Schwab - Charles Schwab Corporation

Transcription

Summer
Business
Update
July 24, 2015
Introduction
Rich
Fowler
Senior Vice President
Investor Relations
2
Charles Schwab Corporation
Agenda
Walt Bettinger, President & Chief Executive Officer
Bernie Clark, EVP, Advisor Services
Jonathan Beatty, SVP, Advisor Services
Break
Terri Kallsen, EVP, Investor Services
Break
Joe Martinetto, Senior EVP & Chief Financial Officer
Close
3
Forward-Looking Statements
This presentation contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements include statements that refer to expectations, projections or other characterizations
of future events or circumstances and are identified by words such as “believe,” “expect,” “will,” “may,” “should,” “could,” “continue,” “build,”
“growth,” “deliver,” “scenario,” “strong,” “remain,” “sustain,” “expand,” “aim,” “drive,” “maintain,” “improve,” “opportunities,” “position,” “estimate,”
“focus,” “increase,” “sustainable,” “commit,” and other similar expressions. These forward-looking statements relate to growth in client assets; the
launch and adoption of innovative products, services and capabilities, including Intelligent Portfolios; growth in revenues, earnings and profits;
building long-term stockholder value; key initiatives; balance sheet growth; expenses; net interest margin and revenue; money market fund
revenues; impact of a Fed Funds rate increase on net interest margin, money market fund fee waivers and sweep balances; bulk transfers; Tier 1
leverage ratio; preferred stock; increase to common dividend; and expansion of the branch footprint and hiring additional financial consultants.
These forward-looking statements, which reflect management’s beliefs, objectives and expectations as of today, are necessarily estimates based
on the best judgment of the company’s senior management. Achievement of the expressed beliefs, expectations and objectives is subject to risks
and uncertainties that could cause actual results to differ materially from those beliefs, expectations or objectives.
Important factors that may cause such differences are discussed in the company’s filings with the Securities and Exchange Commission, including
our Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. Other important factors include general market conditions, including the
level of interest rates, equity valuations and trading activity; the company’s ability to attract and retain clients and grow client assets/relationships;
competitive pressures on rates and fees; the company’s ability to develop and launch new products, services and capabilities in a timely and
successful manner; client use of the company’s investment advisory services and other products and services; the level of client assets, including
cash balances; the company’s ability to monetize client assets; capital needs and management; the impact of changes in market conditions on
money fund fee waivers, revenues, expenses and pre-tax margin; the company’s ability to manage expenses; the volume of prepayments in the
company’s mortgage-backed securities portfolio; client sensitivity to interest rates; regulatory guidance; timing and amount of severance and other
costs related to reducing the company’s San Francisco footprint; the level of field sales activity and related incentive compensation; net interest
margin; trading activity; the effect of adverse developments in litigation or regulatory matters and the extent of any charges associated with legal
matters; and any adverse impact of financial reform legislation and related regulations.
The information in this presentation speaks only as of July 24, 2015 (or such earlier date as may be specified herein). The company makes no
commitment to update any of this information.
4
Today’s Dial-in Number
(800) 871-6752
Conference ID: 60403431
5
Walt
Bettinger
President &
Chief Executive Officer
6
As we move through 2015, we are simply focused
on executing our strategy.
Schwab has maintained a focus on client needs and solid
execution through sideways market returns, sluggish trading
activity and continuing low interest rates.
 We’re growing the business by leveraging our scale to build
products and services aimed at making life better for clients.


