Fitch: Retail Brokers Benefitting from Cyclical and Structural Improvements

CHICAGO--(BUSINESS WIRE)-- While retail brokers continue to enjoy the cyclical benefits of improving market conditions, structural changes in their business models may support more permanent improvements in their performance, according to a special report published today by Fitch Ratings.

Reflecting these favorable dynamics, Fitch affirmed the ratings of Charles Schwab Corporation (Schwab; 'A'/Outlook Stable) and Scottrade Financial Services (Scottrade; 'BBB-'/Outlook Positive) on March 11, 2015.

The affirmations reflected continued earnings improvement, lower leverage metrics and continued revenue diversification, all of which Fitch views positively from a credit perspective. These strengths are counterbalanced by the cyclicality of the business model and the potential for competition and/or operational risks to dampen performance.

The revision of Scottrade's Rating Outlook to Positive from Stable reflects Fitch's expectation for moderating bank growth, improving holding company liquidity and continued strong cash flow leverage metrics.

Improved equity markets helped drive earnings growth over the last year as retail investors continued to make a return to the markets. This has driven improved trading activity and higher fees in the asset management businesses.

Additionally, the retail broker business model continues to evolve, as the retail brokers look to increase their wallet share with customers. This includes offering various banking products as well as multiple wealth management products to their clients.

To the extent that retail brokers are successful in this effort, as industry leader Schwab largely has been, it will create a more durable business model and stickier customer relationships. The sticky relationships are important because they help cement deposit relationships. Retail brokers' high sensitivity to higher short-term interest rates, further underscores the importance of deposits because it will allow the retail brokers to lag deposit re-pricing relative to asset re-pricing, when short-term rates eventually rise.

Price competition, in the form of lower or no trading commissions, has been modest over the past year, though it is likely to increase over time. Fitch believes that reduced trading commissions will be more significantly used as a marketing tool to attract more asset or wealth management business. Retail brokers with scale and diversified revenue will be best positioned to manage any such pricing pressure.

Fitch believes some industry consolidation is possible. For example, E*Trade Financial Corporation continues to wind down its legacy mortgage exposure, increasing the likelihood that it will be acquired to achieve scale efficiencies. In evaluating any such transaction, Fitch would consider the level of mortgage exposure assumed by the acquirer and the impact of the acquisition on leverage levels.

The full report 'Retail Brokerage Industry Update' is available at 'www.fitchratings.com.'

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research: Retail Brokerage Industry Update (Rising Markets and Rates Offer Cyclical Upside)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=861898

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Fitch Ratings, Inc.
Justin Fuller, CFA
Senior Director
+1-312-268-2057
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Media Relations
Alyssa Castelli, +1-212-908-0540
[email protected]
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

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