UPDATE 4-Charles Schwab misses slightly as markets weigh
* Client trading picks up in quarter* Shares down 3.9 percentBy John McCrankOct 17 (Reuters) - U.S. discount brokerage Charles Schwab Corp’s third-quarter profit rose, just missing estimates, as higher trading levels were not enough to offset a combination of headwinds that included weaker equity markets and interest rates.The company’s shares were down 3.9 percent at $12.25 in early afternoon trading on the New York Stock Exchange.The impasse over the U.S. debt ceiling, the downgrading of the U.S. credit rating, and concerns that Europe’s sovereign debt crisis could drag the world’s economy back into recession led to a 14 percent drop in U.S. equities in the quarter, as measured by the S&P 500 index.That drop, along with softer short-term interest rates led to a 7 percent sequential drop in Schwab’s asset management and administration fees.”Schwab is feeling the brunt of a second-half environment that’s really tough on brokers, with the market levels falling, the interest rates tightening up on already tightening margins,” said Ed Ditmire, and analyst at Macquarie Research.Schwab said on Monday it earned $220 million, or 18 cents a share in the quarter, compared to $124 million, or 10 cents a share, a year earlier. Analysts had been expecting 19 cents a share, according to Thomson Reuters I/B/E/S.In the third quarter alone, the Schwab’s shares tumbled over 31 percent, as investors worried weaker markets would crimp profits at retail brokerages in the short term.CLIENTS STAY ENGAGEDBut the volatility also led to more client trades. Schwab said its clients executed a record 1,005,000 trades on a single day in August when the volatility was at its peak.Third-quarter daily average revenue trades - a widely watched measure of client activity - were up 39 percent at Schwab from a year earlier and up 22 percent from the second quarter this year, to 323,100.Average revenue per trade, however, fell 2 percent from both the year earlier and the second quarter to $12.04.”The so-called silver lining, which is high trading volumes, help Schwab less than other firms because it gets less of its revenue from trading commissions than other firms,” Ditmire said.Overall revenue at San Francisco-based Schwab rose 11 percent to $1.18 billion, compared to analysts’ expectations of $1.19 billion.Schwab has been waiving client fees on money market funds for several quarters now because with the low interest rate environment, returns could be nonexistent to negative.The firm said it waived $160 million in fees in the quarter, compared to $128 million in the prior quarter, due to the lower short-term rates.SHORT-TERM CHALLENGES REMAINThe waivers, as well as Schwab’s net interest margin, came in weaker-than-expected, said Alex Kramm, an analyst at UBS.”While rates have started to move higher again lately, metrics will likely deteriorate further in 4Q11,” Kramm said in a note to clients.Schwab said it is looking into expense controls to help offset some of the market headwinds, which Kramm said “could represent a slight positive.”Total expenses came to $821 million, down 5 percent from a year earlier. Expenses related to its $1 billion acquisition of options trading firm optionsXpress came in at an estimated $12 million to $14 million of pretax charges.”The one-time costs related to that (deal) came in higher than we would have thought,” Howard Chen, an analyst at Credit Suisse, said in an interview. He had been expecting around $10 million in expenses related to the deal this quarter.”Within the core franchise, I think Schwab posted fairly resilient results in what was a very challenging summer for all investors,” he added.Total client assets were up 7 percent from a year ago at $1.576 trillion.Net new assets in the quarter, including those from optionsXpress deal and major clearing inflows, totaled $86 billion. Minus the acquisition and inflows, core net new assets were up 21 percent from a year earlier at $17.6 billion.Schwab’s competitors include E*Trade Financial Corp , which is due to report its quarterly results on Wednesday, and TD Ameritrade which reports next week.