7
The investment opportunities ahead of us will help power the
next phase of growth and build long-term stockholder value.
While client trading has not been what we
expected…
Daily Average Trades (DATs)
• Total trades in Q2
down 15%
sequentially
• Daily average
revenue trades
(DARTs) also
down 15%
sequentially
Q2 '13
8
Q3 '13
Q4 '13
Q1 '14
Q2 '14
Q3 '14
Q4 '14
Q1 '15
Q2 '15
…we’re seeing strong client asset flows…
• Q2 ‘15 core NNA of
$37B is highest
second quarter in
our history
Core Net New Assets
(billions)
$140.8
$112.4
$124.8
• 6% annualized
growth rate in 1H ‘15
despite seasonal tax
outflows in April
$71.2
2012
2013
IS + AS (ex-Clearing)
9
2014
1H15
Clearing*
Note: Core net new assets is defined as net new assets before significant one-time flows, such as acquisitions/divestitures or extraordinary (greater than $10 billion)
mutual fund clearing transfers.
* Includes all clearing flows under $10 billion.
…and solid client engagement.
Q2 year-over-year change:
Retail and other advisory
solutions (EOP)
New brokerage
accounts
280 thousand
16%
• A new second quarter record
• Net Transfers of Accounts
(TOAs) are up over 30% YTD
10
$191 billion
8%
• Over half a million retail
accounts (18% of retail assets)
are enrolled in an advisory
solution
We believe Schwab is the largest publicly traded
investment services firm in the U.S.
Total Client Assets
$3,000
$2,500
Client assets
grew 6% in Q2
year-over-year
$2,543
$2,522
(billions)
$2,034
$2,000
$1,500
$1,000
$702
$500
$302
$0
2009
2010
2011
2012
2013
Charles Schwab
TD Ameritrade
Bank of America Merrill Lynch
E*Trade
2014
6/30/2015
Morgan Stanley WM
11
Source: Publicly available company reports for each period.
We continue to make headway on key client
initiatives in 2015…
Advisor Services
Investor Services
12

Schwab Intelligent Portfolios our fully automated investment
advisory service launched in
March; $3B assets as of June 30

Launched Trade Source – a
simplified, one-stop destination
for trading on Schwab.com

Launched Schwab’s Apple Watch
app

Held 54K planning conversations
with clients year-to-date

27 independent branches now
open – most have exceeded NNA
targets
•
Launched Institutional Intelligent
Portfolios in June – fully
automated, open architecture,
investment management solution
for RIAs
•
Expanded Schwab OpenView
Gateway to include integration with
Orion Advisor Services and Redtail
Technologies
Other Solutions & Infrastructure

Expanded ETF OneSource on July
1 to offer 9 more ETFs and one
new provider – now up to 211
ETFs across 66 Morningstar
categories for $0 online trade
commissions

Schwab Index Advantage – 130
plans with 90,000 participants
have signed up for the index
mutual fund or ETF versions

Pledged Asset Line balances
grew to $2.9B – PAL can now be
integrated into SPC relationships

Launched Apple Pay for Schwab
Bank’s debit cards
…and we expect to leverage our scale and financial
discipline to drive profitable growth going forward.
Basis points
• Over the last decade,
we have followed a path
of improving value for
clients and profitability
for owners, made
possible by a relentless
focus on efficiency
• We’ve engineered the
cost of serving client
assets down 30%
faster than the change
in our revenue yield
Revenue and Expense as a % of Average Client Assets
45
$3.0
39
$2.5
35
$2.0
32
25
25
$1.5
$1.0
17
15
Total Client
Assets
ROCA
EOCA
$0.5
$0.0
5
2004
2006
2008
2010
2012
2014
Pre-tax Profit Margin %
45%
35%
34.9%
25%
15%
PTPM
16.0%
5%
2004
13
Trillions
2006
2008
2010
2012
2014
We have multiple opportunities ahead of us…
Key Initiatives
Investor Services
Advisor Services
Other Solutions &
Infrastructure
14
• Retail distribution - expand our branch footprint and hire additional financial
consultants to accelerate client acquisition; could double our branches and triple
our financial consultants over the next 10-20 years
• Advisory services – expand and enhance advisory solutions lineup; continue
penetration into client base
• Marketing - maintain share of voice in a higher interest rate, more competitive
environment to ensure the brand reaches targeted investors
• Portfolio Connect – next generation portfolio management solution
• Advisor efficiency – adoption of Institutional Intelligent Portfolios; enhancements
to core custodial platforms, web and mobile solutions
• ETFs in 401k – extending adoption
• Advisor modeler in Schwab Index Advantage 401k – allows plan consultant to
customize the design of the asset allocation models and be compensated for doing
so
• Broker/Dealer platform modernization – 3-5 year project to update our core
brokerage system; will be more scalable and efficient and enable multi-currency
and multi-firm
…while driving through a shifting financial services
landscape.
Evolving issues factoring into our strategy work:

Higher interest rates could make price competition for self-directed investors and RIA custody services
more intense.

Brand and scale may play an increasingly larger role in determining the “winners”, as investors, RIAs and
401k plans demand better and better value (lower prices with ever-improving services).

