10-KPeriod: FY2018

SCHWAB CHARLES CORP Annual Report, Year Ended Dec 31, 2018

Filed February 22, 2019For Securities:SCHWSCHW-PDSCHW-PJ

Summary

Charles Schwab Corporation (SCHW) reported solid performance for the fiscal year ended December 31, 2018, demonstrating robust growth in net revenues, driven significantly by a 36% increase in net interest revenue due to rising interest rates and growth in interest-earning assets. The company successfully navigated a dynamic market by expanding its client base, evidenced by a 18% year-over-year increase in total net revenues to $10.1 billion. Despite increased investments in employees and technology, expenses grew by 12%, leading to a substantial 49% increase in net income to $3.5 billion and a diluted Earnings Per Share (EPS) of $2.45. Schwab's 'Through Clients' Eyes' strategy continues to resonate, attracting new clients and assets, while capital management remains a focus with a new $4.0 billion share repurchase authorization announced in January 2019, alongside a dividend increase. The company's financial health is underpinned by strong client metrics, with net new client assets reaching $133.9 billion and active brokerage accounts growing to 11.6 million. Schwab managed its risk effectively, remaining compliant with evolving regulatory capital and liquidity requirements, including the transition to stricter Basel III frameworks. Key financial health indicators, such as the Consolidated Tier 1 Leverage Ratio of 7.1% and a pre-tax profit margin of 45.0%, reflect the company's stable financial position and operational efficiency. The company also continues to strategically manage its balance sheet to benefit from interest rate changes while mitigating downside risk.

Financial Highlights

42 data points
Beta

Revenue

$10.13B

Net Income

$3.51B

34.6% Net Margin

EPS (Diluted)

$2.45

Total Assets

$296.48B

Cash & Equivalents

$27.94B

Free Cash Flow

$11.89B

Financial Statements
Beta
Revenue$10.13B
Interest Expense$857.00M
Net Income$3.51B
EPS (Basic)$2.47
EPS (Diluted)$2.45
Shares Outstanding (Basic)1.35B
Shares Outstanding (Diluted)1.36B

Key Highlights

  • 1Total net revenues grew 18% to $10.1 billion in 2018.
  • 2Net income increased 49% to $3.5 billion, with diluted EPS rising to $2.45.
  • 3Net interest revenue saw a significant 36% increase, driven by higher interest rates and asset growth.
  • 4Core net new client assets grew 15% to $227.8 billion, and active brokerage accounts reached 11.6 million.
  • 5Expenses excluding interest increased 12%, reflecting investments in growth, while maintaining efficiency (expenses as a percentage of average client assets remained stable).
  • 6Effective tax rate significantly decreased to 23.1% due to the Tax Cuts and Jobs Act of 2017.
  • 7The company completed a $1.0 billion share repurchase program in Q4 2018 and announced a new $4.0 billion authorization in January 2019.

Frequently Asked Questions

Schwab's total net revenues increased by 18% to $10.1 billion in 2018, driven primarily by a 36% increase in net interest revenue due to higher interest rates and growth in interest-earning assets. Asset management and administration fees saw a slight decrease of 5%, while trading revenue increased by 17%.

The Tax Cuts and Jobs Act of 2017 significantly reduced the federal corporate income tax rate from 35% to 21%. This resulted in Schwab's effective income tax rate decreasing from 35.5% in 2017 to 23.1% in 2018. The company also recorded a one-time non-cash charge in 2017 related to the remeasurement of deferred tax assets due to the tax reform.

Schwab demonstrated strong capital management in 2018. The company completed a $1.0 billion share repurchase program and increased its quarterly cash dividend by 63%. In January 2019, a new share repurchase program of up to $4.0 billion was authorized, and the quarterly cash dividend was further increased by 31%.

Key risks include adverse developments in the general business, economic, and geopolitical environment, which can impact client asset valuations and trading activity. Extensive regulation of financial services businesses is also a significant risk, potentially leading to penalties or limitations on activities. Changes in interest rates can affect profitability, and the company faces risks related to technology and operational failures, cybersecurity breaches, and litigation.