Chuck Talks to Profits

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Investors may sometimes hate market volatility, but Charles Schwab (Nasdaq: SCHW  ) eats it up.

The discount broker reported third-quarter earnings this morning, with revenue besting analyst estimates while earnings per share registered a slight miss. Revenue jumped 11% to $1.2 billion. This translated into a $220 million profit, or $0.18 per share, rising 77% from the year-ago quarter. Consensus estimates called for $1.19 billion in sales and $0.19 earnings per share.

Daily average revenue trades, or DARTs, surged 39% year over year as market volatility brought in trading activity, and average revenue per trade fell to $12.04. While DARTs are an important metric of client trading activity, Schwab relies less on this revenue source compared with other brokers. Trading revenue accounted for 21% of revenue for the quarter, compared to 41% for TD AMERITRADE (Nasdaq: AMTD  ) . E*TRADE Financial (Nasdaq: ETFC  ) is in the same ballpark as Schwab, with 20% of revenue coming from commissions.

Schwab waived $160 million in money market fees in order to maintain positive yields because of the difficult interest rate environment. The broker opened 191,000 new accounts during the quarter and ended with 8.5 million active brokerage accounts. Bank accounts totaled 769,000, and total client assets tallied up to nearly $1.6 trillion.

Brokerage firms are being held hostage by the Federal Reserves low-interest rate policies, as 37.5% of the quarter's revenue is from net interest revenue. The low rate environment constrains the interest rate spread that Schwab earns, not to mention the aforementioned fee waivers the company has implemented to do right by clients. Once rates start to rise, Schwab and other brokers will see interest earnings pounce higher.

Once upon a time, if you called to talk to Chuck, I might have picked up the phone. I can attest that Schwab's internal culture really emphasizes clients first. Chuck's philosophy has always been that if you take care of clients, the bottom line will take care of itself.

Add Schwab to your watchlist to see its profits pounce when rates rise again.

Fool contributor Evan Niu used to be a licensed stockbroker at Charles Schwab. He holds no position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Charles Schwab. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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