UPDATE 1-Schwab Q4 profit jumps from year ago, off from Q3

Wed Jan 16, 2013 11:28am EST

By Jed Horowitz

NEW YORK Jan 16 (Reuters) - Charles Schwab Corp, the biggest online broker by market capitalization, said fourth-quarter net income rose 29 percent from a year earlier on growing client assets, but fell 15 percent from the third quarter.

The company and its rivals, viewed as proxies for individual investor interest in the market, continued to be challenged by rock-bottom interest rates that hurt its returns on investing clients' money.

Trading that generates commission revenue also fell during the quarter, but Schwab said it collected a record $22.6 billion in net new assets in December, indicating clients are getting more confident about investing.

Shares dropped 1.5 percent.

"We didn't see as much lift coming out of the (U.S. presidential) election as we would have hoped and there are still some big issues facing us in Washington, but we are seeing cash flows into pretty much every investment product in January," Chief Financial Officer Joe Martinetto said in a phone interview.

San Francisco-based Schwab said net profit rose to $211 million, or 15 cents a share, matching the mean consensus estimate of 20 analysts surveyed by Thomson Reuters I/B/E/S. In the third quarter of 2012, Schwab's net income totaled $247 million.

"Higher rates remain key to unlocking the firm's earnings power and with a rate hike unlikely until 2015 we believe the shares will continue to track the broader markets," David Trone, an analyst at JMP Securities, wrote in a note to clients. Trone has a "market perform," or "hold," rating on Schwab shares.

Schwab's net interest margin - a key measure of profitability from interest revenue - fell to 1.5 percent from 1.6 percent 12 months earlier. Schwab has said if interest rates remain flat, the margin could drop this year to about 1.45 percent.

Trone and other analysts expressed concern that Schwab's expenses grew 4 percent during the quarter, compared with the previous three months, double the quarterly growth in its revenue.

DOUBLE-DIGIT GROWTH

In 2013, revenue should grow at a double-digit rate and slightly faster than expenses if the effects of U.S. Federal Reserve interest-rate policies continue to be mitigated and markets rise at a "reasonable" rate, CFO Martinetto said.

He shrugged off a 14 percent drop in commission-based trading by clients in the quarter, saying trading revenue now contributes about 17 percent of total revenue, compared with 60 percent ten to fifteen years ago.

Schwab is much more reliant on collecting assets that generate management fees rather than trading fees, he said.

Low interest rates have led Schwab and rivals such as TD Ameritrade Holding Corp to waive fees charged to clients for money-market investments out of concern the low-yielding vehicles would have negative returns if a fee was imposed.

Schwab waived $587 million in money-market fees in 2012, including $142 million in the fourth quarter. In 2011 and 2010 it waived a total of $1 billion.

Total client assets grew 3 percent in the quarter, and 16 percent from a year earlier, to $1.95 trillion.

In recent quarters Schwab has purchased two small advisory firms, Windhaven Investments and ThomasPartners, to fill out its menu of money manager strategy styles, but has no immediate plans for further acquisitions, Martinetto said.

Windhaven actively allocates client funds among different money managers while Thomas focuses on dividend equity strategies.

Schwab is ahead of plan in getting clients to open accounts at OptionsXpress, a firm it purchased in September 2011, although their actual options trading is behind what the company expected, Martinetto said.

Shares of Schwab fell 1.5 percent to $15.06 in morning trading on the New York Stock Exchange. They are up 17 percent since the end of November.

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