CHICAGO--(BUSINESS WIRE)--Strong equity markets and higher interest rates will translate into solid earnings growth for the U.S. retail brokerage sector as companies grow their banking and asset management business lines, according to a new Fitch Ratings report.
Improved equity markets drove earnings growth over the last year as retail investors make a return to the markets. This has driven improved trading activity and higher fees in the asset management businesses. The retail brokers continue to be highly sensitive to higher short-term interest rates, which Fitch believes will further drive significant earnings growth when short-term rates eventually rise.
Price competition, in the form of reduced trading commissions, has been limited over the past year, although Fitch does not rule out additional price competition in the future. Reduced trading commissions may also be used as a means 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. E-Trade 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 considers the level of mortgage exposure assumed by the acquirer and the impact on the acquisition of leverage levels.
Fitch affirmed the ratings of Charles Schwab Corporation (Schwab, 'A'/Outlook Stable) and Scottrade Financial Services (Scottrade, 'BBB-'/Outlook Stable) on March 14, 2014. The affirmations reflect strong earnings improvement, lower leverage metrics and continued revenue diversification. These strengths are counterbalanced by the cyclicality of the business model and the potential for competition and/or operational risks to dampen performance.
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 (Higher Markets and Interest Rates to Buoy Future Performance)