Record Earnings Year Expected for Schwab

Wide-moat-rated

Schwab’s earnings have two buffers in the event of a market correction. The first is the company’s net new asset growth rate. Excluding the effect of outflows from a mutual fund clearing client in the first quarter, Schwab had annualized net new asset growth of 7.8%. In the past three years, average net new assets increased over 5% on average. In our view, net new asset growth should serve to balance out much of a decrease in assets and revenue during a normal market correction. The second buffer the company has right now is growth in net interest income. Even if interest rates remain at current levels, we forecast that Schwab is likely to increase its balance sheet upward of $30 billion through the end of the year. Assuming a 2% net interest spread, this would be roughly equivalent to the revenue yield on an additional $200 billion of client assets. Combining these two buffers, Schwab could see an 11% decrease in client assets and still keep earnings relatively flat, in our view.

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