The company might have fallen short of last quarter's top-line estimates, but the earnings "beat" that brokerage firm Charles Schwab (SCHW 0.32%) dished out earlier this week more than offset the revenue miss. The organization earned $0.93 per share versus expectations of $0.90, and that figure was up 21% from the year-ago bottom line of $0.77 per share. Schwab's stock has moved markedly higher since those numbers were posted.
This buying spree, however, possibly overlooks three big, bullish details buried in the company's fiscal first-quarter report, details that have longer-term implications. Each of them points to strength that will be far longer-lived than just one quarter. Here's a closer look.
1. Higher interest rates lifting net interest income
As a borrower, you might not be a fan of recent rate hikes. If you're a lender, though, you're loving it. Higher interest rates mean the profitability of loans is greater than it is when rates are lower.
To this end, Charles Schwab's net interest costs grew from $136 million for the first quarter of 2022 to $1.25 billion during the three-month stretch ending in March. Net interest revenue soared from $2.3 billion to $4.0 billion. Result? Last quarter's net interest income of $2.8 billion was a 27% year-over-year improvement, extending the windfall growth seen in the latter half of last year.
Image source: Charles Schwab Corp. Figures are in millions of dollars.
And this increase is here to stay. While it's unlikely that Schwab will be able to maintain its net interest income's current growth pace, as long as rates remain near their current points, interest income itself should continue to roll in at its present levels.
2. Schwab still has plenty of liquidity
Most financial stocks were upended following the collapse of SVB Financial's Silicon Valley Bank in early March, but Schwab shares were hit particularly hard. The market broadly presumed its customer base and asset base were much like Silicon Valley Bank's, which could have forced the brokerage house to liquidate securities at a big loss to cover a wave of withdrawals.
Now we know the panic wasn't merited. While Schwab's total asset base did contract since the end of last year, it didn't shrink by much. Notably, it's still got $155.8 billion in highly marketable available-for-sale securities. That's a marked decline from the previous quarter's comparison of $196.6 billion, but it's still more than enough to cover the company's immediate liquidity needs. Its held-to-maturity securities can also be sold if absolutely necessary, although that's typically a last-resort option.
Image source: Charles Schwab Corp. Figures are in millions of dollars.
Moreover, with the fallout from Silicon Valley Bank's collapse now subsiding, Schwab can safely begin re-optimizing its asset mix.
3. Still collecting management fees
Finally, while much recent attention has been given to liquidity concerns and slumping trading revenue, investors might be missing a key nuance about Charles Schwab: It doesn't rely on stock (or bond) trading as a major profit center. It serves a huge crowd of investors that love and own mutual funds and exchange-traded funds that generate fee income regardless of how they're performing and regardless of how stoked others are about buying and selling stocks.
The specifics: During the first quarter of this year, Schwab collected a little over $1.1 billion in asset management and administration fees. That's up slightly year over year despite the fact that the broad market has been down since, and -- let's face it -- much less compelling to be in.
Image source: Charles Schwab Corp. Figures are in millions of dollars.
Sure, Schwab would like its TD Ameritrade property to be driving more trading revenue rather then less. It was never the company's biggest business, though, and even then, trading revenue was only down 7% year over year last quarter. Given the circumstances, that's a relative victory.
More to like than not
Is this report everything it could be? Of course not. The brokerage/bank's available-for-sale assets are (or at least were) under a bit of pressure, even if that pressure is letting up now. It's also not clear when TD Ameritrade's customers' interest in trading will be fully rekindled. Charles Schwab has also suspended its stock-buyback efforts. These aren't details to ignore.
On balance, however, there's much more to like than to dislike about the company's first-quarter results. Chief among the details to appreciate is the fact that these strong results can be readily repeated. Interest income is recurring revenue. Asset management fees are also recurring revenue. Heck, even trading commissions are somewhat reliable revenue, although they slowed down a bit last quarter.
Take the hint. Charles Schwab's solid first quarter is a pretty good indication of what to expect for the remainder of the year and beyond, even if the market and the global economy simply tread water for a while.
