Charles Schwab 2012 Annual Report Download - page 22

t rst, one might be tempted to dismiss 2012 as a replay
of 2011 for Schwab. After all, there were many similarities
— a still-tough macro environment with persistently high
unemployment and a shaky economic recovery, a tense political
debate around scal policy, and a sustained effort by the
Federal Reserve to lower long-term interest rates. Even Schwab’s
earnings per share looked about the same from year to year. Yet
we believe the real story for 2012 lies beneath these surface
similarities. It’s a story of remarkable progress in growing
our business in the face of sustained headwinds, of building
momentum with clients as we continue to invest in improving
our ability to serve them, and of our ability to combine careful
balance sheet management and spending discipline to deliver
earnings power that is both growing and progressively less
susceptible to further Fed rate actions. It’s a story that deserves
a closer look, so let’s dig a little deeper.
We planned for a still-tough environment in 2012, with at
interest rates and some improvement in the equity markets and
trading activity as the year progressed. The equity markets were
indeed in positive territory all year long, ending with double-digit
returns, but trading activity never really picked back up, even
after the election was decided. Additionally, the Fed chose to
extend its quantitative easing activity, which pushed long-term
interest rates down further. Given the way we make money, “still-
tough” ended up being “tougher” and we ended up producing
4 percent revenue growth — not what we’d have done with at
rates and a recovery in trading, but stronger than we expected
under the circumstances. By adhering to our spending plan, we
kept expense growth below revenues while still investing more
than $160 million in our client initiatives, and were thus able to
hold the line on a 29.7 percent pre-tax prot margin and roughly
70 cents of earnings per share. Not bad when you consider the
environment took away almost $200 million of revenue from our
baseline scenario for the year.
Still, sideways is boring, and sideways is not building
stockholder value, but let’s consider the ways in which Schwab
made meaningful progress in 2012. First and foremost,
momentum with clients was far superior. Net new assets totaled
$139.7 billion for the year, $112.4 billion if you look at what
we call core ows, excluding signicant one-time items. That’s
37 percent higher than 2011. Importantly, our fourth quarter
core net new assets of $47.8 billion were more than double the
year-earlier level. While we may not be quite ready to claim that
quarterly performance as our new run rate, our asset gathering
JOE MARTINETTO
CHIEF FINANCIAL OFFICER
STEP BY STEP
NET REVENUES
(IN MILLIONS FOR YEAR ENDED DECEMBER 31)
2008
$5,150
2012
$4,883
2011
$4,691
2009
$4,193
2010
$4,248
20 LETTER FROM THE CHIEF FINANCIAL OFFICER