OREANDA-NEWS. U.S. retail brokers continue to capture more client wallet share and drive a more diverse revenue base, which could support further improvements in their financial performance, according to a special report published today by Fitch Ratings.

Reflecting these favorable dynamics, Fitch affirmed the ratings of Charles Schwab Corporation (Schwab, 'A'/Stable Outlook) and Scottrade Financial Services (Scottrade, 'BBB-'/Positive Outlook) on March 08, 2016.

The ratings affirmations reflected good operating performance driven in part by increased revenue diversification, and lower leverage metrics. These results continue to be counterbalanced by some cyclicality still present in the business model as well as the potential for price competition or large operational risks to weigh on overall results.

Key opportunities for the retail brokers include continue growth of customer wallet share driven by additional products and good customer interfaces driven by investments in technology. Fitch notes that a focus on technology can help keep the retail brokers ahead of competitors all while also contributing to efficiency enhancements.

To the extent that the retail brokers are successful in this effort, as industry leader Schwab has largely been, it has the potential to create a more durable business model and stickier customer relationships.

Other opportunities include continued asset sensitivity to higher short-term interest rates, which could serve to significantly increase the proportion of net interest income in each firm's revenue composition. This could drive significant operating margin improvement, which if sustained could lead to some modest upwards rating momentum over a longer-term time horizon

Key risks for the retail brokers are primarily related to extreme price competition in the form of lower or no trading commissions. At present, Fitch believes that reduced trading commissions will be used more as a marketing tool 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.

Other key risks include the aforementioned operational risks, which Fitch believes to have been largely well managed. Scottrade, for example, recently experienced a cyber breach as part of a larger government probe into cyber threats, and while the company is taking remediation actions, the disruption to its business appears to be contained.