Business context and reporting period
The Charles Schwab Corporation’s Form 10-K covers the fiscal year ended December 31, 2019; it is an annual report, not a standalone Q4 filing. Schwab operates wealth management, brokerage, banking, asset management, custody, and advisory businesses through Investor Services and Advisor Services. At year-end it reported $4.04 trillion in client assets, 12.3 million active brokerage accounts, and 19,700 full-time-equivalent employees.
Financial and operating performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenue | $10.721 billion | $10.132 billion | +6% |
| Net income | $3.704 billion | $3.507 billion | +6% |
| Diluted EPS | $2.67 | $2.45 | +9% |
| Pre-tax profit margin | 45.2% | 45.0% | +0.2 percentage points |
| Net interest revenue | $6.516 billion | $5.823 billion | +12% |
| Asset management and administration fees | $3.211 billion | $3.229 billion | -1% |
| Trading revenue | $617 million | $763 million | -19% |
| Expenses excluding interest | $5.873 billion | $5.570 billion | +5% |
| Operating cash flow | $9.325 billion | $12.456 billion | Lower by $3.131 billion |
Net interest margin rose to 2.41% from 2.29%. Average interest-earning assets increased 6%, while the average rate paid on interest-bearing liabilities rose to 0.42% from 0.37%. Reported client assets grew 24% to $4.039 trillion, supported by market gains and asset gathering; core net new client assets were $211.7 billion, down 7% from 2018. Active brokerage accounts increased 6% to 12.3 million.
For Q4 2019, net revenue was $2.606 billion versus $2.669 billion in Q4 2018; net income was $852 million versus $935 million, and diluted EPS was $0.62 versus $0.65. Q4 2019 expenses excluding interest were $1.494 billion, compared with $1.459 billion a year earlier.
Balance sheet, capital, and liquidity
Year-end total assets were $294.005 billion, down 1% from 2018; stockholders’ equity was $21.745 billion, up 5%. Bank deposits were $220.094 billion, down from $231.423 billion. Long-term debt was $7.430 billion, up from $6.878 billion; no short-term borrowings were outstanding. The debt-to-total-capital ratio was 25%, unchanged. Schwab’s consolidated Tier 1 leverage ratio was 7.3%, and its average Q4 liquidity coverage ratio was 113% ($54.494 billion of eligible liquid assets against $48.135 billion of net cash outflows). The company and its principal bank subsidiary reported capital ratios above applicable minimums.
Material changes and notable items
- Effective October 7, 2019, Schwab eliminated online commissions on U.S. and Canadian-listed stocks and ETFs and the base charge on options. Trading revenue fell 19%; management said the pricing change was intended to improve competitiveness and support longer-term client and asset growth.
- Net interest revenue growth more than offset lower trading revenue and a slight decline in asset-management fees. The Federal Reserve cut rates three times in 2019; management cited higher average asset yields and client cash balances as drivers of annual net interest revenue growth.
- Expenses included $62 million in severance charges associated with a 3% workforce reduction and $25 million of costs related to the announced acquisitions. Other revenue benefited from gains on the sale of advisor software and assignment of leased office space; the filing does not give a combined amount for these gains.
- Schwab repurchased 55 million shares for $2.2 billion in 2019. The quarterly common dividend increased to $0.17 per share during 2019; the Board later declared $0.18 per share in January 2020.
- On January 1, 2020, Schwab transferred all $134.7 billion of amortized-cost HTM securities to AFS; those securities had a $1.4 billion net unrealized gain. The company also elected to exclude AOCI from regulatory capital beginning in 2020.
Outlook, transactions, and risks
Schwab expected 2020 capital expenditures of approximately 5%–6% of net revenue, excluding potential effects of the TD Ameritrade acquisition; its longer-term range was 3%–5%. Management expected to continue lengthening the duration of investment purchases to reduce exposure to lower interest rates and anticipated client cash sorting would subside. The filing’s modeled 12-month net interest revenue sensitivity at year-end was +4.8% for a gradual 100-basis-point rate increase and -7.4% for a 100-basis-point decrease.
Schwab agreed to acquire TD Ameritrade in an all-stock transaction valued at approximately $26 billion based on the stated reference share price. TD Ameritrade shareholders were to receive 1.0837 Schwab shares per share; Schwab expected the deal to close in the second half of 2020, subject to approvals and other conditions. A DOJ second request for information was received in January 2020. The agreement provides for a potential $950 million termination fee in certain circumstances. Separately, Schwab agreed to acquire USAA-IMCO assets for $1.8 billion in cash, with closing expected in mid-2020, subject to conditions. Management expected significant goodwill and amortizable intangible assets from the planned acquisitions.
Key risks include interest-rate and client-cash allocation changes, competitive pricing pressure, market declines, cybersecurity and technology disruptions, credit and liquidity exposures, regulatory change, and legal proceedings. The Crago order-routing class action remained pending; plaintiffs sought unspecified damages, and Schwab said it could not reasonably estimate potential liability. The company also disclosed that the financial impact of LIBOR’s expected phase-out could not yet be estimated. It expected to comply with revised Category III regulatory requirements, with additional risk-management and liquidity rules scheduled to apply from 2021.
Important facts for investors to verify
- Whether net interest revenue and margins remain resilient after 2019 rate cuts, given management’s modeled downside sensitivity and dependence on client cash balances.
- The ongoing revenue, account-growth, and expense effects of commission-free trading, including whether asset gathering offsets lower trading revenue.
- Regulatory approvals, integration costs, share issuance and dilution, deposit-sweep terms, and expected synergies for the TD Ameritrade and USAA-IMCO transactions.
- Capital and liquidity metrics under the post-2019 regulatory framework, including the AOCI election and securities reclassification.
- Progress and potential exposure from the order-routing litigation, LIBOR transition, and other legal, regulatory, cyber, and operational risks.