September 15, 2010 / 3:50 PM / in 7 years

UPDATE 2-Schwab mutual fund, card costs hit 3rd qtr

* Sees Q3 adjusted earnings comparable to $205 mln in Q2

* August net new assets $4.2 bln, total now $1.39 trillion

* Q3 profit to be hit by $150 mln pretax charges (Adds analyst comment, updates share price)

By Joseph A. Giannone

NEW YORK, Sept 15 (Reuters) - U.S. brokerage giant Charles Schwab Corp (SCHW.N) on Wednesday warned its third-quarter profit would be hurt by the costs of covering money-market fund losses suffered by customers in 2008 and a charge related to two struggling credit card programs.

Third-quarter earnings will include about $130 million in pretax charges for covering losses recognized by Schwab money market mutual funds that had invested in a structured investment vehicle that defaulted in 2008. Schwab also posted $20 million of charges from two credit card programs to be discontinued amid “challenging card industry economics.”

Excluding the two charges, Schwab said third-quarter results will be “comparable” to the $205 million reported in the previous period.

Analysts said the charges were disappointing, but that the firm’s asset-gathering and trading results showed resiliency. Credit Suisse analyst Howard Chen said Schwab’s guidance of 17 cents a share of earnings was in line with his expectations.

    “While market and macro factors -- most notably the adverse impact of near-zero short-term interest rates -- continue to obscure the earnings power of the franchise, we continue to like the asset-gathering story,” Chen said in a client note.

    Net new assets flowing into the San Francisco company last month totaled $4.2 billion, compared with $6.2 billion in July. Total client assets fell by 2 percent to $1.39 trillion during August, a period when the benchmark S&P 500 Index equity markets fell 4.7 percent.

    Customer trading during August was down 5 percent from the prior month, and 16 percent lower than the year-earlier period, as a seasonal slowdown was exacerbated by customer worries about the economy.

    “With interest rates and equity-market valuations remaining at or above their year-to-date lows, our operating performance continues to recover,” Schwab Chief Financial Officer Joe Martinetto said in the latest monthly activity update.

    He added Schwab expects to report higher third-quarter revenue, the firm’s first year-over-year quarterly revenue increase since the second quarter of 2008.

    The company’s shares were down 3 cents at $13.82 in late-morning trading on the New York Stock Exchange. (Reporting by Joseph A. Giannone, editing by Dave Zimmerman)

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