* Second-quarter earnings per share 18 cents vs est 19 cents
* Revenue rose 4 percent; expenses up 9 percent
* Shares down 3 percent
By Jed Horowitz
July 16 Brokerage giant Charles Schwab Corp
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
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
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
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"
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.