We are seeing trends from active traders doubting their ability to beat algorithmic/electronic traders.

“Robo-advice” seems overblown by the media – it’s another RIA model that may ultimately require local
distribution or a B-to-C brand to be successful.
− All financial services firms will likely offer their version of online advice within a couple of years.
15

The next leg of growth for RIAs could come from using Institutional Intelligent Portfolios, as it can open
up substantial new distribution opportunities.

ETFs could become the core investment choice in 401ks over the next decade, as decision makers ask
why they use them in personal investing and not in their 401ks.

New forms of indexing may create a price and performance bridge between traditional active
management and cap-weighted indexing, and capture significant asset flows.
As we move through 2015, we are simply focused
on executing our strategy.
Schwab has maintained a focus on client needs and solid
execution through sideways market returns, sluggish trading
activity and continuing low interest rates.
 We’re growing the business by leveraging our scale to build
products and services aimed at making life better for clients.


16
The investment opportunities ahead of us will help power the
next phase of growth and build long-term stockholder value.
Q&A
17
Bernie Clark
Executive Vice President
Advisor Services
18
Advisor Services continues to gather significant
net new assets.
$1,500
End-of-Period $1,000
Assets
(billions)
$692
$722
$839
$1,008
$1,112
$1,137
$2010
2011
2012
2013
$60
$60
$80
Net New Assets
(billions)
Operating leverage
Direct expense per
account
$500
$60
12%
CAGR
$52
2014
1H 2015 *
$66
$48
$40
$16
$20
-3%
from $95.1 as of June YTD
2014 to $92.6 as of June
YTD 2015
Our business model is
highly efficient–
Year-over-year, accounts
increased 8% while total
direct expense grew by
just 5%.
$2010
19
2011
2012
2013
2014
1H 2015 *
* Includes one-time planned outflow of $11.6B in Q1
Note: Includes RBS assets; 2010 RBS assets include an adjustment to exclude RPS omnibus assets and CBRS NNA. Excludes “retail assets” resulting from Schwab
Advisor Network (SAN) and Advisor Source from September, 2010 forward.
19
RIA assets have experienced double-digit growth
over the last decade.
$4.0 1
10%
CAGR
$2.4
RIA Industry Assets
(trillions)
S&P 500
$1.6
$2.0
2,059
903
$1,046
CAGR2
1,468
1,212
$583
Schwab ASI Assets $348
5%
12%
CAGR
$477
(billions)
2004
1Preliminary
20
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Schwab estimate. 2Excludes dividend yield.
Note: Schwab Advisor Services Institutional (ASI) assets exclude Retirement Business Services (RBS) assets. Excludes “retail assets” resulting from Schwab Advisor Network (SAN)
and Advisor Source from September 2010 forward. CAGR is the compound annual growth rate from 2004-2014.
Source: Charles Schwab; marketwatch.com.
RIA Industry is sized at $4T in AUM.
Current RIA Industry Assets | $4T
21
Charles Schwab Independent Advisor Outlook Study, June 2015.
Schwab estimates, January 2015.
Source: Schwab strategy estimates, individual company financial reports, FDIC, ICI, Federal Research Flow
of Funds, Cerulli Associates and Discovery Database.
But $23 Trillion in affluent assets sits outside the
channel.
The Opportunity | $23T1
Current RIA Industry Assets | $4T
22
Charles Schwab Independent Advisor Outlook Study, June 2015.
Schwab estimates, January 2015.
Source: Schwab strategy estimates, individual company financial reports, FDIC, ICI, Federal Research Flow
of Funds, Cerulli Associates and Discovery Database.
1In affluent assets $500k+ outside the RIA channel.
RIAs are expected to continue to capture market
share.
Historic and Predicted Asset Market Share
50%
RIAs expected to
40%
gain market share
as wirehouse
share declines
30%
20%
Wirehouse
10%
Independent (IBD, RIA, and
dually registered)
0%
23
Source: Cerulli Associates, Advisor Metrics 2014: Capitalizing on Transitions and Consolidations.
Our strategy remains focused on three key areas
that will help us continue to succeed in the
market.
Differentiate
Advisor
Services as the
leading RIA
custodian and
champion of
independence
24
1
Deliver the leading custody
and client experience
2
Attract and win new
business
3
Champion the industry and
help our clients grow
Institutional Intelligent Portfolios (IIP) offers
unmatched value.
Advisor Branding



