Schwab Loss Meets Expectations - TheStreet

Schwab Loss Meets Expectations

Charles Schwab's fourth quarter loss is in line with the weakness expected by investors ever since Schwab guided down in mid-December.
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Charles Schwab's

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weak earnings, reported after the market close on Tuesday, were no surprise -- although the net income coming in at half the previous year's fourth-quarter level may have seemed large at first glance.

Schwab had announced mid-December that fee waivers on money market funds would result in earnings per share in the range of two to four cents below the previous quarter. Schwab reported fourth quarter earnings per share of 14 cents, in line with the expected drop from the previous quarter's 17 cent earnings per share.

Schwab missed the Street consensus by one cent -- as did rival discount broker

TD Ameritrade

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, which reported before the market on Tuesday -- and both discount brokers were hit by lower trading levels in the fourth quarter.

The Schwab net income level is what stands out in the earnings, at $164 million for the fourth quarter of 2009, down 47% from the fourth quarter of 2008. Again, that was consistent with the mid-December guidance. For the year, Schwab's net income was $787 million, down 35% from the year-earlier period.

As expected, fee waivers in money market funds were a primary culprit for Schwab's weakness. Money market fee waivers caused by declining rates rose to $110 million in the fourth quarter, bringing the full-year total to $224 million -- the previous quarter's level of fee waivers had been $78 million. Schwab has been forced to waive fees on money market funds due to the historically low rates that have made returns on the investments non-existent.

Schwab said the hit to asset management fees due to the money market fee waivers was equal to a 20% decline.

Schwab announced alongside the earnings that it had commenced a secondary offering of approximately 26.3 million shares. The proceeds will be used to transfer investors from the money-siphon of the money market funds, and into bank sweep products that would help Schwab to stem the tide of losses caused by the money market fee waivers.

One analyst -- who had looked at the Schwab earnings but did not want to be quoted without time for a thorough review -- said that while a secondary offering leads to dilution of share price, the accretion to earnings per share as a result of moving those money-losing assets out of the money market funds should be a net positive for Schwab shareholders.

Chairman Charles Schwab, as in the mid-December guidance, again pointed investors to the weak rate environment and its impact on Schwab's earnings: "Our ability to deliver solid profitability despite unrelenting pressure from declining interest rates enabled us to continue expanding and enhancing the capabilities we've built over Schwab's 30-plus year history."

Schwab's daily average revenue trades (DARTs) -- a metric of client activity closely watched by analysts -- was down in the fourth quarter by 3%, less than Ameritrade's DARTs drop of 7% reported earlier on Tuesday. Trading revenue declined by 8% in 2009 for Schwab.

-- Reported by Eric Rosenbaum in New York.

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