Goldman Lifts View of Discount Brokers

NEW YORK (TheStreet) -- Discount brokers, including Charles Schwab (SCHW) and TD Ameritrade (AMTD), surged Friday after Goldman Sachs improved its outlook on the sector, citing eventual benefits from the Federal Reserve's decision to raise the interest rate charges to banks at the discount window.

Goldman Sachs analyst Richard Ramsden lifted his overall assessment of the discount brokers to neutral from cautious, and specifically upgraded Schwab to neutral from sell.

While Ramsden noted his prior view that rates will remain "lower for longer" was unchanged, he explained the softening of his bearish stance, calling the Federal Reserve's move is a reminder that "rate pressure is cyclical, and while it may last long, it will not last forever." He added that he sees "limited further downside" in the stocks at these levels in the wake of the Fed's decision.

"While the Fed did not adjust the target federal funds rate today and in fact reiterated the process was not intended to be an indication of economic tightening, a process to unwind emergency measures that were put in place during the financial crisis appears to be underway," the note states.

The discount brokers are "highly sensitive to changes in short-term rates, Treasury Yields and the shape of the yield curve," Ramsden writes. "While we are not currently adjusting our estimates given uncertainty in scope and timing of any change n the shape of the yield curve, the downside risk to our estimates appears more limited than it had previously been."

With interest rates at historic lows, the discount brokers have been forced to waive fees on money-market funds in recent quarters. Schwab, for example, waived a total of $224 million in related fees in fiscal 2009, including $110 million in the fourth quarter. Net interest revenue for various assets also suffers, of course.