Although it was in line with their own projections, profits for Charles Schwab’s (Nasdaq:SCHW) missed the streets’ estimates, and fell 47 percent to $164 million in the fourth quarter, or 14 cents a share. Last year the discount broker was able to generate $308 million, equal to 27 cents a share during the same quarter. The street was looking for 15 cents a share for the quarter.
Revenue was also a problem at the company, as it fell by 23 percent to $986 million year-over-year. It is obvious now as to why Schwab cut down on their brokerage fees recently, undercutting all their major competition at the times, as it was suspected they were not only being pressured on profits, but on revenue as well.
The company also announced in its earnings report that they were going to offer an additional 26.3 million in common shares to investors in order to raise money to increase its deposit base as well as migrate some of the balances of their clients into Schwab Bank from the money market funds, which were one of the major factors in the dismal performance of the company for the quarter.
CEO Walt Bettinger said in a press release, “The broad equity indices have shown sustained improvement from their March 2009 lows and we have seen clear indications that clients are increasingly engaged with us in finding the right way forward in this shifting environment. Our ongoing success in building our client base and attracting new assets has led to significant growth in the earnings power of our balance sheet. The company’s average balance of interest-bearing assets, which are primarily funded by client cash inflows, rose by $14.8 billion, or 34%, to $58.6 billion between 2008 and 2009. Over the near term, however, the net interest revenue generated by this growing asset base has been severely impacted by continued declines in the short-term interest rate environment, even as the overnight Fed Funds rate has been at essentially zero since late 2008. As we’ve been discussing for some time, with declining investment yields and essentially no room left to reduce liability costs, the resulting drop in our net interest spread has outweighed balance sheet growth, and net interest revenue declined by 28% in 2009.”
“Money market fund fee waivers caused by declining rates rose to $110 million in the fourth quarter, bringing the full-year total to $224 million, which caused asset management fees to decline by 20%,” Mr. Martinetto said. “In addition, while client trading activity remained healthy in 2009, trading revenue declined by 8% as the market volatility and record-setting volumes of late 2008 eventually eased. With no sign of higher short-term rates on the horizon, we implemented a series of expense reduction measures in 2009 that enabled us to lower costs by 7%, which in turn helped the company achieve a 30.4% pre-tax profit margin and a 17% return on equity, right in line with our expectations for the year given the environment.”
Annual results revealed profits dropped to $787 million to 68 cents a share, a 35 percent fall from 2008.
