Charles Schwab’s securities lending revenue has boomed following the incorporation of retail broker TD Ameritrade, with earnings from this business alone accounting for more than 10 per cent of net interest revenue in Q4.
The US electronic trading platform was brought under the Charles Schwab umbrella on 6 October 2020 for $22 billion after a stellar year of client growth partly driven by national anti-pandemic lockdowns which saw millions of amateur investors turn to stock trading apps to supplement their incomes.
As of January 2021, the platform hosts roughly 13 million client accounts totalling approximately $1.5 trillion in assets.
The surge of retail trading activity, and the subsequent flood of lending revenue, has fundamentally changed Charles Schwab’s revenue model, according to chief financial officer Peter Crawford.
Full-year 2020 securities lending revenue was $334 million in 2020, with $201 million coming in Q4.
By comparison, 2019 full-year revenue was $147 million, including $41 million in Q4.
Securities lending now accounted for more than 10 per cent of Charles Schwab’s net interest revenue in Q4 and contributed 17 basis points towards net interest margin.
“Trading accounted for 20 per cent of our Q4 revenue and with margin lending and securities lending together at more than 10 per cent, we now have roughly a third of our revenue driven by, to varying extent, client engagement and trading activity,” Crawford writes in the firm’s full-year report.
He adds: “We think there's a lot of opportunity long-term to capitalise on the combined strength of TD Ameritrade and Schwab and our securities lending operations.
As of December 31, total client assets reached a record $6.69 trillion spread across 29.6 million brokerage accounts, up 66 per cent and 140 per cent, respectively, in 2019.
The acquisition-driven boost went some way to offset the 6 per cent decrease in overall net interest revenue to $6.1 billion, caused by the extreme low-interest-rate environment created by the Federal Reserve to mitigate some of the financial challenges of the COVID-19 pandemic.
Overall, the firm’s net income for Q4 2020 was $1.1 billion, compared with $698 million for the prior quarter, and $852 million for Q4 2019.
Charles Schwab CEO Walt Bettinger described the TD Ameritrade deal as “the largest brokerage acquisition in history” that represented “an extraordinary capstone to an extraordinary year”.
