SCHW — Q2 2026 Financial Report Analysis

Every revenue line grew at once, and costs grew half as fast

Charles Schwab reported second-quarter 2026 net revenues of $7,072 million, up 21% from $5,851 million a year earlier, and net income of $2,800 million, up 32%. Diluted earnings per share — profit divided by the number of shares outstanding — reached $1.54 against $1.08, up 43%.

The gap between those three growth rates is the whole quarter in miniature. Revenue grew 21%. Expenses excluding interest grew 12%, to $3,403 million, so profit before tax grew faster than revenue (31%, to $3,669 million). Then the share count shrank — 1,739 million average diluted shares versus 1,822 million, after $1.0 billion of buybacks in the quarter and $3.4 billion in the first half — and preferred dividends fell to $119 million from $149 million following the redemption of $2.1 billion of Series I preferred stock against a $1.5 billion Series L issuance. Each step compounds the one before it, which is how a 21% revenue quarter becomes a 43% EPS quarter.

The margin story is about what Schwab pays, not what it earns

Net interest revenue — the difference between what Schwab earns lending out client money and investing it, and what it pays clients and lenders for that money — rose $535 million, or 19%, to $3,357 million. Net interest margin, that spread expressed as a percentage of average interest-earning assets, widened to 3.00% from 2.66%.

That happened despite falling asset yields, not because of rising ones. The Federal Reserve cut its policy rate by a cumulative 75 basis points between the third quarter of 2025 and year-end 2025, then held the upper bound at 3.75% through the whole first half of 2026. Schwab's yields moved down accordingly: cash and cash equivalents earned 3.58% versus 4.30%, segregated client cash 3.58% versus 4.20%, and margin loans 5.68% versus 6.64%.

The offset came from two places.

Funding got materially cheaper. The average rate paid on bank deposits fell to 0.19% from 0.55% — interest expense on a slightly larger average deposit base ($246.3 billion versus $237.6 billion) dropped to $114 million from $326 million. Total funding cost fell to 0.70% from 0.91%. Schwab sets the rates it pays on sweep cash itself, and it passed through roughly half of the Fed's 75 basis points of cuts to depositors while its own assets repriced down more slowly on a blended basis.

The asset mix shifted toward loans. Average margin loans (receivables from brokerage clients) reached $112.1 billion against $78.7 billion, and average bank loans $63.8 billion against $48.7 billion — both yielding well above 4% — while low-yielding legacy securities ran off: held-to-maturity securities averaged $131.1 billion at a 1.73% yield versus $141.1 billion, and segregated cash fell to $41.3 billion from $47.6 billion. The net result is that the blended yield on interest-earning assets actually rose, to 3.47% from 3.45%, even as every individual asset class yielded less. That is a mix effect, and it is doing more work here than any rate move.

Period-end balances show the same trend accelerating: margin receivables ended June at $122.8 billion, up 48% year over year and 17% since December, and bank loans at $67.0 billion, up 33% and 16% respectively, driven by pledged asset lines and first-lien residential mortgages.

One structural caveat worth naming: management has cut the portfolio's exposure to further rate cuts. Its own simulation now shows an instantaneous 100 basis point decline in rates reducing net interest revenue over the next twelve months by 1.6%, versus 5.3% modelled at December 31, 2025 — the result of 2026 hedging activity and balance sheet changes. Comparability is imperfect, since Schwab switched to a dynamically-sized balance sheet model starting this quarter, but the direction is unambiguous: the franchise is much less rate-exposed going into a potential easing cycle than it was six months ago.

Trading: all volume, less per trade

Trading revenue rose 28% to $1,215 million on daily average trades of 11.92 million, up 57%. Revenue per trade fell 19%, to $1.64 from $2.03.

Both facts are true at once because of mix. Equities climbed to 61% of daily trades from 54%, and equities carry far less revenue per order than options do. Within order flow revenue — payments Schwab receives from market makers for routing client orders — options revenue rose 62% to $434 million while equities order flow revenue actually fell 4%, to $190 million. Commissions rose 23% to $528 million on higher volume. So the growth is volume plus options pricing, partly diluted by a retail mix tilting toward plain stock trades. Trading revenue at this level is a function of client engagement that can reverse quickly; it is the least durable of Schwab's four revenue lines.

