Near-zero U.S. interest rates forced Charles Schwab Corp to slash the asset management fees it charges clients, weighing on its profit -- and much more slashing is expected before year end.
The big online brokerage waived $30 million in fees from money market funds in the second quarter, up from only $6 million in the previous quarter, so that investors can pocket at least a 2 percent yield, Schwab's CFO told Reuters.
The waivers contributed to a 31 percent second-quarter profit drop, in line with expectations. But CFO Joe Martinetto said in an interview Schwab still expects to waive a total of $200 million in fees this year as the company waits for the Federal Reserve to tighten rates again.
We're certainly paying for what the Fed has had to do in terms of lowering interest rates here, to get the economy going, Martinetto said. As that starts to pass, you'll see a pretty rapid improvement in our financial picture.
Schwab, by far the largest U.S. online brokerage, warned earlier this year it could waive up to $200 million in fees. Martinetto said on Thursday that remained a good estimate, adding: It's going to probably be a little more back-end loaded than we had anticipated.
The company's shares slid 2.6 percent on the Nasdaq, performing slightly worse than peers, after a strong bounce earlier this week.
Although Schwab's asset management fees dropped 21 percent in the second quarter, that was offset by an 18 percent rise in trading revenue as the company's investment advisers and retail customers dove in to take advantage of the market rebound.
The company, which runs a fast-growing bank and offers investment advice, benefited from robust trading activity in April and May before a 15 percent slump in daily average revenue trading, or DARTS, in June.
Market volatility eased going into the summer, which could signal lower trading revenue ahead. Richard Repetto, analyst at Sandler O'Neill, said trading declined by approximately 20 percent more so far in July. The decline in volatility and the summer seasonalities are resulting in a pullback in trading, the analyst said.
Martinetto said individual investors have been a little slower to react than the investment advisers under Schwab's custodial umbrella. They're still probably a little shell-shocked and haven't made a big move back into the market yet.
MORE WAIVERS, BREAKAWAY BROKERS
The San Francisco-based company earned $205 million, or 18 cents per share, in the quarter, down from $295 million, or 26 cents per share, a year earlier. Revenue fell 17 percent to $1.09 billion. The results were spot on analysts' average estimates.
Investors pin much weight on how Schwab handles a prolonged period of low interest rates, intended to jump-start lending amid the recession.
The company is now waiving a portion of fees on 19 of its 29 money market funds, Martinetto said, adding higher waivers on taxable funds have offset lower waivers on Treasury funds.
Despite the recession, which has rocked the financial sector, Schwab added $17 billion in new assets in the quarter as it continued to snap up individual investors and so-called breakaway brokers disillusioned or dislodged in the financial crisis.
The company attracted 74 newly independent advisors in the first half of the year, up 54 percent from last year, the CFO told Reuters. He added the pipeline of potential breakaway brokers in talks with Schwab is pretty full, but it's a longer term cyclical trend ... that will build over time.
Schwab counted $1.2 trillion in client assets at the end of last month -- comparable to the largest U.S. brokerages. It also competes with Fidelity Investments, as well as online brokers TD Ameritrade (AMTD.O) and E*Trade (ETFC.O).
Schwab shares were off 47 cents at $17.62 in early afternoon trading. They jumped nearly 10 percent in the three days prior to the earnings report.