Client web portal and mobile
app featured with advisor
branding
Visualization of portfolio and
asset allocation
Co-browsing allows advisors to
see what clients see
Dynamic Features
25

Automated daily rebalancing
and tax-loss harvesting

Dynamic reporting

Paperless on-boarding

Works with existing Schwab
systems and services

Account data easily imported
into portfolio management
systems
ETF Portfolios

Taxable, IRA, municipal bond and
income portfolios

Broad set of over 450 ETFs across
all major fund families

4% cash minimum in each
portfolio, held in Schwab Bank

Tax loss harvesting available for
accounts over $50,000
Unmatched Value

Integrates with
Schwab Advisor
Center, Schwab
Alliance and
leading third
party technology.
Tiered platform pricing based on
assets custodied at Schwab1
10 bps
<$100M
AUM
No fee
>$100M
AUM

No account service fees, trading
commissions, or custody fees
charged to clients

Advisors assign management fees
IIP is offered by Schwab Wealth Investment Advisory, Inc.
Not including assets enrolled in Institutional Intelligent Portfolios.
Hypothetical example is for illustrative purposes only and is not intended to represent a set of portfolios.
1
Client Experience Transformed: continuing to
innovate to enhance experience and scale.
Client
Client Experience Transformed:
Objective | digitize
custody workflows to
provide a faster, more
efficient, transparent,
secure, and paperless
experience to
advisors and their
clients
26
 Integrates Schwab’s workflows
with our advisors’, benefitting
advisors, their clients and
Schwab
 Leads the industry in bringing
digital workflow solutions to
advisors
 Delivers a state-of-the-art digital
experience to advisors’ clients
Sign and
submit forms
electronically
Advisor
Schwab
Authorize
wires via
computer
or mobile
phone
Receive
account
disclosures
electronically
market.
Differentiate
Advisor
Services as the
leading RIA
custodian and
champion of
independence
27
1
2
Attract and win new
business
3
We advocate on behalf of the RIA industry.
Legislative and regulatory affairs
• Investment Adviser Association (IAA) Lobby Day
• RIA Washington Watch
Strategic insights and programs
Advocacy
•
Schwab Insights Hub
•
Industry studies
RIA industry awareness
• RIA Talent Advantage
• University Grants
• RIA Student Intern Program
28
Jon Beatty
Senior Vice President
Advisor Services
29
market.
Differentiate
Advisor
Services as the
leading RIA
custodian and
champion of
independence
30
1
2
Attract and win new
business
3
We take a consultative approach to building deep
relationships with our clients.
Consultative
Approach
31
Local
Presence
114 staff across the
Specialization
country with an average
11.2 years tenure at
Schwab
Our sales team drives growth.
Business Development
Relationship Management
Consult
and
Develop
Deal
Client
Experience
Prospect
Transition to
client
Sales
Consulting
• Share of wallet
• Organic growth
• Retention
32
Relationship managers help advisors leverage RIA
Benchmarking results to develop an action plan.
2015 | 1,007 firms representing $726B in AUM
Advisor
Relationships
Industry
Leadership
RIA industry insights…


Drive action.

