Brokerage Firms Post Solid Gains in Earnings

A jump in new accounts and interest income at discount brokerages Charles Schwab Corp. and TD Ameritrade Holding Corp. helped fuel strong profit gains in the second quarter, the companies said Tuesday.

Merrill Lynch & Co., the world’s biggest brokerage, also reported a hefty profit increase, but warned that business conditions had become “challenging.”

Schwab, the biggest U.S. discount broker, said second-quarter profit rose 35% after price cuts lured new clients. Net income was $251 million, or 19 cents a share, compared with $186 million, or 14 cents, a year earlier, the San Francisco-based company said. Revenue jumped 21% to $1.3 billion.

Client assets at Schwab increased 16% from a year earlier, to $1.3 trillion, as the firm expanded its promotion effort with its Talk to Chuck campaign, featuring its eponymous 68-year-old founder and chief executive. Last month the company cut commissions for the ninth time in two years to attract business.

Schwab said its active account base grew by 173,000 in the quarter to about 6.8 million.

Omaha-based TD Ameritrade’s quarterly profit soared 67% to $139.8 million, or 23 cents a share, from $83.6 million, or 20 cents, a year earlier. Revenue surged 130% to $540 million.

The company’s results were pumped up in part by its acquisition of TD Waterhouse in January, but it also benefited from the addition of 128,000 accounts in the quarter, to about 6.1 million, CEO Joseph Moglia said.

Despite the rocky stock market in recent months, some analysts said the discount brokerages’ growth in new clients was a healthy sign.

“Clients continue to bring in new accounts despite the market weakness,” said Michael Vinciquerra, an analyst at Raymond James & Associates in Atlanta. “We’ll definitely see a tough summer, but the longer-term outlook for discount brokers looks good.”

With more client assets under their roofs, the discounters have more opportunity to earn recurring fee income from those sums. TD Ameritrade said its client asset total was $255 billion as of June 30, up from $79 billion a year earlier, before the Waterhouse merger.

More client assets also mean a greater opportunity for the brokerages to make money off loans to clients. That has helped them decrease their dependence on commission income.

Schwab’s net interest revenue -- interest income minus interest expense -- rocketed 41% in the quarter from a year earlier. TD Ameritrade’s net interest revenue surged 102%.

Schwab shares rose 11 cents to $14.37. Ameritrade jumped $1.05 to $14.69. Both have been beaten down in recent weeks as the stock market has slumped.

Separately, Merrill Lynch said second-quarter profit rose 44% to $1.63 billion, or $1.63 a share, from $1.14 billion, or $1.14, a year earlier. Revenue was up 29% to $8.2 billion.

Investment-banking fees rose, profit margins at Merrill’s brokerage reached an all-time high and earnings from fund management doubled.

But shares of New York-based Merrill lost 77 cents to $67.50 after Chief Financial Officer Jeffrey Edwards said that business conditions were more “challenging” and that it was too early to predict how earnings might shape up this quarter.