Schwab raises revenue and profit outlook for 2014

NEW YORK Wed Feb 12, 2014 5:41pm EST

NEW YORK Feb 12 (Reuters) - A strong January prompted brokerage Charles Schwab Corp on Wednesday to raise its forecasts for revenue and profit margins for 2014.

Revenue, which totaled $5.4 billion in 2013, will likely grow at a "high single-digit rate" this year, Chief Financial Officer Joe Martinetto said in a "business update" conference with analysts on Wednesday. In late October, Martinetto more cautiously estimated the rise would be in the "mid-to-high single digits."

Robust trading volume and the addition of almost $12 billion in new money to customer accounts last month spurred his rosier projections.

The forecast assumes that the S&P 500 index will gain 6.5 percent this year, client trades will grow 5 to 6 percent over last year and short-term U.S. interest rates will stay at rock-bottom levels.

Martinetto did not make a direct earnings forecast but said pretax profit margin, a key indicator of profitability, should jump to "around 34 percent" this year from 31.4 percent in 2013. Three months ago he was vaguer, saying the margin would likely top 30 percent.

Merrill Lynch, Bank of America Corp's wealth and investment management unit, had a pretax profit margin of 26.6 percent last quarter, and senior executives said Tuesday that the margin should rise above 30 percent if interest rates rise to more "normal" levels. Most economists expect rates to remain low through most of 2014.

Morgan Stanley's wealth business had a margin of 19 percent last quarter and aims to elevate it to between 22 and 25 percent by the end of 2015.

Low interest rates remain a key factor depressing profit at Schwab and other large brokerage firms that make much of their money by investing the cash that clients keep in their brokerage accounts. Although longer-term rates have inched up slowly in a reviving U.S economy, Schwab remains captive to short-term rates that remain stalled well below 1 percent, Martinetto said.

Out of about $252 billion of interest-rate sensitive assets, some $240 billion is invested in short-term markets keyed to the federal funds rate that sits at 0.25 percent. "There is still pressure at the short end, and we're very levered to short rates," Martinetto said.

Last year, for one example, Schwab waived $674 million of fees on clients' money-market accounts because the charge would have led to a negative return.

In a more normal rate environment, Schwab makes more money on cash kept in its bank than in money market funds. Chief Executive Walt Bettinger said Tuesday that when rates rise the firm is likely to make it more difficult for clients to have their cash swept into money funds. "There may be opportunities to modify money fund eligibility and free up significant dollars that can be moved into the bank, with wider spreads and very attractive returns on equity," he said.

Schwab currently opens money-market funds to clients who have minimum accounts per household of $500,000, or $100,000 for clients of independent investment advisers who use Schwab for trades and custodial services.

Schwab's upbeat 2014 forecast was underscored by its report that clients averaged 588,000 trades a day in January, up 17 percent from December and January 2013. Total clients assets at the end of January were $2.2 trillion, up 10 percent from a year earlier.

If Schwab has excess cash to use going forward, priorities will be to raise employee compensation, which had been constrained since 2009, Martinetto said. Bettinger said the firm also hopes to open more full-service branches in wealthy areas of the United States, and singled out Charlotte, North Carolina, the headquarters of Bank of America, as one area where it needs representation.

Schwab, which has been shifting its emphasis from do-it-yourself traders to people who want advice on their investments, has about 200 full-service branches, well below the more than 500 that competitors such as Morgan Stanley and Merrill Lynch boast.

Shares of Schwab, up 52.4 percent over the past 12 months, inched up 16 cents, or .62 percent, in trading on Wednesday.