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Schwab-TD Ameritrade Merger to Complete

Investors looking at Charles Schwab await its pending merger with TD Ameritrade. The two companies announced the deal in November last year and hope to complete it later this year. 

This combination will hold Schwab as one of the key players in the financial sector. Currently, they announced a 75% probability of going through with it in their valuation model. 

There is not much antitrust concern about combining the two companies’ retail online brokerage businesses. There are many online brokerage companies and the space is very competitive. 

However, the combined registered investment advisor of the two businesses will likely have upward of 40% of the market share by assets. 

There are many types of wealth management firms, though. The combined companies’ market share of wealth management assets is probably only a mid to high-single-digit percentage.

Here’s a near to medium-term outlook for Schwab’s earnings on a stand-alone basis: 

The largest driver of the company’s earnings is net interest income. In recent quarters, it has made up around 60% of net revenue. 

Net Interest Income Likely to Remain Constrained at Schwab

The positive outlook for interest rates in the United States reversed in late 2018. Rates gradually declined the following year.

However, in March 2020, the federal-funds rate was dramatically cut to 0%-0.25%. They did this to deal with the economic downturn caused by the coronavirus crisis.

The 10-year U.S. Treasury yield has also fallen below 1%. That level wasn’t even breached during the “zero interest rate policy” period after the 2008 financial crisis. Net interest income will likely remain constrained at Schwab for a couple of years. 

Another major revenue lever for Schwab is client asset growth. Approximately 30% of the company’s net revenue comes directly from asset management and administration fees. 

The company has been building out its investment management service offerings. These include its exchange-traded fund, separately managed accounts, and robo-advisor offerings. However, these offerings have experienced pressures on their pricing. 

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