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Schwab Is Targeting Strong Operating Margins in 2017

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Dec. 4 2020, Updated 10:42 a.m. ET

Augmenting operating margins

Charles Schwab (SCHW) has improved its operating margins on improved interest income, administration fees, asset management fees, and new assets. The company has also worked on expense management and has seen margins above 40.0% in recent quarters. In 3Q16, the company posted a strong pretax margin of 41.5% compared to 36.5% in 3Q15.

In the first nine months of 2016, Schwab posted a 39.4% margin compared to 34.9% in the corresponding period last year. Margins rose mainly on interest income, increased trades, asset management fees, and expense management. The company’s major expenses include compensation and benefits, professional services, and occupancy and equipment. It reported operating expenses excluding interest of ~$1.1 billion in 3Q16 compared to $1.0 million in 3Q15.

Brokerage firms have faced margin pressures due to falling commissions. Some firms with banking models have coped with lower commissions by gaining interest income. Brokers are also focusing on customized solutions and technology-driven trading for their clients in a bid to attract more assets.

Charles Schwab is demonstrating a positive trend through advisory, asset management, and interest income.

Here’s how a few of Schwab’s competitors in the industry performed in terms of operating margins in their last fiscal years:

  • TD Ameritrade Holding (AMTD): 41.1%
  • E*Trade (ETFC): 31.0%
  • Interactive Brokers Group (IBKR): 45.4%

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

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Advisory dominates

As of November 2016, Charles Schwab was managing ~$1.4 trillion of its total assets through advisory services, an 8.0% rise year-over-year. The rise and quantum of assets reflect a strong shift of retail assets toward advisory-based services. The company is working on a long-term strategy of focusing on customized requirements by providing advisory services, technology support, and advancements.

On a sequential basis, Schwab’s compensation and benefits rose 1.0% to $609.0 million. Professional services rose 5.0% to $131.0 million, and occupancy and equipment fell 1.0% to $100.0 million in 3Q16.

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