Insights

33
Largest and most extensive study of its kind
Establishes key RIA industry benchmarks
Results help Schwab Relationship Managers
further deepen existing client relationships as
they partner to identify strengths and
opportunities, and create actionable goals
Customized reports give each firm essential
metrics to help guide their decision-making
Key
Performance
Indicators
Firm Growth
Operating
Margins
Compensation
and Staffing
Our client relationships allow us to gather insights.
1
2015 top priorities for advisors
1. Acquire new clients through client referrals
2. Acquire new clients through business referrals
3. Recruit new staff to increase firm's skill set/capacity
4. Enhance strategic planning and execution
5. Improve productivity with new technology
34
1For firms $250M+ in AUM
2For firms $100M+ in AUM
Our consultative approach deepens advisor
relationships and drives asset growth.
Business
Consulting
Technology
Consulting
Operations
Consulting
Year-to-date, 106 firms representing our highest value clients
with $88 billion in total AUM have taken advantage of our
consulting expertise.
Relationship managers partner with team of consultants and work 1:1 with
clients in their offices to help them prepare for the future
Focused on strategic topics that advisory firms confront in their
lifecycle to promote growth and enhance business performance:
Strategic planning
Succession planning
Client segmentation
Technology optimization
Referral strategy
35
market.
Differentiate
Advisor
Services as the
leading RIA
custodian and
champion of
independence
36
1
2
Attract and win new
business
3
We continue to win new business from a diverse
mix of channels.
Source of Advisors in Transition (AIT)
168
22%
170
10%
8%
162
133
78
21%
19%
17%
4%
4%
29%
34%
9%
10%
36%
34%
36%
$154M average
regional AIT deal
size.
Other
Regional BD
IBD
Wirehouse
33%
2011
37
46%
2012
*Other includes Banks, Institutional BDs, Trusts and Insurance.
Note: Percentages do not add up to 100% due to rounding.
37%
2013
48%
45%
2014
1H-2015
37
Advisor Services remains the leading custodian in
every segment.
Market Share1 by Client Segment
100%
Other custodians
80
Pershing
60
TD Ameritrade
Fidelity
40
Schwab has a leadership position
across all client segments, from
small to mega firms
20
0
$0-50M
$50-100M
$100-250M
$250-500M
$500M+
Firm RIA AUM
1Share
38
of firms reporting single custodian.
Source: Discovery Data, BCG analysis.
Client Promoter Benchmarking Scores show
Schwab continues to win.
CPS Benchmarking Survey Performance
40
30
38
37
30
26
24
20
10
Schwab
8
Schwab
21
6
0
0
Custodian Competitor A
Custodian Competitor A
Custodian Competitor B
Custodian Competitor B
-10
-20
-22
-27
-25
-30
2012
2013
Custodian Competitor C
Custodian Competitor C
2014
Note: The Competitive CPS Benchmarking Survey is a blind survey of advisors who custody at multiple custodians including Schwab. This survey if different from the
internal CPS client survey and the resultant metrics are not comparable.
39
Source: Schwab Analytics & Business Insights.
Q&A
40
Break
41
Terri
Kallsen
Executive Vice President
Investor Services
42
We are serving more clients and meeting more
needs with our size and scale.
Investor Services at a glance
$1.407 T
7M
1M
325+
43
total client assets
total brokerage accounts
total bank accounts
local branch locations
Note: Data as of June 2015. Investor Services includes the Retail Investor business, which serves individual investors directly, and businesses where we serve individual
investors indirectly through retirement plans and corporate brokerage services, and the mutual fund clearing business.
Our investments in both people and technology
have led to strong business results…
Year-over-year growth continues to
be strong for Retail…
Client Assets
Net New Assets
+4%
YoY
+17%
YoY
New Household Net New Assets
+18%
YoY
44
…while other key performance
metrics are improving as well
Assets in an Advisory Relationship
+8%
YoY
Assets in Trading Services
+7%
YoY
Futures Trading Volume
+16%
YoY
Note: Data as of June 2015. Does not include businesses where we serve individual investors indirectly through retirement plans and corporate brokerage services, or
the mutual fund clearing business.
…and we continue to deepen trust with our
clients…
IS reached a record Client Promoter
Score of 51…
…and our High Net Worth clients
have even higher CPS levels
55
51
63
50
45
CPS for
HNW clients
40
35
2Q12
45
2Q13
2Q14
Note: Regular CPS as of June 2015 (not value weighted by assets).
2Q15
…all leading to Schwab’s external credibility.
J.D. Power
2015 “Highest in Investor
Satisfaction with
Self-Directed Services”
46
Barron’s
4/5 Stars – 2015 Best
Online Broker Rankings
Note: Charles Schwab & Co., Inc. received the highest numerical score among self-directed investing service providers in the proprietary J.D. Power 2015 Self-Directed Investor
Satisfaction StudySM. Study based on responses from 3,776 investors measuring 10 providers and measures satisfaction of self-directed investors. Proprietary study results are
based on experiences and perceptions of consumers surveyed in January-February 2015. Your experiences may vary. Visit jdpower.com.
