EUR 850.00 For Business Accounts Only

Morningstar | New Morningstar Analyst Report for Charles Schwab

Charles Schwab reported record operating profits of $3.65 billion in 2017, and operating profits should rise significantly in the following years from the compound effect of revenue growth and operating margin expansion. We project that over the next five years, operating income will approximately double from 2017's level due to the effect of higher interest rates, growth of the company’s bank, recent strong growth in client assets, and the effect of a lower corporate tax rate. Net interest income is highly profitable, with management aiming for a majority of interest-rate-related revenue to fall to the bottom line. This mix shift to more net interest income will expand operating margins.There are three legs to the net interest income story. The first is the effect of higher short-term rates on the company’s floating-rate portfolio. The second is the repricing of the other portion of the company's fixed-rate bank portfolio, which has a duration of around four years. Only a fraction of this portfolio reprices annually, so a steeper yield curve has always been an earnings driver that would play out slowly over years. The third leg is management's intention to continue shifting client cash balances from money market funds to its bank. Even with money market fund fee waivers reversed, the company has only around a 50-basis-point revenue yield from its money market funds, while it can earn more than 200 basis points at the bank. To support the bank growth, Schwab has had to retain earnings to bolster its regulatory capital. We wouldn't be surprised if the company's dividend increases 25% to 50% after the majority of remaining client cash balances have been moved into Charles Schwab's bank.Schwab Intelligent Portfolios is an interesting opportunity that is illustrative of the company's wide moat. Charles Schwab is one of the only companies that can make online advisory for the masses profitable, because of its scale-driven operational cost advantage, distribution platform, and proprietary products. Whatever developments occur in the retail brokerage and wealth management industry, Charles Schwab has the resources and capabilities to adapt to them.