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