Charles Schwab first quarter profit down 7 percent on higher costs, fewer trades

By Jed Horowitz

NEW YORK (Reuters) – Charles Schwab Corp said on Wednesday that its first-quarter net income fell 7 percent to $302 million on slower client trading activity and higher spending focused in part on the discount brokerage’s new robo-adviser offering.

Though revenue was up 3 percent from a year earlier to $1.53 billion, it fell 2 percent from the fourth quarter of 2014 and missed the consensus analyst estimate of $1.54 billion, as compiled by Thomson Reuters I/B/E/S.

Earnings per share of 22 cents were off 8 percent from a year ago, and also missed the consensus analyst estimate of 24 cents per share.

Expenses rose 9 percent in the first quarter to $1.04 billion on seasonally higher compensation and benefit expenses, including a previously unannounced decision to accelerate its 401(k) matches for many of its 14,900 employees.

“Even as our business growth remained strong, environmental factors contributed to a disappointing rate of revenue growth for the first quarter,” Chief Financial Officer Joe Martinetto said in a statement.

Client trading volume slowed as the quarter progressed, dropping 8 percent from the fourth quarter of 2014, he said. He also cited “flat-to-lower interest” rates, an issue that has plagued the investment returns of Schwab and its competitors since the Federal Reserve took rates close to zero over six years ago to stimulate the economy.

Discount brokerages rely on investing idle cash in its customers’ trading accounts at much higher rates than it pays on the cash, but rock-bottom rates have sidelined that profit source.

Schwab earned an average of just 1.67 percent on the $149.4 billion of cash and interest-earning assets on its balance sheet during the quarter. It also waived $184 million of fees on $165.4 billion of money-market funds held by clients to protect them from negative returns on the investments.

Martinetto said that although Schwab is driving “business growth” by spending heavily on products such as its automated “Schwab Intelligent Portfolios” offering, it expects to hit its 2015 goal of raising expenses by a “modest” 4 percent.

Schwab also said it continues to transform itself from a low-commission broker to a full-service firm giving advice for a fee. While it added 274,000 new brokerage accounts to bring its total to 9.5 million active accounts during the quarter, about half of clients’ $2.5 trillion of assets are enrolled in a Schwab-related advice program, it said.

(Reporting By Jed Horowitz; Editing by Chizu Nomiyama and Christian Plumb)