This success is driven by our purpose—Champion
Every Client’s Goals with Passion and Integrity.
Trust
Earn our clients’ trust by treating them in an
ethical and empathetic way
Partnering
Partner with our clients proactively by
delivering great value across all channels
Innovation
Constantly improve the client experience with
innovative solutions
Personalized
Service
Provide actionable insights and personalized
service to our clients
We believe our sustainable competitive advantages around operating discipline
and scale help us be a strong partner for our clients
47
Part of our purpose is supporting clients through
life events, which we know drive financial decisions.
Percentage of investors who
switch firms due to life events
42%
Retirement
Change in family
composition
Change in wealth
Change in personal
circumstances
48
Source: “The Future of Advice” McKinsey & Company, December 2014.
Yet in the industry, many advisors fail to
provide needed support at these critical times.
Retirement
Change in family
composition
Change in wealth
Change in personal
circumstances
49
15%
% Advisors Aware
% Advisors who reached out
93%
75%
14%
74%
16%
65%
11%
Having a financial plan as you encounter major life
events is critical to reaching financial goals.
Most clients acknowledge the importance
of developing a financial plan…
90%
of investors state that
financial planning is critical
…yet few clients have developed a
plan for themselves
35%
of Affluent investors have
developed a financial plan
Ensuring that clients engage in planning discussions to support them through
all life events is core to the Schwab offer
50
Today we offer planning tools and resources to all
clients at all wealth levels, free of charge.
Complex Planning
Wealth Tier
Wealth
Transfer
Cost
$0-25K
$0
$25K-$250K
$0
$250K+
$0
Example
topics
51
Robust
In-depth
Wealth
Online Tools Retirement Plan Preservation
Retirement
savings
Portfolio
construction
and check-up
Options on
how to reach
goals
Income
generation
Equity
compensation
We continue to
evolve our
planning offering
to best meet our
clients’ needs
Trust
planning
Charitable
giving
To make our planning resources available to more
clients, we are committed to expanding our Branch
Network over time.
We’ve started the process
of expanding our Branches…
Added new locations
in key markets
Added additional
Financial Consultants
(FC)
Introduced FC
assistants
52
…and we’ll continue to focus
on expansion going forward
Reducing FC practice
size
Targeting additional
markets for new
branches
Continue growing FC
headcount
We also leverage our exceptional phone teams to
partner with clients on financial planning and
other needs.
TALENT
PROCESS
100 leads per employee generated
YTD, an increase of 75% versus 2014
Service Plus
CULTURE
53
Our efforts to provide enhanced interaction training is
helping us exceed internal targets for lead production and
conversion
TECHNOLOGY
Source: Data as of June 2015; applies to licensed reps only.
37% lead conversion rate, up 5 pts
from 2014—resulting in $35K in
incremental NNA per conversion
And we continue to build our digital capabilities so
our clients can engage with us on their terms.
Video conferencing – our pilot which
launched this year has seen 89%
client satisfaction
Virtual trading events – each event
reaches up to 3,000 clients and drives
a 15% increase in trade volume
The combination of technology and people helps us build our sustainable
competitive advantage
54
Schwab Intelligent Portfolios is an example of a
digital financial solution with the benefit of
human support.
SIP has shown strong
early growth…
Already larger than any online advisor
18 yrs to 80+
…is attracting a broad
range of investors…
Nearly half of new-to-firm clients are
below 40
All wealth levels
…and we’re not done
innovating
55
Source: Data as of June 2015.
Advisor Services offer launched in June
Goal-based planning capabilities to be
incorporated
Financial planning allows us to deepen our
relationships with clients who have diverse needs…
Within our Affluent segment:
56
30%
Have a banking relationship
24%
Invest in an advisory
solution
27%
Have a Trading Services
account
…and so we remain committed to making it easier for
our trading clients to do business with us.
We continue to improve our tools and
support…
…and we are marketing aggressively to
attract new clients
Tools
1. New markets tab
within TradeSource
2. Apple Watch support
Support
1. Virtual Advisor
2. Twice weekly market
overview
57
Our efforts to deepen client relationships
through planning conversations will drive future
growth.
CPS is significantly higher among
clients who have a plan in place…
CPS for clients in practice who engage in
planning conversations
+20 pts
vs Retail overall
CPS for clients who engage in complex
planning discussions
+44 pts
vs Retail overall
58
…while clients who develop a financial plan
consolidate assets at higher rates
NNA
$30K
Per HH
Advisory
Solutions
$24K
Advisory
Solutions
Enrollments
6.4x
Per HH
More likely to
enroll
Deepening client relationships by supporting
them through life events…
59

