Charles Schwab & Co. reported higher profits due to increased money market fund revenues and a shift of sweeps to bank deposits, according to the company's 2nd quarter earnings release, "Schwab Reports Record Quarterly Net Income of $452 Million, Up 28%." It says, "The Charles Schwab Corporation announced today that its net income for the second quarter of 2016 was $452 million, up 10% from $412 million for the first quarter of 2016, and up 28% from $353 million for the second quarter of 2015." BlackRock CEO Laurence Fink also recently discussed money market funds and his expectations for the path of interest rates on the firm's 2nd quarter earnings call, according to the transcript on SeekingAlpha.com. We review these reports, as well as the ICI's latest Money Market Fund Holdings, below.
Schwab CFO Joe Martinetto comments, "We delivered record financial results in the second quarter based on sustained success in growing our client base, as well as the effects of the Federal Reserve's initial rate increase in December and the relative stability of other environmental drivers until late in the period. Asset management and administration fees were a record $757 million, up 13% year-over-year, as higher short-term interest rates lifted net money fund revenue."
He adds, "Net interest revenue was a record $798 million, up 30% from the second quarter of 2015, reflecting both stronger short-term rates and a $30-plus billion increase in average interest-earning assets through a combination of organic asset gathering and bulk transfers of client sweep cash balances from money market funds to Schwab Bank. We currently expect to transfer up to $8 billion in money fund balances to Schwab Bank during the second half of 2016. In June, the Bank became the default sweep option for all new accounts, and we anticipate approximately $3 billion of related incremental deposit growth by year-end."
Barron's elaborated in an article, "Charles Schwab's 2Q Revenue Lifted by Money-Market Fund Fees." It says, "Charles Schwab's (SCHW) second-quarter revenues slightly exceeded Wall Street analysts' estimates on Monday morning. Analysts note that the bulk of the earnings beat appeared to be due to a reduction in fees waived on cash-like money-market funds. Managers of money-market funds have waived fees over the past few years so keep ultra-low yields above zero. Schwab's quarterly report says that the company netted $239 million before the $55 million in fee waivers last quarter; average fees on money markets after waivers was 0.45% last quarter compared with 0.16% in the second quarter of 2015."
The Barron's piece continues, "Schwab waived $55 million in money-market fees during the most-recent quarter, less than the $97 million waived in the first quarter. Jefferies' Daniel Fannon notes that Schwab's net revenues for the quarter, $1.828 billion, were $28 million above the firm's estimate. In other words, the revenue beat was "predominantly a function of lower money fund waivers."
On the BlackRock call, one analyst commented, "We know money-market funds have been waiving fees for some time now just because rates are so low. If medium- to long-term interest rates continue to decline, might bond funds have to start doing similar things?" Fink responded, "Well, if anything, we've had [a] 25 basis point increase in the United States, so actually money market funds in many cases are in a better position today than they were a year ago. You're seeing, as you suggested, a flattening of the yield curve.... If the U.S. goes down that path, and we're reversing that increase, and indeed the Federal Reserve needs to ease, that's a whole different issue."
He continued, "I don't see that as an outcome at this moment. I believe the U.S. economy is growing -- not as well as we want it to be, but I think we will see a 2% economy this year ... and we still have plus or minus, a 5% unemployment rate in this country. So despite all of the headwinds and uncertainties, I don't see at this time, a Federal Reserve that turns itself into a central bank that has to aggressively ease. And so, it may delay their path towards normalizing of interest rates, but I don't see any possibility at this moment that they will be forced to going back into an easing mode."
Fink added, "I would tell you very clearly, the U.S. economy is still the area where people want to invest worldwide. And I don't see that -- I don't see the atmosphere where I have to worry about money market funds in the United States [going negative] any time soon. I think we're going to live in this environment of low rate for a long time though."
BlackRock's release says, "Investment advisory, administration fees and securities lending revenue decreased $45 million from the second quarter of 2015 reflecting mix shift from equities to fixed income and cash products, partially offset by lower yield-related waivers on certain money market funds and the effect of AUM acquired in the BofA Global Capital Management transaction. Securities lending revenue of $151 million in the current quarter increased $4 million from the second quarter of 2015."
In other news, the Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of June 30, 2016), which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See our July 13 News, "MF Portfolio Holdings: Repo, Agencies Up; TDs, CDs, European Down Big," for our earlier report on holdings.)
The release explains, "The Investment Company Institute (ICI) reports that, as of the final Friday in June, prime money market funds held 29.5 percent of their portfolios in daily liquid assets (down from 30.8% in May) and 46.8 percent in weekly liquid assets (up from 46.3% last month), while government money market funds held 54.6 percent of their portfolios in daily liquid assets (down from 57.6%) and 69.6 percent in weekly liquid assets (down from 73.9%)." Regulatory minimums are 10% daily liquid assets and 30% weekly liquid assets.
It continues, "At the end of June, prime funds had a weighted average maturity (WAM) of 29 days (down from 31 days) and a weighted average life (WAL) of 44 days (down from 46 days). Average WAMs and WALs are asset weighted. Government money market funds had a WAM of 41 days (up from 39 days) and a WAL of 100 days (up from 96 days)."
The Prime Money Market Funds by Region of Issuer table shows Americas at $446.6 billion, or 43.8%, up from $424.8 billion in May; Asia and Pacific at $215.5 billion, or 21.1%, down from $229.5 billion; Europe at $351.1 billion, or 34.4%, down from $487.2 billion; Supranational at $183 million, or 0.1%, down from $1.4 billion; and Other at $5.9 billion, or 0.6%, down from $7.5 billion. The Government Money Market Funds by Region of Issuer table shows Americas at $1.335 trillion, or 90.4%, up from $1.160 trillion; Asia and Pacific at $23.7 billion, or 1.6%, down from $25.1 billion; Europe at $116.6 billion, or 7.9%, down from $192.4 billion; and Other at $65 million, or 0.1%, down from $70 million.
The release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data. The report includes all publicly offered money market funds that are registered under the Securities Act of 1933 and the Investment Company Act of 1940. All master funds are excluded, but feeders are apportioned from the corresponding master and included in the report."
