Interim Business Update. April 23, 2015

Transcription

1 Interim Business Update April 23, 2015

2 Introduction Rich Fowler Senior Vice President Investor Relations 2

3 Agenda Walt Bettinger President & Chief Executive Officer Joe Martinetto EVP & Chief Financial Officer 3

4 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 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, accelerate, expand, upside, aim, drive, provide, on pace, outpace, progress, launch, on track, maintain, improve, and other similar expressions. These forward-looking statements relate to growth in client assets; client demand for advisory services; the launch and adoption of Schwab Intelligent Portfolios, Institutional Intelligent Portfolios and other innovative products, services and capabilities; growth in revenues, earnings and profits; client loyalty and referrals; planning conversations; net new assets; interest rate upside; the sweep and bulk transfer of money market fund balances to Schwab Bank and the revenue impact; expansion of the branch footprint and hiring additional financial consultants; liquidity, balance sheet growth and capital formation; net interest margin and revenue; 2015 spending; operating leverage; and expense discipline. 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 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 company s ability to develop and launch new products, services and capabilities in a timely and successful manner, including Institutional Intelligent Portfolios; client use of the company s investment advisory services and other products and services; client sensitivity to interest rates; rate of capital formation; regulatory guidance; the volume of prepayments in the company s mortgage-backed securities portfolio; 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; acquisition integration costs; 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 April 23, 2015 (or such earlier date as may be specified herein). The company makes no commitment to update any of this information. 4

5 Today s Dial-in Number (800) Conference ID:

6 Walt Bettinger President & Chief Executive Officer 6

7 Schwab is well positioned to attract a growing share of investable assets in the U.S. Investors continue to choose Schwab s contemporary, full-service business model. We re leveraging our strengths to provide innovative and disruptive solutions for clients. Our competitive and structural advantages will continue to power growth and build stockholder value. 7

8 Client loyalty continues to set new records... The overall Retail Client Promoter Score reached a record 52 in the first quarter Client scores in high net worth and advisory solutions averaged 10 and 6 points higher, respectively, than Retail overall Retail Client Promoter Scores (CPS) Q1 '15 Total Retail Fee-Based Advisory Solutions High Net Worth (>$1M assets)

9 which drives referrals and helps grow our client base. Q1 core net new assets of $34.2 billion a 6% annualized organic growth rate Total Client Assets (EOP, trillions) 12% CAGR $2.52 We re on pace to exceed $100 billion of core NNA for our 4 th consecutive year $ Q 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.

10 Net new assets from retail investors have strengthened notably Q1 15 Retail NNA was up 28% year-overyear First Quarter Retail Investor NNA $12.5 B Net transfer of account (TOA) $s from other firms are up 116% from year- earlier levels Q1 '07 Q1 '08 Q1 '09 Q1 '10 Q1 '11 Q1 '12 Q1 '13 Q1 '14 Q1 '15 10

11 as clients remain engaged with their financial lives. Client interactions are strong Assets Under an Advisory Relationship Planning Conversations with 25,000 Clients in Q1 On track to meet with 100,000 clients this year $1.13 T $159 $ % +18% +9% $1.25 T $188 $1,063 Q1 '14 Q1 '15 Retail & other advisory solutions Advisor Services * 30% and client cash as a % of client assets remains 20% near historic lows as they participate in the 10% markets. Mar 09 Client Cash as a % of Client Assets 12% Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar * Excludes Retirement Business Services Trust.

12 Our client asset growth continues to outpace competitors. We believe that Schwab is now the largest publicly traded investment services firm in the U.S. as measured by client assets $3,000 $2,500 $2,000 $1,500 $1,000 $500 $ Q1 '15 Charles Schwab Bank of America Merrill Lynch GWIM Morgan Stanley WM Total Client Assets (billions) TD Ameritrade E*Trade $2,524 $2,510 $2,047 $695 $ Source: Publicly available company reports for each period. Note: E*Trade assets as of February 28, 2015.

13 We re making progress on our 2015 client initiatives. Investor Services Launched Schwab Intelligent Portfolios fully automated investment advisory service that charges no advisory fees, commissions or account services fees Launched Trade Source simplified, one-stop destination for trading on Schwab.com Advisor Services Products and Infrastructure Announced the details of Institutional Intelligent Portfolios to be launched in Q2 fully automated, open architecture, investment management solution for RIAs Expanded Schwab OpenView Gateway to include integration with Orion Advisor Services and Redtail Technologies Concluded the inaugural Executive Leadership Program class and launched the 2015 class the program has now reached 66 firms, representing $157 billion in AUM Expanded ETF OneSource to offer 18 more ETFs now up to 198 ETFs across 64 Morningstar categories for $0 online trade commissions Pledged Asset Line balances grew to $2.5B PAL can now be integrated into SPC relationships Launched Apple Pay for Schwab Bank s debit cards Charles Schwab Investment Management reached $31B in ETF AUM and is now the 7 th largest ETF provider in the U.S. 13

14 We re seeing strong adoption of our new Schwab Intelligent Portfolios TM service. After 6+ weeks in market: Average funded account size is $80K. $1.5 billion total assets 23,000 total accounts Average household assets are over 2x average retail client. Cannibalization and asset allocation are consistent with pre-introduction assumptions. Just over 1/3 of existing clients are under 45 years old; just under 2/3 of new clients are under 45. Majority of enrollments are from existing clients, with the new-to-firm percentage building. Vast majority of clients enrolling were previously self-directed. 14 Note: Assets and account balances as of April 21, Client profile observations use data available as of April 13, 2015.

