Author Topic: SCHW - Charles Schwab  (Read 2274 times)

Spekulatius

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Re: SCHW - Charles Schwab
« Reply #10 on: July 01, 2020, 05:52:03 PM »
I have owned Schw since 2012 and recently doubled my position as the stock fell under 34.  Schw and Amtd are merging...their 2019 combined net income was 5.4 billion (with net interest margin at 2.4%).  After the merger they will have 1.9 billion shares outstanding, therefore the combined entity is trading at 61 billion.  Mgmt claims they will realize 1.8 billion of cost synergies within a few years.  They also get some easy to calculate revenue synergies (they get to lower the rate on swept cash amtd paid to td bank and transfer that cash to schw bank in increments over time) but they were careful not to put any numbers on it (i believe they reluctantly said 1 billion is reasonable).  They also claimed that over time they would capture more of both numbers.  Anyway, I'm using 7-7.5 billion of earning power, or 8 times their earnings in a couple years.  However, schw consistently grows net new assets 5-8% and they have a natural revenue lift at 70% of the rise in the stock market or 3.5-4% over time (with rising margins).  As you can see their model produces high single digit revenue growth and their multiple historically reflected that and the fact that they are the low cost provider.  Interest rates are the biggest driver of earnings and their historic net interest margin of 4% doesnt look likely anytime soon.  But even with 2% NIM's with the rapidly increasing cash balances of the last few years still makes this stock very cheap.

Speaking of interest earning assets - they are exploding. 2019 YE balance was $274B; and it was growing by about 25B a year. At the end of May it's $361B!  In May alone, they added 1.25MM new brokerage accounts - that's 10X normal.

So business is booming. Much of that cash surge, I'm assuming, is from customers raising cash in the downturn ( March saw a $40B increase from February).

Looking backwards, NIM scraped along at ~1.6% from 2012-2015. That's probably where it's headed again. Of course, back then they only had $100-130B in interest-earning assets. Making 1.6% on 370B is almost $6B right there, and that doesn't count AMTD.

Schwab really is a beast. It's kind of mind blowing, this operation. They have 19,500 employees, custody for 7,000 RIA's
(including mine), and process a mind-boggling number of transactions. And where do they make most of their money? Scraping a couple of basis points on the cash their customers are too lazy to put in a money market. They have 14MM brokerage accounts, which by my math has an average of $26,500 cash each.

This thread has re-awakened my interest. Thx for the thread.

Edit: It's probably unwise to take that 370B as gospel. It may not last, if customers put it to work; and I'm not sure they can make margin on all of it (last Q it was noted they parked something like $58B of the cash at the Fed).

Thanks for thr number, they are helpful. The headwinds from lower NIM for the next years is something one needs to content with. SCHW is similar to banks in this respect, however compared to banks, they donít have to content with the potential ugly loan losses. I am pretty sure that 10 years from now, they will be in as strong and perhaps stronger position relative to competition as they are today.
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sundin

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Re: SCHW - Charles Schwab
« Reply #11 on: July 03, 2020, 01:47:06 PM »
Similar to banks, scale and trust would be the moat for Schwab. Its meaningful to see that TD still held onto 13% of the business once 25%+ of their business was coopted to zero fees by Schwab before purchase(this will make for a great business case). The strategic fit for TD was the deposit base and network for growth.

Outside bull case of a steepening yield curve, potential for revenue growth is there with increased deposit growth and new fee generating products offerings like chequing accounts/robo advisors/potentially offering loans as well. This is likely a good bet.


cmlber

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Re: SCHW - Charles Schwab
« Reply #12 on: July 03, 2020, 03:43:28 PM »
Similar to banks, scale and trust would be the moat for Schwab.

Scale is the moat, trust/brand/stickiness all make it difficult for competitors to get to Schwab scale.  They are going to eliminate 60-65% of TD's cost base as a merged entity.  Said another way, a competitor with $1.3 trillion in assets (not small...) has to operate with $2 billion of expenses that Schwab won't have... 

The only real scaled competitor is Fidelity and there's no reason for them to compete aggressively to steal each others clients. JPM/BAC/MS all have ~$3T to Schwabs $5.2T (stealing 5-7% market share every year) in client assets, but with business models that are destined to lose clients to Schwab and Fidelity.