Schwab Stock Jumps 5% on Record Net Inflows


By Dave Kovaleski, ValueWalk, Saturday, January 25

Shares of Charles Schwab (NASDAQ:SCHW) were moving higher Tuesday following the release of the firm’s fourth quarter earnings.

Schwab easily beat estimates, generating $5.3 billion in revenue, a 20% year over year jump. It was also better than estimates of $5.2 billion.

The financial services giant reported net income of $1.8 billion, or 94 cents per share, which was some 84% better than the same quarter a year ago. On an adjusted basis, net income hit $1.9 billion, or $1.01 per share, which topped estimates of 91 cents per share.

There were a few major reasons for Schwab’s gaudy numbers in the quarter. Let’s take a closer look.

Record net inflows last year

While it was a strong quarter for Schwab, the gains look much better when compared to a very challenging fourth quarter of 2023. Schwab had one of its most difficult years in recent history in 2023 as it was hammered by the banking crisis.

Schwab saw customers move cash from sweep accounts into high-yielding investments due to high interest rates, which hurt earnings. Also, deposit outflows caused Schwab to secure other sources of liquidity, which was more expensive with higher rates attached to the borrowings.

On top of that, Schwab was hit with a $172 million special assessment from the FDIC in the same quarter a year ago to shore up the Deposit Insurance Fund.

That said, a lot of good things happened for Schwab in Q4, starting with it fully integrating its acquisition of Ameritrade. The integration of the blockbuster Ameritrade brokerage acquisition from a few years ago raised net new assets for Schwab by 19% in the quarter. For the full year, Schwab brought in $115 billion in net new assets, bringing full year total to $367 billion, a 20% increase over 2023.

Boost from Ameritrade integration

Further, new brokerage account openings jumped 23% year-over-year in the quarter to 1.1 million. That increased total active accounts to 36.5 million. In addition, Schwab saw $15 billion in net inflows into its funds and ETFs, bringing the full-year total to a record $55 billion. Converted retail Ameritrade clients accounted for approximately 35% of net inflows.

This contributed to a 22% increase in asset management fee revenue to $1.5 billion, and a 14% jump in trading revenue on its platform. Trading revenue could benefit in 2025 if Schwab approves spot Bitcoin trading on its platform, as CEO Rick Wurster suggested last year.

Additionally, its net interest income increased 19% due to lower deposits costs, which were helped by lower interest rates. The lower interest rates also led to a $35 billion rise in sweep cash, including $25 billion in December.

“In the fourth quarter of 2024, we added $115 billion in core net new assets, bringing asset gathering for the year to $367 billion – a 4.3% annualized growth rate,” Wurster said. “This 20% annual increase in net new assets reflects our ongoing progress following the Ameritrade integration.”

Margins spike on expense management

The other story for Schwab this quarter was its expense management and its ability to expand its margins.

Schwab was able to reduce non-interest expenses by 7% year over year to $3.0 billion. A good chunk of that was not having to pay the FDIC’s special assessment. However, Schwab also cuts costs on communications, occupancy and equipment, advertising, and other areas, stemming from the streamlining of operations due to the Ameritrade integration.

The revenue gains and cost reductions led to a huge spike in margins, as the profit margin grew from 26.8% a year ago to 43.3% in Q4. For the full year, the profit margin was 39.2%, up from 33.9% in 2023.  

Heading into 2025, it is somewhat of a mixed outlook for Schwab. Schwab thrives in strong markets and economies, and it is hard to get a read on how things will play out in what could be a transitional year. Wall Street analysts have a price target of $84 per share, which is just a 3% increase over the current $80 per share price.

The stock is not all that cheap either, given it underperformed last year, with a P/E ratio of 29 and a forward P/E of 19. On the other hand, the Ameritrade acquisition will start to be accretive to earnings going forward and the margin expansion is impressive. Schwab looks to be a solid long-term option, but investors may want to wait for a better opportunity to jump on board.

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