15 Schwab is well positioned to attract a growing share of investable assets in the U.S. Investors continue to choose Schwab s contemporary, full-service business model. We re on track to exceed $100 billion of core NNA for the 4 th consecutive year. We re leveraging our strengths to provide innovative and disruptive solutions for clients. Schwab Intelligent Portfolios TM is resonating with all types of investors. Our competitive and structural advantages will continue to power growth and build stockholder value. Interest rate upside still intact and growing. Significant opportunity to sweep additional MMF balances to Schwab Bank for higher returns as capital is available. Will expand our branch footprint and hire additional financial consultants over time to accelerate client acquisition. 15

16 Joe Martinetto Executive Vice President & Chief Financial Officer 16

17 2015 started off with great business momentum and a reminder that the environment still matters. Today we ll discuss: Q1 results 2015 financial outlook Capital picture 17

18 Our Q1 financial story included strong business growth Q1 15 Actual Core net new assets Total client assets Average interestearning assets $34.2 B $2.52 T $149.4 B 6% annualized growth rate; strongest Retail quarter since Q1 08 Up 9% year-over-year, a $216 billion increase New record level, up 5% sequentially 18

19 and a less helpful environment Q1 15 Actual Baseline Scenario S&P 500 return (annualized) Avg. 10 Yr. Treasury yield Fed Funds effective rate DARTs 1.8% 6.5% 1.96% 2.35% 0.11% 0.09% (7%) 5% 19 Source: market return and interest rate data from Bloomberg.

20 which, combined with accelerated and seasonally higher expenses, pressured our results for the quarter. ($ in millions, except per share amounts) Q1 14 Q4 14 Q1 15 Net Revenues: Asset management & admin fees Q1 15 v. Q1 14 $611 $641 $644 5% Net interest revenue % Trading revenue (8%) Other (7%) Provision for loan losses (1) (3) 4 N/M Net impairment losses on securities Total net revenues $1,478 $1,551 $1,526 3% Expenses $956 $997 $1,042 9% Pre-tax Profit Margin $ $522 $554 $484 (7%) Pre-tax Profit Margin % 35.3% 35.7% 31.7% (3.6 pts) Reported Net Income $326 $350 $302 (7%) Earnings per Common Share $0.24 $0.25 $0.22 (8%) Return on Common Equity (annualized) 13% 12% 10% Overall revenue growth of 3% from asset mgmt. fees and net interest revenue, despite slowdown in trading Higher expenses due to timing payroll tax resets, HSA contribution, accelerated 401k match, equitybased incentive plan timing changes and Intelligent Portfolios marketing Still-solid pre-tax profit margin of 31.7% 20

21 We maintain substantial liquidity and a low risk profile as balance sheet growth and capital formation continue. (in millions) Q1 14 Q2 14 Q3 14 Q4 14 Q1 15* Total Assets $144,066 $143,401 $147,444 $154,642 $160,129 Deposits from Banking Clients $95,591 $95,688 $97,345 $102,815 $109,503 Payables to Brokerage Clients $32,308 $31,484 $33,131 $34,305 $31,617 Long-term Debt $1,902 $1,901 $1,900 $1,899 $2,895 Stockholders Equity $10,815 $11,170 $11,473 $11,803 $12,158 Parent Liquidity $1,025 $957 $950 $1,043 $1,937 CSC Capital Ratios Tier 1 Capital 17.1% 17.2% 17.8% 18.0% 15.9% Tier 1 Leverage 6.6% 6.8% 6.9% 6.9% 6.8% Issued $1B of senior notes Proceeds used to support Parent liquidity Risk-weighted ratios reflect Basel III changes in risk weightings Tier 1 Common/Risk-weighted Assets 15.5% 15.6% 16.2% 16.4% 14.6% 21 * Preliminary. Note: Parent Liquidity equals Parent Working Capital plus Level 1 Securities (market value) as defined by the Liquidity Coverage Ratio rule.

22 The current rate environment continues to weigh on net interest margin. 1.70% Net Interest Margin 1.60% 1.50% 1.40% Q3 '14 Q4 '14 Q1 '15 Q2 '15 Q3 '15 Q4 '15 At current rate levels and asset mix, NIM could average around 155 basis points for Expect incremental pressure from lower reinvestment yields on fixed-rate assets. Balance sheet growth should mitigate some rate pressure. Very strong organic growth in early 2015 (grew $5.5B in Q1) should help boost net interest revenue for the year. MMF (off-balance sheet) bulk transfer to the Bank of approximately $1B expected in Q2. If interest rates return to late 2014 levels, NIM could average around 160 basis points for

23 As we get deeper into 2015, we ll monitor the overall revenue picture closely. Equity market valuations began Q2 close to Baseline Scenario levels. Expected timing of Federal Reserve rate action has been slipping. Trading activity continues to run below prior year levels. 23

24 With our expected 2015 spending remaining at a modest pace of approximately 4% year-over-year growth, we will be very thoughtful with any adjustments. Important considerations: Duration of environmental/revenue slack Vital nature of the to do list Regulatory initiatives, Intelligent Portfolios, marketing, etc. Impact on business momentum If lost, time and effort to regain We ll deliver the maximum operating leverage consistent with investing to sustain our enhanced business momentum and build long term stockholder value 24

25 We re aiming to keep Schwab s financial story as simple as possible in Simple means delivering: Solid business growth Solid revenue growth Expense discipline The environment may complicate things a bit. We will keep managing the levers under our control to deliver solid profitability now and remain poised for improved performance as conditions permit. 25

26 Q&A 26

27 Interim Business Update April 23,