Periodically, Joe Martinetto, Senior Executive Vice President and Chief Financial Officer, will use this forum to provide insight and commentary regarding Schwab's financial picture. For any questions, please contact Investor Relations via email or call:
Richard G. Fowler, Senior Vice President: (415) 667-1841
The commentary in this section speaks only as of the date specified below. The company makes no commitment to update any of this information.
February 28, 2017
Today we announced another reduction in our online equity, ETF, and option trade commission rates, following moves we announced just a few weeks ago on February 2nd. With this second action coming right on the heels of the first, I thought it might be useful to share some context regarding how they both fit within our financial planning for 2017.
Those of you familiar with the Business Update we held on February 2nd know that we shared a baseline financial scenario for the year that included low double digit revenue growth, a revenue/expense growth gap of 200-300 basis points, and a pre-tax profit margin of at least 41%. That scenario was based on assumptions including 6.5% appreciation in the S&P 500, flat client trading volume relative to 2016, and no further Fed rate hikes. It also included the effect of the pricing moves we announced that day. We then shared our expectations regarding the allocation of potential incremental revenue coming from any further rate hikes: a more balanced allocation between stockholder returns and reinvesting in the business or pricing for the first hike, followed by allowing a substantially larger portion of subsequent rate impacts to fall to the bottom line.
Presenting our scenario in this manner enabled us to provide a picture of our expectations if no further Fed action materializes this year. At the same time, it also enabled us to avoid providing competitors with specifics around the additional pricing moves we’re allowing for in our 2017 planning while still providing an accurate overall picture of our approach.
Now that today’s news regarding some of those additional pricing moves is out, I wanted to share the scenario as we’ve been using it internally - in essence, our Plan for the year – which we’ll work from going forward. It uses the same assumptions for equity market returns and client trading activity, but allows for a Fed rate hike at mid-year. It also includes pricing moves akin to today’s announcement along with some incremental reinvestment in the business. Under those circumstances, we’d expect to produce results at the stronger end of the revenue growth and profitability expectations I mentioned above (remember we’re assuming just one hike, in June). Importantly, our basic guidance about using the benefits of incremental rate hikes remains in effect – we’ve simply invested in our clients ahead of that next Fed move.
Of course, to the extent the year unfolds differently or the environment turns against any further rate hikes, we’ll retain the flexibility to adjust our spending as we always do when necessary, balancing our investments to drive long-term growth with strong near-term profitability.
Let me close by reiterating the thoughts I shared at the end of the Business Update: Please don’t miss the bigger picture here. This is a company that is performing extraordinarily well. We are engaged in a growth strategy, working to drive client acquisition that drives scale, which allows us to continue to make the investments that drive more growth and more scale, all in the service of building value for both clients and stockholders. Today’s moves should be viewed in the context of that long-term focus on driving profitable growth. Commission pricing should never be an obstacle for any individual trying to determine whether to come to Schwab for their investing needs.
This commentary contains forward-looking statements relating to the company’s baseline financial scenario and assumptions; pricing moves and their effect; the allocation of potential incremental revenue from rate hikes; allocation between stockholder returns and reinvesting in the business or pricing; investing in clients; flexibility to adjust spending; balancing near-term profitability with long-term growth; making investments that drive client acquisition, growth and scale and build value for clients and stockholders; profitable growth; and trading commission costs as a barrier for investors. Achievement of these expectations and objectives is subject to risks and uncertainties that could cause actual results to differ materially from the expressed expectations.
Important factors that may cause such differences include, but are not limited to, general market conditions, including the level of interest rates, equity valuations and trading activity; the company’s ability to attract and retain clients and grow those relationships and client assets; competitive pressure on rates and fees; client use of the company’s investment advisory services and other products and services; the level of client assets, including cash balances; the company’s ability to monetize client assets; capital and liquidity needs and management; the company’s ability to manage expenses; regulatory guidance; client sensitivity to interest rates; trading activity; the effect of adverse developments in litigation or regulatory matters and the extent of any charges associated with legal matters; any adverse impact of financial reform legislation and related regulations; and other factors set forth in the company’s most recent report on Form 10-K.
