Schwab Q1 earnings

On 4/22, Schwab hosted their spring update detailing exceptionally strong quarterly earnings. The merger with TD Ameritrade and the surge in retail activity have driven Schwab’s business trends:

  • Total client assets rose to $7.1t up 6% QoQ
  • Core new asset growth shot up 24% QoQ, totaling $148.2b inflows for the quarter which is more than last year’s flows!
  • Revenue up 13% QoQ   
  • Trading (up 45%) and margin lending (up 20%) surged during the quarter, helping revenues.

 

Current Price: $67.8                         Price Target: $78 (up from $68)

Position Size:   2.41%                       Performance TTM: 95.1%

 

Schwab is building scale and platform as premier asset gather. 

  • Transfer ratio of 1.6, means that 1.6x the assets came to Schwab from competitors than left Schwab
  • Schwab recorded 1,597k new households for Q1, up 92%. 
  • Schwab is succeeding with millennials.  70% of new-to-firm households were under the age of 40.

TD Ameritrade merger

  • One-time costs are a bit higher (+$600m) than expected and now targeting $2.0b-$2.2b total costs. 
  • Scope of back-office data/hosting/software Integration has increased with surge in retail activity
  • Estimates for recurring synergies have increased +$800m to an expected $4.3b-$4.8b annually

Net interest margin of 1.48% down from 1.55%

  • Average interest earning assets rose 60% ($465b) driven by market volatility and mergers.
  • Schwab remains levered to rising rates:
    • Increase 50bips in 5-year UST will increase revenues by 8%
    • Increase of 25bips in Fed Funds Rate will increase revenues by 15%

Profitability – industry leader

  • ROTE of 24% and pre-tax profit margin of 47.4%.  Expect margins to continue 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 1.05%

 

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

www.crestwoodadvisors.com