Schwab Earnings Will Set Dreary Tone for Discount Brokerages

Charles Schwab (SCHW) will likely set a dreary tone for discount brokers when it releases its fourth quarter earnings results on Thursday. The nation's largest discount brokerage is expected to report profits below analysts' estimates due to a slowdown in trading volumes and an acceleration of money market fund fee waivers.The good news is that Schwab alerted Wall Street to the negative news last month, so any bad news shouldn't come as a shock. The company has also announced proactive measures to bolster assets and halt its revenue slide that include slashing trading fees for customers with lower balances and an aggressive move into the Exchange Traded Funds' market. But it is too soon to tell if the moves will offset the poor earnings news.

Unfortunately, the dwindling trading volumes and the need to cut fees have thwarted a respectable effort by management to cut costs and remain profitable in a very difficult economic environment. The fee waivers are expected to cost the company $100 million in revenue in the fourth quarter. The new cuts in trading fees could cost the company an additional $15 million to $20 million.

"A lot of the drivers that Schwab relies on for revenues are not clicking on all cylinders," says Morningstar equity analyst Jason Ren. Still, Ren believes Schwab has done a good job of gathering assets while things have been difficult -- something that could help the firm once the economy improves.

By offering ETFs, Schwab has added a way to build assets among its core customers. Analysts believe that if online brokers can grow their accounts, their revenues will follow. Also, cutting its trading fees may entice low-balance customers to trade more, increasing trading income for the firm.

Both measures by Schwab may place pressure on competitors, Etrade Financial (ETFC) and TD Ameritrade (AMTD), who are also struggling to maintain revenue growth. So far, Ameritrade and Etrade have not cut their trading prices in a reaction to Schwab. Morningstar analysts say Etrade's online brokerage business remains profitable, but it is still hurt by its banking operations. Ameritrade's trading volume has sustained it, but it appears ill prepared for growth.

"We suspect that results for Schwab will continue to be impacted by the challenging market conditions and weakening economy, while the stronger client activity resulting from increased market volatility and management's aggressive efforts to control cost will provide some relief in the coming quarters," said a report from Zacks Equity Research.

Unfortunately, for Schwab, it could use some relief right now.
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