Schwab 3Q profit falls, still beats estimates

Charles Schwab Corp. reported Wednesday its third-quarter earnings fell sharply from results that included a big gain a year ago, but still topped analysts expectations. The ongoing financial market turmoil weighed on the retail brokerage's assets under management.

The third quarter saw unprecedented losses in financial markets, including the failure of Washington Mutual Inc., the bankruptcy of Lehman Brothers Holdings Inc. and the shotgun wedding of Merrill Lynch & Co. to Bank of America Corp. At the end of September, the Dow Jones industrial average was down 22 percent year over year, and the Standard & Poor's 500 index had lost 24 percent of its value.

"Investors are experiencing market conditions that are as difficult as I have seen in my career and that test anyone's resolve and confidence," Chairman Charles Schwab said in a statement.

Schwab earned $304 million, or 26 cents per share, during the quarter, down from $1.53 billion, or $1.28 per share, during the year-ago period, which included a hefty $1.21 billion gain on the sale of U.S. Trust. Excluding that boost, earnings totaled 27 cents per share in the 2007 period.

Revenue declined 3 percent to $1.25 billion, as the financial markets' collapse drove down asset management and interest revenue.

While the earnings results topped the 23-cent-per-share profit expected by analysts polled by Thomson Reuters, revenue missed Wall Street's $1.28 billion forecast.

Client activity picked up in the highly volatile market, with Schwab clients averaging 397,800 trades per day in September, compared with 271,400 trades during the same month last year. Despite clients adding $24.4 billion to their accounts during the third quarter, total client assets fell 9 percent to $1.305 trillion at the end of September amid sharp declines in equity markets.

"In a broad down market, revenue held up very well," said Chief Financial Officer Joe Martinetto. "Revenue was modestly impacted by the market environment."

Martinetto attributed revenue declining only 3 percent to the diverse revenue stream at Schwab. The firm generates revenue not just through management fees but trading fees and through its banking operations as well.

"The quarter was clearly a positive one for Schwab," Goldman Sachs Group Inc. analyst William Tanona wrote in a research note. "Trading activity held in well during September,"

Asset management fees fell 2 percent to $596 million from $610 million during the year-ago period. Interest revenue also slid to $497 million from $593 million, but was offset by a sharp decline in interest expense to $50 million from $160 million in the prior-year-quarter.

"Despite a very tough market environment, Schwab reported much better than expected asset management and trading revenue," Citi Investment Research analyst Prashant Bhatia wrote in a research note.

Revenue was also negatively affected by $73 million in charges tied to investments Schwab held in Lehman Brothers and Washington Mutual debt. Martinetto said the Washington Mutual investment was completely liquidated, while a write-down was taken on the Lehman investment.

Before the failure of the two banks, the investments were worth $89 million.

During the quarter, Schwab added 21,000 net new accounts, a 51 percent increase year-over year. As of Sept. 30, Schwab had about 5.2 million total accounts, 4 percent more than it did on the same day last year.

Shares of Schwab fell $1.03, or 4.9 percent, to $19.94, faring better than broader indices. The Dow Jones industrial average, which had rallied earlier in the week, closed down 733 points, or 7.9 percent, and the S&P 500 declined by 9 percent.

Schwab shares have fallen 24 percent since peaking at $26.20 at the end of the September as broader markets plunged.

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