year earlier
to $56.6 billion, and the number of active brokerage accounts rose
6%. Assets in Schwab's digital advisory products, meanwhile,
climbed 20%. For some clients, robo advice is free of management
fees if the client agrees to keep a relatively high portion of
their portfolio in cash.
Schwab's ability to gather new assets and grow cash balances,
while continuing to pay little on cash, helps alleviate concerns
over the coming loss of commission revenue. Trading revenue made up
about 6% of total revenue during the period, the last before online
commissions for stocks fell to zero.
Rival E*Trade will post its quarterly results later this week,
while TD Ameritrade reports early next week.
Write to Lisa Beilfuss at lisa.beilfuss@wsj.com
(END) Dow Jones Newswires
October 15, 2019 14:04 ET (18:04 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
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