Asset management fees grew, but fee yields fell

Asset management and administration fees rose 16%, to $1,825 million. Average client assets rose 26%, to $12.72 trillion. The gap is fee compression from mix: the fee-based managed investing solutions that carry the highest rates yielded 0.37% on average balances versus 0.40% a year ago, and the mutual fund, ETF and alternatives complex yielded 0.15% versus 0.16%. Growth is landing disproportionately in Schwab's own low-cost equity and bond funds, ETFs and collective trust funds, which earn just 0.07%. Rising markets lift the asset base faster than they lift this revenue line, and that will stay true.

Bank deposit account fees — earned on client cash swept to TD Bank entities under the 2023 insured deposit agreement — rose 35% to $333 million on better net yields, even though the underlying balances keep shrinking: $3.0 billion of those balances moved onto Schwab's own balance sheet in the first half of 2026, following $6.7 billion after September 10, 2025. This line is in structural runoff; each transfer reduces fee revenue but adds funding Schwab can invest itself, which is why it shows up as a plus in net interest revenue.

Client growth is the part that compounds

Core net new client assets — money clients moved in, excluding market gains — were $119.8 billion in the quarter, up 49%, and $259.8 billion in the first half, up 19%. Total client assets reached $13.08 trillion, helped by an S&P 500 that rose 15% in the quarter. New brokerage accounts were 1.4 million, up 26%, and active accounts reached 39.8 million, up 6%. Assets receiving ongoing advisory services grew 23%, to $6.67 trillion.

The two segments diverged in a way worth noting: Advisor Services (custody and support for independent registered investment advisors) grew revenue 27%, to $1,544 million, faster than Investor Services' 19% growth to $5,528 million — while its expenses grew only 8% versus 13%. The independent-advisor channel is currently the better-operating-leverage half of the business.

Takeaway: The 43% EPS jump is not a rate windfall — every asset yield Schwab reports fell year over year. It is a deposit-cost and mix result: Schwab passed roughly half the Fed's 2025 cuts through to client cash, while adding $48 billion of average margin and bank loan balances yielding 4-6% as $28 billion ran off from securities and segregated cash yielding 1.7-3.6%. That is a repeatable change in balance sheet shape, not a one-quarter print, and it is why management has simultaneously cut the portfolio's downside to further rate cuts to roughly a third of what it was at year-end.

What management said, and what to watch

Schwab raised its expense outlook in this filing: it now expects total expenses excluding interest for full-year 2026 to rise approximately 10% to 11%, attributing the increase to volume-related costs supporting trading activity and to operating and integrating Forge Global Holdings, acquired March 2, 2026 for $636 million. Forge contributed $40 million of revenue and a $33 million net loss in the quarter — small, and currently dilutive to margins. Management also now expects full-year capital expenditures to run slightly above its previously stated 3-5%-of-revenue range, after a $633 million multi-year software license pushed second-quarter capex to $792 million from $136 million a year ago (booked with an offsetting liability in long-term debt, so it does not run through the income statement now).

Three things to watch from here. First, expense guidance of 10-11% against first-half revenue growth of 18% still implies positive operating leverage for the year, but the second-quarter expense rate (+12%) is running at the top of that range — the cushion is thinner than the headline margin suggests. Second, trading revenue is doing a lot of work: at 17% of net revenues and up 28% on a 57% volume surge, a return to calmer markets would remove more from the growth rate than any other line. Third, the legacy bond book is still a drag on capital — accumulated other comprehensive loss stood at $10.6 billion at June 30, improved from $11.0 billion at year-end but not gone, and the consolidated Tier 1 leverage ratio fell to 8.7% from 9.3% as buybacks and balance sheet growth consumed capital. The adjusted Tier 1 leverage ratio of 6.8% sits inside management's 6.75%-7.00% long-term objective, which leaves less room for buybacks to accelerate from here than the earnings growth alone would imply.