Schwab offers mixed report on company outlook

After more than a year of revenue contraction and cost cutting, Charles Schwab Corp. said it is proceeding with plans to invest aggressively for growth this year.
But in a news release announcing its client activity report for February, the online brokerage also warned that revenue pressure persists — and that its first-quarter earnings will be as much as 4 cents lower than its fourth-quarter 2009 results.
“We are increasingly convinced that the interest-rate head winds pressuring our revenues are cresting,” chief financial officer Joe Martinetto said. He was referring to more than $200 million of fee waivers on money market mutual funds that the company absorbed last year to ensure that investors didn’t take losses on their cash-like investments.
But Mr. Martinetto cautioned against expectations for a quick revival. “While the revenue pressures we face may be cresting, they have yet to subside.”
Low interest rates also have dented net interest revenue that Schwab and other brokers build through margin-account lending, stock lending and other interest-sensitive sources. In an effort to attract volume, Schwab recently introduced flat $8.95-per-share online-trading commissions for all clients, a rate it had previously offered only to its best customers.
Rival TD Ameritrade Holdings Corp., which unlike Schwab and Fidelity Investments has not offered lower commissions, has also been hurt by low interest rates. But while rivals were cutting back marketing and other expenses to preserve capital during the prolonged downturn, TD Ameritrade boosted its investments to gain market share, chief executive Fred Tomczyk has said in recent presentations.
Schwab said today that it is reversing its spending philosophy, and expects first-quarter compensation expenses to rise by about 8% from the last quarter of 2009. The company has been selectively hiring sales and project-related staff, has begun its 2010 payroll tax accruals and is ramping up a national advertising campaign aimed at IRA investors. Total marketing expense this quarter should rise by 25% over the previous quarter, it said.
Mr. Martinetto said management fee waivers on the money market funds “are likely to creep up by approximately 15% between the fourth and first quarters, due to the continuing impact of reinvesting maturing assets at lower rates,” resulting in even lower net income than in the earlier quarter.
Reporting on its February numbers, Schwab said new and existing clients added net new assets of $7.9 billion during the month, up from $5.5 billion in February 2009 and $6 billion in January of this year. But the February figure is still down from the $10.2 billion in net new assets Schwab recorded in December.
The company ended February with $1.4 trillion of total client assets, up 37% from the year-earlier period and up 2% from the end of January.
Daily trades throughout Schwab fell 15% from January to 302,600, and were also 14% below the trading volume of February 2009. In the firm’s Advisor Services unit, which caters to clients of registered investment advisers, trades fell 13% from January and 34% from February 2009 to an average of 18,800 daily transactions.
In another reflection of low rates, customers for the 11th consecutive month withdrew cash from their money market accounts, though the outflow fell to $757 million from about $2 billon and higher in most of the previous months. With the exception of money markets and the firm’s large-cap stock funds, which suffered $344.7 million of outflows last month, Schwab registered net gains in its other fund categories. The strongest inflows were recorded in taxable bond funds, which gained $1.7 billion of new money in February and $2.8 billion in January. Taxable bond funds have been by far Schwab’s most popular vehicles for at least 13 months.

Related Topics: Charles Schwab & Co.