Drives the next phase of growth.

Creates a sustainable competitive advantage through our
investments in people and technology.

Solidifies our leadership as a modern wealth management
firm.
Q&A
60
Break
61
Joe
Martinetto
Senior Executive Vice President &
Chief Financial Officer
62
Our financial story
remains simple:
• Solid performance,
including sustained
reinvestment to build the
business
• We are poised to drive
future growth and take
advantage of an improved
environment
63
Today we’ll discuss:
 Q2 results
 2015 financial outlook
 Rate sensitivity
 Capital picture
Despite environmental puts and takes…

Equity market returns were in positive territory for much of Q2,
but ended the quarter mostly sideways from Q1.
− S&P 500 is up 0.2% year-to-date.

Interest rates gained only enough ground to bring us back to our
baseline scenario assumption from late 2014.
− The 10-year Treasury averaged 2.16% in Q2 and ended the quarter at
2.35% vs. our baseline scenario assumption of 2.35% for the year.

Client trading volumes remained muted.
− DARTs were down 5% in 1H ‘15 vs. 1H ‘14.
64
…our success with clients, diversified revenue
sources and expense discipline…
Q2 year-over-year change:
Total brokerage accounts
Total client assets
(EOP)
(EOP)
$2.54 trillion
6%
Average interestearning assets
$154 billion
65
9.6 million
4%
Expenses as a % of average
client assets
12%
16 basis points
flat
…produced solid financial results during the second
quarter.
($ in millions, except per share
amounts)
Q2 ‘14
Q1 ‘15
Q2 ’15
v. Q2 ‘14
Q2 ‘15
•
Overall revenue
growth of 6% from
strong asset mgmt.
fees and net interest
revenue, despite
continued softness
in trading
•
$17M settlement in
Other revenue
•
Kept expenses in
line with plan – 4%
growth
year-over-year
•
Solid pre-tax profit
margin of 36%
Net Revenues:
Asset management &
admin fees
$632
$644
$670
6%
Net interest revenue
562
588
612
9%
Trading revenue
212
227
203
(4%)
65
63
79
22%
Provision for loan losses
7
4
2
(71%)
Net impairment losses on
securities
-
-
-
-
$1,478
$1,526
$1,566
6%
Expenses
$957
$1,042
$999
4%
Pre-tax Profit Margin $
$521
$484
$567
9%
Pre-tax Profit Margin %
35.3%
31.7%
36.2%
.9 pts
Other
Total net revenues
Reported
Net Income
$324
$302
$353
9%
Earnings per Common Share
$0.23
$0.22
$0.25
9%
12%
10%
12%
Return on Common Equity (annualized)
66
We continue to maintain a healthy balance sheet.
(in millions)
Q2 ’14
Q3 ‘14
Q4 ‘14
Q1 ’15
Total Assets
$143,401
$147,444
$154,642
$160,169
$163,626
Bank Deposits
$95,688
$97,345
$102,815
$109,503
$112,911
Payables to Brokerage Clients
$31,484
$33,131
$34,305
$31,617
$31,480
Long-term Debt
Stockholders’ Equity
Parent Liquidity
Q2 ’15*
$1,901
$1,900
$1,899
$2,895
$2,894
$11,170
$11,473
$11,803
$12,158
$12,423
$957
$950
$1,043
$1,937
$1,736
17.2%
17.8%
18.0%
16.2%
16.0%
6.8%
6.9%
6.9%
7.0%
6.9%
15.6%
16.2%
16.4%
14.9%
14.7%
•
Completed a $650M
bulk transfer of
MMF sweep
balances to the
Bank
•
Reported results of
Dodd-Frank Annual
Stress Test – Bank
capital ratios
exceed “well
capitalized” level
throughout entire
period
•
Q2 Tier 1 Leverage
ratio is within our
desired range of
6.75-7.00%
CSC Capital Ratios
Tier 1 Capital
Tier 1 Leverage
Common Equity Tier 1
67 * Preliminary. Note: Parent Liquidity equals Parent Working Capital plus Level 1 Securities (market value) as defined by the Liquidity Coverage Ratio rule.
Given our first half results and the current environment,
we face some challenges in reaching our baseline revenue
scenario.

