Near-Term Headwinds but Longer-Term Tailwinds for Schwab
We look for the bottom in net interest income and trading.
The competitive and economic environment for Charles Schwab (SCHW) and other retail brokerages has dramatically changed over the past year. Charles Schwab merged with longtime peer TD Ameritrade, while E-Trade merged with Morgan Stanley (MS) after commissions on many common types of trades were set to $0 in October 2019. In 2020, the global economy went into free-fall as a result of COVID-19, and monetary authorities have cut interest rates to near 0%. The world is likely to be in another extended period of lower interest rates, similar to after the 2008 financial crisis.
Given the precipitous decline in net interest revenue and a triple-digit spike in trading volume, we decided to provide an assessment of whether we've hit bottom for interest-rate-related income and whether current trading volume is sustainable. For net interest income, we believe there's still room to fall from prepayments and the reinvestment risk inherent in Charles Schwab's mortgage-backed securities portfolio. TD Ameritrade's interest-rate-related bank deposit account agreement revenue with Toronto-Dominion Bank TD will also face significant headwinds, but its merger with Charles Schwab has mitigated the earnings impact. Money market fund fee waivers are also likely to double in the following quarters.
Trading volume is up 100%-350% at the retail brokerages as a result of several permanent and transitory factors. We believe the move to $0 commissions has permanently elevated trading volume for the retail brokerages. But we also believe volume related to COVID-induced market volatility, changes in behavior due to self-quarantining, a massive run in technology stocks, and the anecdotal rise in recreational traders will prove transient. Ultimately, we forecast that retail brokerage trading volume may fall 20%-50% from recent levels but remain significantly higher than it was before $0 commissions.
This information was published Nov. 23 as part of a larger report, which is available to Morningstar's institutional clients.
Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.