- Strong organic growth of 8% – Schwab has had higher net new asset growth in the first half of this year than any prior full year’s growth!
- 45% adj pretax margin
Current Price: $68.1 Price Target: $78
Position Size: 2.19% Performance TTM: 105%
Schwab is building scale and platform as premier asset gather.
- Transfer ratio of 3 to 1, means that 3x the assets came to Schwab from competitors than left Schwab
- Schwab recorded 4,810 new brokerage accounts in the first half of this year
- Schwab is succeeding with millennials. 70% of new-to-firm households were under the age of 40.
Expenses
- Total expenses up +1% QOQ due to $200m charge for reserve for potential find on robo advisor disclosures.
- 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.
Net interest revenue was up +2%
- Net interest margin of 1.46% down slightly from 1.48%
- Deposits were $368b down -$1b as clients invested cash into equities and bonds
- Strong growth in margin lending +38% YOY
- Schwab’s revenue remains sensitive to interest rate changes
- Starting in Q3 Schwab is converting over TD Ameritrade cash accounts which will aid growth to deposits by about $10b per month.
Profitability – industry leader
- ROTCE of 20% and pre-tax profit margin of 44.6%. Expect margins to continue to expand over the next 2-3 years due to cost savings and scale from the 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
[category Equity Earnings]
$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