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Schwab-TD Ameritrade Merger Can Create Value in Face of Low Rates

The combination will cement Schwab's position as one of the key players in the financial sector.

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The primary topic for investors looking at Charles Schwab (SCHW) is the pending merger with TD Ameritrade (AMTD). The two companies announced the deal in November 2019 and hope to complete it in the second half of 2020. We believe the merger is more likely than not to occur and currently incorporate a 75% probability of its going through in our valuation model. We don’t see much antitrust concern regarding combining the two companies’ retail online brokerage businesses, as there are many online brokerage companies and the space is very competitive. However, the combined registered investment advisor businesses of the combined companies will likely have upward of 40% market share by assets. There are many types of wealth management firms, though, and we estimate that the combined companies’ market share of wealth management assets is probably only a mid- to high-single-digit percentage.

We recently tempered our near- to medium-term outlook for Schwab’s earnings on a stand-alone basis. The largest driver of the company’s earnings is net interest income, which in recent quarters has made up around 60% of net revenue. The positive outlook for interest rates in the United States reversed in late 2018, and rates gradually declined in 2019. However, in March 2020, the federal-funds rate was dramatically cut to 0%-0.25% to deal with the economic downturn caused by the coronavirus. The 10-year U.S. Treasury yield has also fallen below 1%--a level that wasn’t even breached during the “zero interest rate policy” period after the 2008 financial crisis. Net interest income is likely to remain constrained at Schwab for a couple of years.

Michael Wong does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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