Those of you who follow The Charles Schwab Corporation closely may receive our quarterly financial results through a wire service/email, a market data aggregator, or simply by checking our corporate website. This morning, we began making our results available via another widely-used platform: Twitter. You can find our page on www.Twitter.com with the handle @CharlesSchwab. Today’s activity includes a Tweet noting the availability of fourth quarter 2015 results with a link to our press release, and follow-ups sharing the headlines from this morning’s announcement.
Today we released our November Monthly Activity Report. While we produced another month of solid client metrics, we have no illusions about another press release stealing the show later this week. As you know, the Federal Reserve is widely anticipated to begin raising interest rates on December 16th. We have seen economic and employment reports meet expectations, FOMC minutes evolve, and member speeches show increasing conviction.
We issued our SMART report for the month of August today, and between the client metrics shown there and the trading data that we’ve already posted it’s clear we’ve been busy. With the elevated market volatility late in the month, our clients made extensive use of our branches, phone-based service centers and online capabilities to help keep their investing on track. Many of them engaged with our financial consultants and subject matter experts to ask questions about how their assets enrolled in our advisory solutions are positioned, as well as assess their holdings and determine what, if any, action should be taken.
By now, you may have noticed that we recently made a few changes to our disclosures, and I’d like to make sure everyone is aware of these developments as well as provide context for how they help tell our story. As a large savings and loan holding company, our required reporting has expanded significantly in recent years. In addition, as Schwab evolves, we revisit our reporting and strive to keep it closely aligned with the everyday workings of the business. In the second quarter of 2015, we added a new Other Regulatory Disclosures tab to our corporate website, made changes to the Asset Management and Administration Fees (AMAF) table in our earnings release package, and included some new information in our 10-Q filing.
As we announced in our earnings release today, our Q4 ’14 financial results included two nonrecurring items related to the company’s non-agency residential mortgage-backed securities (RMBS) portfolio: net litigation proceeds of approximately $28 million and net losses of $8 million from selling securities totaling approximately $500 million. Taken together, these items increased pre-tax income by approximately $20 million, or $.01 per share. With the financial crisis well behind us, it’s been a while since we’ve needed to discuss these securities, so I wanted to walk through some history and share a perspective on these recent developments.
Concurrent with our Earnings Release today, we are inaugurating a new approach to reporting on our clients’ trading activity intra-quarter. We have retired the inclusion of trade reporting in our Monthly Market Activity Report (“SMART”) and are now providing a weekly look at trading activity, including revenue, asset-based and other trades, which is posted on the Investor Relations landing page on aboutschwab.com. Here’s a link to our initial report: http://www.aboutschwab.com/investor-relations.
As you look through today’s earnings release, you might notice that the size of our balance sheet (shown in the Financial and Operating Highlights table on page 5) hasn’t changed much since year-end 2013, continuing to hover around $144 billion. That’s unusual for us – for example, the company’s balance sheet grew by approximately $8 billion during the second half of 2013. Given the factors influencing this situation, I wanted to share some perspective on current client behavior and ramifications for our capital management going forward.
As I mentioned in my last post, here are a few more thoughts on the evolution of client behavior during the market recovery, which is now a full five years along: With the S&P 500 up over 170% from its lowest point in the first quarter of 2009 and setting new records, it’s not really surprising to see investors put cash back to work in the markets. There are, however, some interesting aspects to the way our clients have reallocated their holdings across products and asset classes during the recovery thus far.
The S&P 500 Index bottomed at 676.53 on March 9, 2009, so we are now a full five years into the market recovery. As the recovery has strengthened in recent months, we have been asked more often about individual investor engagement, with the questioner usually equating engagement with trading activity.
This is my inaugural CFO Commentary. I expect to use this site regularly to provide perspectives on Schwab's financial picture, including color on our performance and details on topical issues. Over time, I can see sharing more significant financial information that might be better discussed in a forum like this, versus press releases or other forms of communication.
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