Rise in expenses puts major dent in company's 2Q financials
Shares of The Charles Schwab Corp. sold off Tuesday on disappointing financial results that showed the company is still struggling to hold the line on expenses.
The company's stock traded down more than 5% at one point in active trading Tuesday before recovering some of the loss. Schwab shares closed the day at $21, or down 3.27%.
Net income for the second quarter ended June was off 6.9% from a year ago, to $256 million. The $0.18 per share profit was a penny less than the estimates of 23 analysts compiled by Thomson Reuters.
Expenses were up 8.7% to $925 million for the quarter, negating a 4.2% rise in net revenue.
In a statement, Schwab chief financial officer Joe Martinetto blamed the expense jump to “temporary and seasonal factors that elevated compensation and benefits expense.”
Those expenses were related to earlier changes the company made to employee bonuses, health savings account contributions and equity-incentive vesting schedules. Mr. Martinetto added that “careful headcount management will result in limited growth during the rest of 2013” and an improvement in profit margins and earnings.
A key revenue line, net interest revenue, rose by a modest 3.2%.
Schwab's net interest revenue is more sensitive to changes in short-term interest rates, which have held relatively steady, Mr. Martinetto said. The company's net interest margin of 149 basis points was down 2 basis points from the first quarter, said Sterne Agee analyst Jason Weyeneth in a report Tuesday, and is expected to bottom this year in the mid-140 basis-point range. “We remain cautious on the stock given a stretched valuation despite the leverage to higher short-term rates and substantial long-term upside,” Mr. Weyeneth wrote.
Despite some headwinds overall at the company, Schwab's independent RIAs continued to bring in net new assets, adding $13.6 billion in the second quarter. Overall, though, Schwab suffered a net asset drain of $21.7 billion in the first quarter due to the loss of a mutual fund clearing client.
The company had $2.05 trillion in total client assets as of June. Its 7,000 independent advisers accounted for $900 billion of that amount.
Including assets managed by Schwab's affiliated RIAs, more than $980 billion of client assets are “currently receiving some form of ongoing advice,” said Schwab chief executive Walt Bettinger in a release.
Building fee-based “advised” assets is a critical goal for the company. Mr. Bettinger noted that in late May, Schwab rolled out a dividend-growth strategy under its new ThomasPartners asset management unit, which Schwab acquired last December for $85 million in cash. The deal added another proprietary manager to Schwab's existing Windhaven Investment Management Inc. unit, a tactical manager of exchange-traded-fund portfolios.
The company did not release updated asset data for ThomasPartners, which had $2.3 billion under management when it was acquired.
Assets at Windhaven totaled $17.3 billion at the end of June, up 56% from the second quarter of 2012, the company said. Windhaven had $3.9 billion in assets when Schwab bought the manager in 2010 with the hope of attracting investors interested in downside protection.
So far, most of the Windhaven assets have come from retail clients, not Schwab-affiliated advisers.
