Sluggish trading and low interest rates led to a 45 percent drop in profit at Charles Schwab Corp , matching its own worst-case-scenario forecast, but the brokerage said the worst has passed.

For the first time, the largest U.S. discount broker said it could be on the hook for as much as $890 million in litigation related to a YieldPlus fund case. Analysts said a related $11 million charge caused Schwab to miss Wall Street expectations in the first quarter.

Shares of Schwab were down 1 percent at $19.16. The company stood by an earlier revenue and cost forecast for this year.

We believe that the worst of the environmental pressure on our revenues is now behind us, and that our strong business momentum will help us achieve improving financial performance in the coming months, Chairman Charles Schwab said.

Schwab said first-quarter profit fell to $119 million, or 10 cents per share, missing the average analyst forecast by a penny, according to Thomson Reuters I/B/E/S. A month ago, the company said per-share earnings could be as low as 10 cents.

The YieldPlus charge was the reason Schwab missed expectations, said Richard Repetto, analyst at Sandler O'Neill. This is the first time they acknowledged that maximum liability could be $890 million, he added.

Trading in the first quarter dropped 9 percent from a year earlier, when markets raced to a 12-year low, while near-zero interest rates compelled the company to waive $125 million in money market fees, higher than last quarter.

The waivers, which pinched revenue in the last few quarters, probably will not rise, Chief Financial Officer Joe Martinetto told Reuters. We're pretty much at the high water mark now, he said.

With the U.S. Federal Reserve keeping rates low to kick-start the economy, fund managers such as Schwab and rival TD Ameritrade Holding Corp waive fees in an effort to retain client investments.

Quarterly revenue dropped 12 percent to $978 million, below analysts' expectations of $982 million. Asset management fees fell 16 percent, undercut by mounting fee waivers.

Trading revenue fell 19 percent. The measure of daily trading fell 9 percent from last year and was flat from February to March. Trading activity is below last year's records, showing a multi-quarter decline in market volatility.

This was the third quarter in a row that Schwab lowered profit expectations ahead of its financial report, each time sending its shares lower. The shares are about flat year to date, having recovered from a drop in January and February that stemmed in part from a cut in customer trading fees.


A judge ruled last month that Schwab violated federal law when it failed to get approval from shareholders of its YieldPlus mutual fund before putting roughly half the fund's assets into uninsured mortgage-backed securities.

News of the case doesn't seem to be having any impact with the clients, and really isn't affecting the overall state of the business, Martinetto said.

A May 10 trial date is set.

Schwab accrued $11 million connected with the litigation in the latest quarter, and said it has not established a reserve for potential liabilities.

The final outcome remains uncertain, but the small relative charge ($11 million) could signal a better outcome than some may have feared, UBS analyst Alex Kramm wrote.

(Reporting by Jonathan Spicer; Editing by Gerald E. McCormick, Lisa Von Ahn and Robert MacMillan)