Schwab (SCHW) Rides on Strategic Buyouts, Expenses Rise

Driven by steepening of the yield curve, solid economic revival and opportunistic acquisitions over the past year, Charles Schwab SCHW is likely to witness solid growth. However, steadily rising operating expenses and margin pressure remain concerns.

Over the past year, Schwab has been on an acquisition spree. The buyouts of TD Ameritrade, USAA’s Investment Management Company, Wasmer, Schroeder & Company, LLC and the acquisition of Motif’s technology and intellectual property are likely to further strengthen the company’s position in the brokerage industry and help diversify revenues. Driven by strong liquidity position, Schwab is well poised to expand through inorganic initiatives.

The company’s revenue growth is impressive. Schwab’s revenues witnessed a compounded annual growth rate (CAGR) of 11.8% over the last five years (ended 2020). These were mainly driven by the company’s efforts to enhance trading revenues, rise in advice solution revenues and acquisitions. Further, several initiatives including commission free-trading, reduction of fees for the Schwab market cap-weighted index mutual funds and launch of Schwab Stock Slices are expected to continue contributing to the company's market share.

However, like other brokerage firms such as Raymond James RJF, Interactive Brokers (NASDAQ:IBKR) IBKR and LPL Financial (NASDAQ:LPLA) LPLA Schwab’s net interest margin is expected to remain under pressure in the quarters ahead. Also, with the Federal Reserve signaling no change in the interest rates anytime soon, a similar trend is expected to continue. Hence, margin contraction is likely to hurt top-line growth to some extent.

Further, mounting operating expenses remain a headwind for Schwab. Expenses witnessed a CAGR of 13.1% over the last five years (2016-2020), mainly due to rise in compensation and benefit costs, and acquisitions. Also, costs related to compensation and regulatory spending as well as strategic buyouts to drive operating efficiency are expected to keep expenses high in the upcoming quarters.

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