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Schwab and Ameritrade's Institutional Business Poised for Rebound, Says Bernstein

Brad Hintz, of Bernstein Research, says Ameritrade and Schwab will need a while before their businesses really get cranking: "As we have stated in our launch piece on the industry, the upturn in the capital markets cycle begins with increased institutional activity, then gradually spreads to the retail sector. But today's unsettled economic environment makes the cycle is much less clear to investors. If the US recovery continues, the institutional businesses should be poised for a rebound after its 2011 'stutter step.'"

Hintz continues: "Schwab (ticker: SCHW) saw total client assets increase by $66 billion in January, up 4% m/m and 9% y/y, to $1.744 trillion, due to modest gains in net new assets and large market gains. Specifically, net new assets were up $7 billion, down 32% m/m but up 11% y/y, and market gains contributed $59 billion to the asset base. The company added 74k new brokerage accounts during the month and now has 10.86 million clients, flat m/m and up 7% y/y.

"- Retail clients took $3 billion out of money market funds during the month as they increased or stemmed outflows in other mutual fund asset classes. Net bond mutual fund purchases were at the highest level in over a year, up $3.4 billion, despite the current low interest rate environment. Equity mutual funds were essentially flat m/m, bringing an end to 10 straight months of large outflows in the asset class, while international mutual fund flows of $669 million reversed seven consecutive months of outflows. Hybrid mutual funds continued to show their strength with $730 million of net flows.

"As we have noted in past research, the pace and duration of the retail cycle lags other areas in the capital markets industry. Retail volumes typically fall sharply after negative equity market events and then slowly recover only after equity market conditions improve significantly. Trading revenue has also historically correlated with equity market performance and volatility, and this past month was no different. In January, daily average trades at Schwab and Ameritrade (ticker: AMTD) were 468K (+8% m/m) and 374K (+18% m/m), respectively.

"- Total client assets at Ameritrade increased to $426 billion, up 5% m/m. Average spread-based balances were $74 billion, up 1% m/m and 24% y/y, while average fee-based balances were $81.4 billion, up 4% m/m and 6% y/y."

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