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Charles Schwab Sees Record Margins on Interest, Expense

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Rising margins

Charles Schwab (SCHW) reported a strong pre-tax margin of 39.4% in 2Q16, as compared to 36.2% in 2Q15. For 1H16, the company has reported a 38.3% margin, as compared to 34.0% one year previously. These rising margins have been helped by interest income, increased trades, and expense management, partially offset by subdued trading income.

The company reported operating expenses, excluding interest of ~$1.1 billion in 2Q16, as compared to $999 million in 2Q15.

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For the September quarter, margins are expected to be above 36%. There’s pressure on margins across the industry due to reductions in commissions as well as new offerings from FinTech companies. However, Charles Schwab is demonstrating a reverse trend in innovation and interest income. Its major expenses include compensation and benefits, professional services, and occupancy and equipment.

Here’s how a few of the company’s peers in the brokerage industry fared in terms of operating margins in their last fiscal years:

  • Interactive Brokers Group’s (IBKR) operating margin was 45.4%.
  • TD Ameritrade’s (AMTD) operating margin was 41.1%.
  • E*TRADE’s (ETFC) operating margin was 31.0%.

Together, these companies make up 1.4% of the Vanguard Financials ETF (VFH).

Advisory services help margins

Charles Schwab is focusing on improving value for its clients by providing advisory services, innovative ways of executing trades, tech-based advancements. Its total expenses as a percentage of average client assets have fallen at a faster pace during the past decade, as compared to its revenue as a percentage of average client assets.

Its expenses as a percentage of average client assets fell to 0.17% in 2Q16 from 0.32% in 2004. However, revenues as a percentage of average client assets fell to 0.26% in 2Q16 from 0.39% in 2004. This fall has resulted in a recent pre-tax profit margin of 34%–38%, as compared to 16% in 2004.

On a quarter-over-quarter basis, Charles Schwab’s compensation and benefits fell 4% to $602 million. However, professional services, occupancy and equipment, and communications saw marginal rises in the June quarter.

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