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Increased Client Activity to Aid Schwab (SCHW) Q3 Earnings

Charles Schwab SCHW is scheduled to report third-quarter 2020 results on Oct 15, before market open. Its revenues and earnings are likely to have declined in the quarter on a year-over-year basis.

In the last reported quarter, the company’s earnings lagged the Zacks Consensus Estimate. Lower revenues and a rise in expenses hurt the results.

Schwab does not have an impressive earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in only one and lagged in three of the trailing four quarters, with a surprise of 0.7%, on average.

The Charles Schwab Corporation Price and EPS Surprise


The Charles Schwab Corporation price-eps-surprise | The Charles Schwab Corporation Quote

Moreover, activities of the company during the third quarter failed to encourage analysts to revise earnings estimates upward. Over the past seven days, the Zacks Consensus Estimate for its earnings for the to-be-reported quarter has been revised 3.9% lower to 49 cents. Also, the figure indicates a decline of 33.8% from the year-ago reported number.

The Zacks Consensus Estimate for third-quarter sales is pegged at $2.47 billion, which suggests a 9% decline from the year-ago quarter’s reported figure.

Key Development During the Quarter

In July, Schwab completed the acquisition of Naples, FL-based Wasmer, Schroeder & Company, LLC, which is expected to strengthen its position in the brokerage industry. The deal was announced in February.

Update on the Schwab-TD Ameritrade Deal

On October 6, 2020, Schwab concluded the acquisition of TD Ameritrade for roughly $22 billion, which led to the creation of a behemoth in the online brokerage space, with combined client assets of more than $6 trillion and serving nearly 28 million brokerage accounts.

The all-stock deal, announced in November 2019, will deliver substantial scale to Schwab, helping it to drive long-term growth and serve a wide spectrum of customers at lower costs.

Now, before we take a look at what our quantitative model predicts, let’s check the factors that are likely to have impacted Schwab’s third-quarter performance.

Key Factors at Play

Similar to the first half of the year, the coronavirus outbreak-related concerns continued to give rise to market volatility during the third quarter of 2020.

Notably, Schwab opened 206,000 new brokerage accounts in July, up 60% year over year, and 202,000 accounts in August, up 60% year over year. Moreover, the Zacks Consensus Estimate for the company’s active brokerage accounts for the third quarter is pegged at 14,298, which suggests an improvement of 18% from the previous year’s reported number.

Thus, driven by a rise in volatility along with increased client activity, Schwab’s trading revenues are expected to have improved in the quarter.

Also, the company is expected to have witnessed a rise in total client assets and average interest-earning assets in the to-be-reported quarter.

The Zacks Consensus Estimate for total client assets for the to-be-reported quarter is pegged at $4.4 trillion, indicating 15.8% growth from the previous year’s reported figure. Moreover, the consensus estimate for average interest-earning assets is pegged at $384 billion, which suggests growth of 44.9% year over year.

However, despite expected growth in assets, Schwab’s net interest revenues are not likely to have witnessed much improvement in the quarter because of near-zero interest rates.

Notably, in mid-September, the company announced that third-quarter total net revenues “are running slightly lower” than the previous quarter. This is because the sharp reduction in long-term rates has resulted in an acceleration of prepayment activity in the mortgage-backed securities held within the company’s investment portfolio.

Schwab’s operating expenses have remained elevated over the past few quarters. Moreover, because of continued regulatory spending as well as ongoing investments to drive operating efficiency, overall expenses are expected to have remained high in the to-be-reported quarter.

What the Zacks Model Unveils

According to our quantitative model, chances of Schwab beating the Zacks Consensus Estimate this time are low. This is because it does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or better — which is required to be confident of an earnings surprise call.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Earnings ESP: The Earnings ESP for Schwab is -5.29%.

Zacks Rank: The company currently carries a Zacks Rank #4 (Sell).

Stocks Worth a Look

Here are some finance stocks that you may want to consider as these have the right combination of elements to post an earnings beat in their upcoming releases, per our model.

U.S. Bancorp USB is scheduled to release quarterly results on Oct 14. The company has an Earnings ESP of +7.70% and currently carries a Zacks Rank of 3. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Truist Financial Corporation TFC is slated to report quarterly earnings on Oct 15. The company, which carries a Zacks Rank of 3 at present, has an Earnings ESP of +6.99%.

The Earnings ESP for The Bank of New York Mellon Corporation BK is +1.97% and it carries a Zacks Rank of 3, at present. The company is slated to report quarterly numbers on Oct 16.

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