Schwab says earnings can grow if rates stay flat

(Reuters) - Charles Schwab Corp Chief Executive Walter Bettinger told investors and analysts that the largest online brokerage can increase earnings in a low-rate environment -- provided those rates stop their precipitous decline.

The key is continued reductions in costs while still developing new services, combined with attracting new customers through its online, branch-office and advisory channels.

"We don't need rising rates, we just need rates to stop falling," said Bettinger. "Our true earnings potential is masked by a tough environment."

Shares of Schwab closed up 21 cents, or 1.8 percent, at $12.12 in New York Stock Exchange trading Thursday.

Schwab waived $168 million of fees in the fourth quarter. Chief Financial officer Joe Martinetto projects quarterly waivers of $165 million to $170 million this year if rates hold steady, reflecting continued growth in its money market funds.

Schwab, which waives hundreds of millions of dollars in fees from money-market fund customers, says that will continue as the Federal Reserve commits to keeping rates low through 2014.

Martinetto cautioned that Schwab has slashed expenses since 2008 to offset revenue declines but most of the easy cuts have been made. Future reductions must balance savings benefits against the potential impact on capabilities and service.

Project spending this year, he said, will fall more than 20 percent to $140 million from 2011 levels.

Among several business initiatives at Schwab is its plan to open a network of advisory offices operated by independent franchisees. Bettinger said the firm is on track to open 12 to 15 locations this year.

Since February last year, when the independent branch strategy was first revealed, Schwab has signed up only three advisers but it has received applications from some 1,700 people.

"We are very diligent to the extent we allow that business to grow," he said.

Online brokers like Schwab also have been hurt by the turbulence of the markets since 2008, which along with the fact that equities turned in a flat year in 2100 has driven many small investors to the sidelines.

So while stock prices rallied last month, small investors remain wary of jumping back into the market after years of turbulence, Bettinger said.

As the largest online brokerage and a firm built on smaller investors, Schwab is a barometer for how most Americans feel about taking risk in the markets.

The S&P 500 Index rose 4.4 percent in January, its fourth positive month in five, yet retail sentiment was "pretty tough" and reflected a "lack of confidence," Bettinger said during the firm's winter update.

"From a client engagement standpoint, the markets went up, but you don't get swings in retail sentiment with how fast the markets move in a four-week period," he said.

Bettinger also disclosed that Benjamin Brigeman, head of Schwab's flagship investor services division, is leaving later this year for family reasons. In a SEC filing Thursday, Schwab said Brigeman would step down effective February 15, with his responsibilities assumed by John Clendening and Andrew Gill.

(Reporting by Joseph A. Giannone; Editing by Gary Hill, Bernard Orr)