Schwab profit up 12 percent; to buy asset manager

Mon Oct 15, 2012 12:45pm EDT

A man walks past a Charles Schwab Investment branch in Washington January 19, 2010. REUTERS/Jim Young

A man walks past a Charles Schwab Investment branch in Washington January 19, 2010.

Credit: Reuters/Jim Young

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(Reuters) - Charles Schwab Corp (SCHW.N) said higher asset management revenues helped boost third-quarter profit 12 percent, and the U.S. brokerage announced plans to buy smaller asset manager ThomasPartners Inc.

Brokerages like Schwab have been under pressure due to soft equity trading as uncertainty over Europe's debt problems, the state of the U.S. economy, and the upcoming U.S. election keep many retail investors on the sidelines. Years of ultra-low interest rates have also been a drag on profits.

San Francisco-based Schwab on Monday said it earned $247 million, or 19 cents a share, in the third quarter, up from $220 million, or 18 cents a share, a year earlier.

The latest results included a nonrecurring tax benefit of about $20 million. Excluding that benefit, earnings were about 17 cents a share, in line with analysts' average estimate, according to Thomson Reuters I/B/E/S.

Revenue rose 1 percent to $1.2 billion.

Shares of Schwab were up 5 cents at $13.00 in midday trading in New York.

PUSH TOWARD FEE-BASED ADVISORY PRODUCTS

Schwab said it had struck a deal to buy money manager ThomasPartners, which focuses on dividend income, as it anticipates growing demand for income-oriented investment strategies. The deal includes an $85 million cash payment and possible future payments based on growth in assets under management (AUM).

"We think this acquisition is further evidence of Schwab's push to increase fee-based advisory products in an effort to increasingly 'annuitize' its revenue stream in a low-rate backdrop," said Keith Murray, an analyst at Nomura Equity Research.

ThomasPartners managed $2.3 billion in assets as of September 30, in largely growth-oriented investment portfolios designed to generate dividend income streams. The firm already uses Schwab as a custodian for its assets.

"That dividend growth strategy has caught our clients' attention as some of them are looking for returns on portfolios in an environment where yields are pretty low on fixed income," Joe Martinetto, Schwab's chief financial officer, said in an interview.

"We think that by bringing it in-house and giving it a full national kind of attention at Schwab that we are going to be able to grow it pretty significantly in pretty short order."

Martinetto pointed to Schwab's Windhaven Investment Management. When Schwab announced it was buying Windhaven in August 2010, the firm had AUM of $3.9 billion. As of September 30, Windhaven's AUM had grown to $12.5 billion due to strong demand for its managed portfolios.

ASSET MANAGEMENT REVENUE RISES

Years of low interest rates have led Schwab to waive more than $1 billion in fees on money market funds due to the near-zero rates being paid out.

Schwab said it waived $136 million in money market fund fees in the third quarter, down from $160 million a year earlier and $146 million in the second quarter.

Asset management and administration fee revenue was up 12 percent to $524 million, helped by the decline in fee waivers and growth in other mutual fund balances and advice programs.

That helped offset a decline in trading and net interest revenues. Trading revenue fell 18 percent from a year earlier to $204 million and was down 7 percent from the second quarter. Net interest revenue fell 1 percent from a year earlier to $439 million.

Net new assets came in at $20.4 million, down 76 percent, due in part to the unwinding of a business unit associated with a former acquisition.

Schwab had $1.89 trillion in total assets as of September 30.

Revenue trades -- which include all client trades that generate either commission revenue or revenue from principal mark-ups, such as fixed income -- tumbled 19 percent from a year earlier at an average of 261,500 a day. Asset-based trades were down 11 percent at 45,200 a day.

Schwab clients opened 198,000 new brokerage accounts during the third quarter, down 61 percent year over year. The company ended the quarter with 8.7 million active brokerage accounts, up 3 percent, and 844,000 banking accounts, up 10 percent.

Third-quarter expenses rose 2 percent to $835 million.

(Reporting By John McCrank; Editing by Gerald E. McCormick and John Wallace)

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