On 10/29, Schwab hosted their fall update for Q3, a quarter which had earnings of $.51. beating estimate of $.47. Key takeaways are:
- Schwab reported solid core new asset growth of 5%.
- Completion of the TD Ameritrade acquisition
- AUM jumps to $6.0t. from $4.1t
- Expect cost savings of $1.8b-$2.0b over 2-3 years which will increase margins over 10%
- SCHW is already the 7th most profitable company in the finance sector (on TTM pretax margin) and the cost synergies could increase margins 10 percentage points!
- Low interest rates remain a headwind with Net Interest Margin (NIM) falling to 1.34%.
- Rising deposits up 52% yoy have helped offset falling NIM.
- Valuation remains attractive.
Despite lower interest rates, we remain optimistic that SCHW will continue to grow AUM significantly this year, leveraging its platform to drive ESP growth.
Current Price: $41.64 Price Target: $48 (up from $38)
Position Size: 1.85% Performance since initiation on 6/24/19: 8.8%
Q2 Highlights:
- Total client assets rose to $6.0T, with core new asset growth of 5%.
- Client assets 6% annualized organic growth
- Brokerage accounts 21% annualized growth
- Focus on growing digital platform with 64% digitally active households
- Net interest margin
- Net Interest Margin (NIM) was 1.34% falling from 1.53% in Q2, more than offsetting the growth in deposits as interest revenue fell 14%.
- NIM will increase slightly with AMTD acquisition
- Advice and Funds
- Schwab fee based advice solutions assets grew to $361.2b up 13% YoY.
- Schwab assets in proprietary ETFs up 12% to $168.9b
- Expanding into bank loans with $22.3b up 32%
- Profitability – industry leader
- ROE 12% and 39.1% pre-tax profit margin. Expect margins to expand 10% points over the next 2-3 years due to cost savings and scale from the mergers
- Current expenses are elevated due to mergers
- Capital allocation
- Schwab will look to issue a preferred stock issue as growth in balance sheet and acquisitions will require more capital. Share buybacks are on hold.
- Dividend yield of 1.70%
- Valuation is attractive at 19x earnings. Target price set at 22x.
Schwab Thesis:
- Expect Schwab’s vertically integrated business model to drive AUM growth. Schwab has averaged 6% organic core net new asset growth as retail clients and advisors are attracted to Schwab’s low cost trading and custody services.
- Conservative, well-managed firm who is a leader in online trading and focused on leveraging platform.
- Schwab will experience material AUM growth with USAA and TD Ameritrade mergers. Expect SCHW to reduce costs and leverage platform.
Please let me know if you have any questions.
Thanks,
John
$SCHW.US