Client Asset Growth Leads to a Strong Finish for Schwab
We may increase our current $47 fair value estimate by up to 10%.
Wide-moat Charles Schwab (SCHW) reported a fairly strong finish to a tumultuous 2020, as it closed its merger with TD Ameritrade and equity markets continued to rally. Including the results of Charles Schwab’s merger with TD Ameritrade that closed in October 2020, net revenue for the fourth quarter increased 60% to $4.2 billion and net income to common shareholders increased 31% to $1.05 billion from a year ago. Taking into account the shares issued with the TD Ameritrade merger, GAAP earnings per share in the fourth quarter decreased 8% to $0.57, while adjusted earnings per share that excludes acquisition-related costs and acquired intangible amortization increased 17% to $0.74. Client assets ended the year at $6.7 trillion, up about 12% sequentially on a proforma basis. We anticipate that we may increase our current $47 fair value estimate for Charles Schwab upwards of 10% to account for the rally in equity markets over the past couple of months.
We continue to anticipate some downward pressure in interest rate-related revenue and trading volumes, but strong growth in client assets can partially compensate. Net interest income in the fourth quarter was higher than the third quarter run rate for the combined Charles Schwab-TD Ameritrade due to higher margin loan balances. In the fourth quarter, the combined firm had about $54 billion of margin loans compared with $46 billion in the third quarter. Margin loans are also the company’s highest yielding interest-earning asset and helped boost the company’s overall net interest income. However, the yields of all other interest earning assets were down sequentially. The yield on available-for-sale securities that is the largest contributor to interest income at around 60% of the total decreased to 1.44% from 1.59% in the third quarter. Another significant interest rate-related revenue line is the company’s bank deposit agreement with Toronto-Dominion Bank (TD), and it sequentially decreased to $355 million from $381 million.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.