By Jed Horowitz
NEW YORK Jan 16 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
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
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
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
"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
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
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
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
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.