Charles Schwab Reports In Line

Zacks

Charles Schwab Corporation’s (NYSE:SCHW - News) fourth quarter 2011 earnings came in at 13 cents per share, in line with the Zacks Consensus Estimate. This compares favorably with the year-ago quarter’s earnings of 10 cents.

Net income for the reported quarter came in at $163 million, up 37% from $119 million in the prior-year quarter. The year-ago net income included charges relating to the Schwab YieldPlus Fund. Excluding this, the company earned $218 million in the fourth quarter of 2010.

Improved trading revenue, reduced provision for loan losses and lower non-interest expenses were among the quarter’s positives. However, lower net interest revenue as well as asset management and administration fees were the headwinds.

For the full year 2011, earnings came in at 70 cents per share, missing the Zacks Consensus Estimate by a penny. The company reported earnings of 38 cents in the previous year. 

Quarter in Detail

Net revenue for the reported quarter was $1,113 million, down 1% from $1,127 million in the prior-year quarter. This, however, compares favorably with the Zacks Consensus Estimate of $1,108 million. The year-over-year decrease was primarily attributable to lower net interest revenue as well as asset management and administration fees.

Revenues for full year 2011 were $4,691 million, up 10% from $4,284 million in the previous year. Full year revenues came in marginally better than the Zacks Consensus Estimate of $4,689 million.

Charles Schwab’s average interest-earning assets for the reported quarter increased 16% year over year to $100.1 billion.

Total non-interest expense increased 5% sequentially but dropped 4% year over year to $861 million. The year-over-year decrease was primarily attributable to the absence of the class action litigation and regulatory reserve during the reported quarter.

Charles Schwab’s pre-tax profit margin improved to 22.6% from 20.3% in the prior-year quarter.

As of December 31, 2011, Charles Schwab had total client assets of $1.68 trillion (up 6% sequentially and 7% year over year). Total new assets decreased to $21.5 billion from $86.0 billion in the prior quarter and $26.2 billion in the year-ago quarter. New brokerage accounts were 203,000, down from 506,000 in the prior quarter and 225,000 in the year-ago quarter.

As of December 31, 2011, Charles Schwab had a total of 8.6 million active brokerage accounts, 780,000 banking accounts and 1.49 million corporate retirement plan participants.

Annualized return on equity (:ROE) as of December 31, 2011, came in at 8%, down from 12% in the prior-quarter but flat with the prior-year quarter.

Our Viewpoint

While a focus on lower-cost capital structure will help sustain better results in the upcoming quarters, the company’s financials will continue to be impacted by lower trading activity and volatile interest rates. We are also concerned about the company’s lower degree of capital intensity relative to its peers.

Charles Schwab currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. However, its competitor Raymond James Financial Inc. (NYSE:RJF - News) retains a Zacks #4 Rank (short-term Sell rating).

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