Brokerage giant Charles Schwab Corp (SCHW.N) reported a 7 percent slide in second-quarter profit on Tuesday, driving shares down 4 percent as rising expenses outstripped forecast-beating revenue.
Client trading in stocks and bonds remains muted while expenses have stayed high due to technology projects and pay raises aimed at keeping salaries competitive after cuts made during the Great Recession, Schwab's chief financial officer, Joe Martinetto, said in an interview.
Net profit fell to $256 million, or 18 cents per share, in the second quarter, from $275 million, or 20 cents per share, a year earlier.
Revenue jumped 4 percent to $1.34 billion, topping forecasts, but expenses rose 9 percent to $925 million.
"Expenses were a disappointment," Christopher Harris, an analyst at Wells Fargo Securities, said in a note to clients. While net interest revenue rose more than he expected, Harris said money-market fees and trading commissions also missed his forecasts.
San Francisco-based Schwab is highly sensitive to short-term interest rates, which fell during the second quarter. To insure that clients in low-yielding money-market accounts do not lose money, for example, Schwab waived $312 million of fees in the first half of the year, including $157 million in the second quarter.
Martinetto said Schwab continues to forecast full-year earnings per share in the mid-70-cent range, with the pretax profit margin topping 30 percent as revenue growth overtakes increases in expenses going forward.
Pretax profit margin in the second quarter was 30.8 percent, down from 33.7 percent one year earlier. It was the second consecutive quarter that profit missed analysts expectations by a penny a share, according to estimates from 23 analysts compiled by Thomson Reuters I/B/E/S.
Schwab's shares, which have gained more than 50 percent this year on expectations of rising interest rates, were down 4.0 percent at $20.86 near midday.
Trading revenue, which a decade ago represented about 60 percent of total revenue, rose 7 percent to $235 million, or about 18 percent of revenue. Asset management fees topped Schwab's revenue mix at $572 million followed by net interest revenue of $473 million.
Schwab, founded 40 years ago as a low-commission firm for self-directed traders, is repositioning itself as a company that can help "affluent investors" with $50,000 to $2 million of investable assets meet their financial goals through "advisory" relations.
Though summer is generally a slow marketing season for brokerage firms, Martinetto said Schwab is spending a little more than normal this year because its new ads aimed at encouraging people to buy Schwab-managed mutual funds, exchange-traded funds and other "advice" products are bearing fruit. Money is coming in from investors who are a "little more affluent than our historical pattern," he said.
Schwab's total asset management and administration fees in the second quarter rose 15.3 percent from the same period in 2012 to $572 million.
About 430,000 of its 6.2 million active retail brokerage accounts pay fees for "advised" products, and Martinetto said that over time fee revenue should rise as the firm improves at selling its actively managed products. In addition, Schwab services $900.4 billion of assets from clients of independent investment advisers, up 14 percent from a year earlier.
(Reporting by Jed Horowitz in New York; Additional reporting by Aman Shah in Bangalore; Editing by Leslie Adler)