(Recasts, adds more analysts’ comments, share movement)
By Anurag Kotoky
BANGALORE, Nov 20 (Reuters) - Friedman Billings Ramsey raised Charles Schwab Corp SCHW.O to “market perform” from “underperform,” saying the investment brokerage was in a position to begin sweeping more client balances from money market funds into its bank, resulting in a significantly higher revenue yield.
Fox-Pitt Kelton, Bernstein Research and Sandler O’Neill also said Schwab, the biggest U.S. online brokerage, was capable of weathering the current financial turmoil and emerge healthier in the longer term with its strong funding position.
Shares of the company rose as much as 9 percent on Nasdaq, while the broader S&P Financial Index .GSPF was mostly flat.
Friedman’s Matt Snowling estimated that out of Schwab’s $202 billion in assets under management, about $67 billion is invested through money-market sweep and another $19 billion is invested in other tax-exempt funds.
“..We are not suggesting that Schwab will actually move anything close to that (remaining) $114 billion total but, for every $10 billion of cash moved from a money fund to the bank sweep, we estimate Schwab earns an additional $0.13 per share on an annualized basis,” Snowling said.
Sweep accounting involves the automatic transfer of an amount of money that exceeds a certain pre-set level into a higher interest earning investment option, which is usually a money market deposit account.
In a sweep program, investors get the best interest rate without getting too involved in the bank procedure. “Schwab’s strength has been a key advantage in attracting new business vis-a-vis weakened competitors,” Fox-Pitt’s David Trone said in a note to clients.
However, at least four analysts cut their price targets on the shares of the company, saying declining short-term interest rates and weakening equity markets will hurt the brokerage in the near term.
The company’s fund management fees and net interest revenues are under pressure from falling interest rates and a decline in its managed asset values, Friedman’s Snowling said in a note. He cut his price target on the stock by $1.50 to $16.50.
Discount brokerages like Schwab increasingly rely on fees from the assets managed by their client registered investment advisers (RIAs).
In return for the fees, they offer custodial services including technological and operational support for RIAs, who often do business with more than one custodian.
Bernstein Research analyst Brad Hintz lowered his price target by $4 to $19, but maintained his “outperform” rating on the stock.
“We believe the equity market will continue to decline at least through the first half of 2009 and also assume the Fed will make further cuts to the Fed Funds rate, both of which have negative implications for the firm’s bottom line,” Hintz said.
Friedman’s Snowling said any further interest cut will likely force money markets managers, including Schwab, to begin waiving fees to maintain customer yields above 0 percent or high enough to compete with bank deposits.
Separately, Fox-Pitt’s Trone cut his price target on Schwab stock by $2 to $24, while Sandler O’Neill analyst Richard Repetto reduced it by $6 to $20.
Shares of San Francisco-based Schwab were trading up 8 percent at $15.82 on Nasdaq. They earlier touched a high of $16. Shares of smaller rival TD Ameritrade Holding Corp (AMTD.O) were up more than 8 percent, while those of E*Trade Financial Corp (ETFC.O) gained more than 7 percent. (Editing by Vinu Pilakkott, Himani Sarkar)