7/18 ...Schwab profit down on U.S. Trust buy
(UPDATE: recasts, adds earnings details in graphs 4, 7-11)
By Jack Reerink
NEW YORK, July 18 (Reuters) - Charles Schwab Corp. (NYSE:SCH - news), the No. 1 U.S. discount and Web broker, said on Tuesday second-quarter profit fell 20 percent due to a charge for buying money management firm U.S. Trust, but it reported strong asset growth despite the recent stock market slump.
San Francisco-based Schwab, which has 7.2 million brokerage accounts, said it earned $137.1 million, or 9 cents per diluted share, in the second quarter. That compared with a profit of $170.5 million, or 12 cents per share, in the year-ago quarter. Net revenues rose 26 percent to $1.4 billion.
Schwab, which started as a discount broker some 25 years ago, earlier this year agreed to buy U.S. Trust for $2.7 billion, in a move to become a full-service brokerage. Excluding the $44 million charge for buying U.S. Trust and other acquisition charges totalling $17 million, Schwab's quarterly profits rose 17 percent to $198.8 million, or 14 cents per diluted share.
Schwab's stock price rose 1-7/16 to 38-3/4 in afternoon trading on the New York Stock Exchange as investors celebrated news that Schwab once again beat rival Merrill Lynch & Co. Inc. (NYSE:MER - news), the No. 1 U.S. full service brokerage, in asset growth for the quarter.
The operating results matched Wall Street's lowered expectations of 14 cents per share, according to market research firm First Call/Thomson Financial. Analysts in recent months had cut their profit forecasts for Schwab because the Nasdaq stock market and stock trading volumes slumped more than 10 percent in the quarter.
Investors typically trade less in a falling market, hurting Schwab's brokerage commissions and income from margin loans to investors who buy stocks with borrowed money. As a result, Schwab's operating results for the second quarter were a far cry from the record $284 million profit, or 22 cents a share, in the first quarter.
Despite the market slump, Schwab customers put $37 billion more into their brokerage accounts in the quarter, up 69 percent from a year ago but down 31 percent from the first quarter. The brokerage's total client assets rose to a record $931 billion, bolstered by the U.S. Trust acquisition.
``The asset generation is so strong that the stock is doing well,'' said analyst Guy Moszkowski of Salomon Smith Barney. Moszkowski contrasted Schwab's stock price gain with weakness in Merrill shares, which fell 3-9/16 to 128-7/16 on investor worries of slowing asset growth.
``That shows you investors can look beyond earnings,'' Moszkowski said. Merrill soundly beat analysts' expectations but Schwab's earnings at best matched and by some measures fell short of expectations, Moszkowski said, adding the Schwab earned about 13 cents a share excluding goodwill charges for the U.S. Trust buy.
Schwab's asset growth beat that of Merrill which reported $11 billion in new U.S. assets in the quarter, down 77 percent from the record first quarter. Merrill had beaten Schwab in asset growth in the previous two quarters, briefly ending the discount brokerage's long-held position as the No. 1 asset gatherer.
US Trust, which manages the assets of some 7,000 wealthy U.S. families, attracted $11 billion in new assets in the quarter, up from $9 billion in the first quarter, said Schwab's chief financial officer, Christopher Dodds, in a telephone interview.
Schwab processed around 240,000 customer stock trades per day in the quarter, up 50 percent from 160,000 a day in the year-ago period but down from a record 310,000 a day in the first quarter.
Online trades made up 81 percent of all Schwab client trades during the second quarter, up from 67 percent a year earlier. Industrywide, Web trading volumes are expected to be down at least 20 percent to 1.1 million a day in the second quarter, according to US Bancorp Piper Jaffray.
One of Schwab's online competitors, DLJdirect (NYSE:DIR - news), also on Tuesday reported a sharp fall in online trading volumes from the record first quarter. The broker, an affiliate of investment bank Donaldson Lufkin & Jenrette (NYSE:DLJ - news), reported a bigger-than-expected loss in the second quarter due to increased advertising spending.
Schwab, which has 394 offices across the United States, signed up 400,000 new customers in the quarter, bringing the total to 7.2 million. |
