UPDATE 3-Schwab profit falls but says financials to improve

Mon Apr 16, 2012 2:09pm EDT

* 1st quarter EPS 15 cents, meets Street expectations

* Net new assets highest since 1st quarter 2008

* Shares down 0.72 percent

By John McCrank

April 16 (Reuters) - Charles Schwab Corp, one of the largest U.S. brokerages, reported a 20 percent drop in quarterly profit on Monday, as expected, due in part to lower asset management fees and higher expenses, but said its outlook was improving.

Years of low interest rates and market volatility have weighed on the profitability of Schwab and other brokers. Those pressures were amplified beginning last summer as a result of the debt crisis in Europe and liquidity measures taken by the U.S. Federal Reserve to backstop the U.S. economy.

The low rates cut into interest-derived revenues and have led Schwab to waive over $1 billion in fees on money market funds over the years to avoid negative returns to clients due to the near-zero rates being paid out.

San Francisco-based Schwab said it waived $163 million in money market fund fees in the quarter, compared with $112 million a year earlier.

The Fed has said it may leave interest rates at rock-bottom levels through 2014 as the economic recovery remains uncertain.

But Joe Martinetto, Schwab's chief financial officer, said the low point for short-term rates, based on the 10-year Treasury yield, appears to have been the fourth quarter of last year and that earnings should benefit going forward.

"We are looking for, all other things being equal and no other changes in the economic environment, continued improvements in the financials as we move through the remainder of the year," he said in an interview.

SOFT EARNINGS MASK STRONG ASSET GROWTH

Schwab earned $195 million, or 15 cents a share, in the quarter ended March 31, meeting Wall Street expectations. A year earlier, the company earned $243 million, or 20 cents a share.

Asset management fees were down 4 percent at $484 million. Expenses rose 8 percent to $876 million, with compensation and benefits expenses up 6 percent at $465 million.

Revenue fell 1 percent from a year earlier to $1.19 billion.

On a quarter-over-quarter basis, revenue grew faster than expenses, which was an encouraging sign, JMP analyst David Trone said in a note to clients.

Schwab's core net new assets rose by $26.9 billion, the most since the first quarter of 2008, and 13 percent above Trone's estimate.

Overall assets stood at a record $1.83 trillion.

Schwab clients opened 240,000 new brokerage accounts in the quarter and made an average of 318,400 revenue trades per day in the quarter. That was flat from a year earlier, before Schwab bought options trading specialist optionsXpress.

Average revenue per trade was up 2 percent to $12.35.

Nomura analyst Keith Murray described the trading levels as "sluggish," but said the results were mostly positive.

"A decent result given the challenging rate backdrop and core growth metrics continue to head in the right direction," Murray said.

Schwab shares were down 0.72 percent at $13.77 on Monday afternoon.

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