Charles Schwab Earns a Spread on Idle Client Cash. What Happens to the Stock if That Spread Narrows?
The brokerage business may not be exactly what it looks like from the outside.
Overview
Contrary to a common assumption, stock trading isn't the top source of revenue for brokerage firms like Charles Schwab (NYSE: SCHW). Neither are fees for investment management. Surprisingly enough, clients' cash balances along with fixed income assets (like bonds) and margin interest are most brokerages' biggest sources of revenue. And with interest rates at multiyear highs, this revenue has been significant of late. In fact, net interest revenue of nearly $3.4 billion accounted for nearly half of Schwab's second-quarter top line.
So what happens to Charles Schwab's revenue if interest rates peel back again?
Details
You need to do a little digging to find it, but it's there. During the three months ending in June, Schwab spent just under $1.1 billion of its own money paying for access to this customers' funding. Mostly, this went to interest payments on bank or bank-like deposits. But it collected over $4.4 billion worth of interest payments, with the biggest chunk of those receipts coming from fixed-income securities it owns for itself. Its average net yield? That is, the difference between the nearly 4% it's getting on these assets and the interest rate of just under 1% it's paying for access to this capital? It's right at 3%. Not bad.
Source
Originally published at www.fool.com.