Schwab’s Q4 results – strong 2021

On 1/28, Schwab hosted their Winter Update detailing quarterly earnings and outlook.  Schwab Q4 were excellent showing continued strong asset growth and good expense control.

  • Strong new asset growth of 8% – $550b for 2021, showing strength of Schwab’s platform
  • Profitable franchise – pre-tax margin of 47.5% and ROTE of 22%
  • Earnings are highly levered to short-term interest rates – 25 basis point increase in Feds Funds rate will increase earnings 4%-5% over following 12 months!

 

Current Price: $91.9                         Price Target: $105 (increased from $90)

Position Size:   2.53%                       Performance TTM: 68.2%

 

Schwab is building scale and platform as a premier asset gather. 

  • Total client assets of $8.1t
  • Active brokerage accounts 33.2m
  • 200%+ increase of net flows into Schwab fund products and managed solutions

 

Delivered record financial results

 

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Expenses

  • Expected to grow 6%-7% in 2022 of which 3.5%-4.0% for integration-driven hardware and software build.
  • Through merger with TD Ameritrade, SCHW expects $1.8b-$2.0b in expense savings over next 3 years, which equates to ~20% of total expenses.

 

Profitability – industry leader

  • Adjusted ROE of 22% and pre-tax profit margin of 47.5%.  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 0.75%

 

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 questions.

Thanks,

John

 

[category Equity Earnings]

[tag SCHW]

$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