- Total client assets rose to $6.7t up from $4.0t at Q4 2019 with organic growth of 7%.
- Trading, securities lending and margin lending surged during the quarter, helping interest income. Schwab has handled this influx of retail business relatively well.
Despite lower interest rates, we remain optimistic that SCHW will grow EPS at a mid-teens rate through the cycle:
- Grow AUM organically at ~6%
- Stock market growth of ~6.5%
- Increase margins due to scale and cost savings from merger.
Current Price: $55.8 Price Target: $68 (up from $48)
Position Size: 2.13% Performance TTM: 20.2%
Q4 Highlights:
- Total client assets rose to $6.7T, with core new asset growth of 7%.
- Net interest margin of 1.55% up from 1.34%
- Average interest earning assets rose 72% ($462b) driven by market volatility and mergers.
- Schwab acquired $166b in deposits from (USAA and TD) which will be transitioned to Schwab’s balance sheet at roughly $20b per year, so deposit growth will have a tailwind.
- Revenue from securities and margin lending surged to 10% of total interest income adding 17bips to NIM.
- Company remains levered to interest rates and higher interest rates would provide a huge tailwind for earnings.
- Profitability – industry leader
- ROTE 15% and 42.2% pre-tax profit margin. Expect margins to expand 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 plans to build capital on the balance sheet due to rising deposits and mergers, which may temper share buybacks.
- Dividend yield of 1.29%
- Valuation is attractive at 20x earnings. Target price set at 23x.
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 has experience material AUM growth with USAA and TD Ameritrade mergers. Expect SCHW to reduce costs and continue to leverage platform.
Please let me know if you have any questions.
Thanks,
John
$SCHW.US
John R. Ingram CFA
Chief Investment Officer
Partner
Direct: 617.226.0021
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109