The S&P 500 ended basically flat for the first half of 2015 vs. our baseline
assumption of 6.5% for the full-year.

Interest rates were below our baseline scenario for much of the period.

First half ‘15 trading activity was down vs. a 5% baseline scenario increase.

Expenses remain on plan – no more than 4% growth for the full-year.
− On balance, we continue to prioritize investing for long-term growth over adjusting
expenses to achieve a minimal short-term earnings impact.
Even if the first half environment persisted, we’d expect expenses to grow no
faster than revenues for full-year 2015.
68
The recent rate environment has helped a bit; net interest
margin remains under modest pressure at these levels.
Net Interest Margin
1.70%
1.60%
1.50%
1.40%
Q3 '14

69
Q1 '15
Q2 '15
Q3 '15
Q4 '15
At current rate levels and asset mix, NIM could decline a few more basis points through the end of
2015.
− Rates picked up slightly across the yield curve during Q2, which limited pressure on our NIM.
− Expect some incremental pressure from lower reinvestment yields on fixed-rate assets.
− Balance sheet growth should more than offset rate pressure.


Q4 '14
Strong organic growth YTD and a MMF to Bank sweep bulk transfer of $650M in Q2 should help boost net interest
revenue for the year.
If short-term rates remain at current levels, MMF revenues could at least match Q2 levels.
We remain positioned to take advantage of rising rates…
Rate sensitivity refresher

We estimate 60 bps of incremental NIM for the 1st 100 bps of Fed Funds rate increase; additional
60 bps on 2nd 100 bps move up; assume less than 60 bps after that as we share more with clients.
− The 60 bps is the net impact to Schwab of the various asset classes’ reactions to rates and the rate we choose to
pay on our deposits – assets and liabilities don’t all move up in lockstep with the FF increase.
− Majority of the benefit will occur in the first few quarters with the full effect realized over a couple of years as just
under 1/3 of the balance sheet assets are tied to long-term rates.
− “Normalized” NIM could get back to 3.5-4.0%, but may not reach peak level (4+%) as the mix has changed (e.g. more
assets in Bank securities portfolio now vs. margin loans).

The 1st 100 bps of FF increase will also eliminate all money market fund fee waivers.
− With average management fees in the mid-to-upper-50s bps range, the majority of waivers will be eliminated with a
FF move up to 50 bps.

70
The yield insensitivity of sweep balances (currently 80% of bank deposits and 90% of MMF
balances) and the proprietary nature of the MMFs should keep the majority of the balances in
place even as rates rise.
…and will utilize capital flexibility as it develops.

We remain focused on initiating bulk transfers from MMF sweep to the Bank for
higher returns as soon as possible.
− We assume roughly ½ of the $140B MMF sweep balances may be available to move because:

Some balances are more yield sensitive – the split between MMF sweep and purchased funds is 90/10
today, but historically, the purchased proportion has been larger in higher-rate environments.

Some balances will continue to qualify for MMF sweep even after we modify the criteria for existing AS
accounts.
− We aim to keep our Tier 1 Leverage ratio within our desired range of 6.75-7.00% (we’re at
6.9% now).

We have some room in our capital mix to issue preferred stock if we choose.
− Expect to keep outstanding preferred stock around 10% of total equity capital (currently around 7%).

71
Expect to increase regular common dividend as earnings grow to stay within
targeted payout ratio of 20-30% of earnings.
Our financial story remains simple.

While the environment is complicating things a bit, we continue
to deliver:
− Solid business growth
− Solid revenue growth
− Expense discipline

72
We are managing the levers under our control to drive
profitable growth now and remain poised to take advantage of
any improvement in the environment.
Q&A
73
Appendix
74
Disclosures
Slides 33-34
Important Disclosures related to the RIA Benchmarking Study
2015 RIA Benchmarking Study from Charles Schwab, fielded January to March, 2015. Study contains selfreported data from 1,007 firms. Schwab did not independently verify or validate the self-reported information.
Participant firms represent various sizes and business models categorized into 12 peer groups—7 wealth
manager groups and 5 money manager groups, by AUM size. Each participating advisory firm submitted only
one set of responses.
Independent investment advisors are not owned by, affiliated with or supervised by Schwab.
75
Summer
Business
Update
July 24, 2015

Schwab - Charles Schwab Corporation

Transcription

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