Having worked for a bank for over 10 years, I follow quite a few financial stocks. There were two things that my years in banking taught me. First, change is constant. Second, you need to get to know your client, because if you don’t, your competition will take them away. Bankers need to learn a new rule as well, competition doesn’t just come in the form of a traditional bank anymore. Increasingly brokers, credit card companies, and online banks are wreaking havoc among traditional banks. One great example of this disruptive force is The Charles Schwab Corp (NYSE:SCHW) Corporation.
Know Your Competition
One common theme among banks is the need to diversify their revenue stream. Banks like BB&T Corporation (NYSE:BBT) and Capital One Financial Corp. (NYSE:COF) have capitalized on this idea by diversifying into insurance and investments in BB&T Corporation (NYSE:BBT)’s case, and traditional deposit accounts with Capital One Financial Corp. (NYSE:COF).
Brokers have also caught onto this idea by offering both deposit accounts and loans to their customers as well as brokerage solutions. Some brokers like E TRADE Financial Corporation (NASDAQ:ETFC) jumped on this idea a bit too early and felt the brunt of bad loans. However, companies like TD Ameritrade Holding Corp. (NYSE:AMTD) have the benefit of increasing their lending to brokerage holders without the complications of mortgages, home equities, and other loans.
Charles Schwab Corp (NYSE:SCHW) seems intent on continuing to dominate the discount brokerage business, while also disrupting the banking business at the same time. Schwab’s increased brokerage assets, bank accounts, and loans, argues that this company is becoming a one-stop financial shop for many.
The Brokerage Side Of The House
Some companies find it difficult to continue growing their existing business, while also trying to expand into new ventures. However, Charles Schwab Corp (NYSE:SCHW) seems to be handling this expansion fairly well. The company saw 9% growth in new assets, a 2% increase in new brokerage accounts, and has 8.9 million active brokerage accounts.
Schwab’s attempt to toe the line between broker and bank is producing margins that are less than some brokers, but better than some banks. In particular, BB&T is a more traditional bank and reported a pre-tax margin of 27.53% in their recent quarter. Capital One, which is becoming more of a traditional bank through its purchase of ING and HSBC assets, reported a margin of 19.61%.
On the other side of the coin, E*Trade reported a negative pre-tax margin in two of the last four quarters, and TD Ameritrade Holding Corp. (NYSE:AMTD) Ameritrade managed a margin of 36.74%. By comparison, Charles Schwab Corp (NYSE:SCHW)‘s pre-tax margin in the quarter was 25.66%. What should really get investors excited though is the company is predicting this margin may rise as high as 30% this year.
