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How Did Charles Schwab’s Margins Turn Out in 1Q16?

Robert Karr

Did Charles Schwab Meet 1Q16 Earnings Estimates?

(Continued from Prior Part)

Improved efficiency

Charles Schwab (SCHW) reported a strong pretax margin of 37% in 1Q16. This reflects strong growth in investor services and banking and a strong handle on expenses. The company reported operating expenses excluding interest of $1,109 million in 1Q16, compared to $1,042 million in 4Q15.

The company is focusing on expense discipline combined with scale and innovation in order to maintain margins and gather new assets. Its major expenses include compensation and benefits, professional services, and occupancy and equipment.

Here is how a few of the company’s peers in the brokerage industry fared in terms of operating margin in their last fiscal years:

  • Interactive Brokers Group’s (IBKR) operating margin was 45.4%.
  • TD Ameritrade Holding Corporation’s (AMTD) operating margin was 41.1%.
  • E*TRADE Financial Corporation’s (ETFC) operating margin was 31.0%.

Together, these companies form 10.8% of the iShares U.S. Broker-Dealers & Securities Exchanges ETF (IAI).

Maintaining margins

Charles Schwab focuses on improving value for its clients and profitability for its stakeholders. Its total expenses as a percentage of average client assets have fallen at a faster pace over the last decade compared to revenue as a percentage of average client assets. Its expenses as a percentage of average client assets fell to 0.18% in 1Q16 from 0.32% in 2004. However, revenues as a percentage of average client assets fell to 0.25% in 1Q16 from 0.39% in 2004. This has resulted in a recent pretax profit margin of 34%–38% compared to 16% in 2004.

Overall, the industry is facing some margin pressures due to pricing pressures from greater competition as well as an increase in compensation expenses to push for more retail assets. Considering the technology- and advisory-focused solutions offered by Charles Schwab, operating margins around 40% can be healthy for maintaining investments as well as for distributing profits.

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