OREANDA-NEWS. Fitch Ratings has affirmed the Long- and Short-Term Issuer Default Ratings (IDRs) of Charles Schwab Corporation (Schwab) at 'A/F1'. The Rating Outlook is Stable. A complete list of ratings follows at the end of this press release.

KEY RATING DRIVERS

IDRs AND SENIOR DEBT

The rating affirmations reflects Schwab's leading market position with retail investors, good earnings diversity, and scalable business model combined with appropriate cash flow and balance sheet leverage metrics for its rating category. Rating constraints primarily include the potential for intense price competition and/or operational risks combined with some sensitivity of the business model to movements in equity markets.

Schwab has evolved its business model away from pure trading commissions and more toward a full service financial firm catering to the needs of the mass affluent and mass market retail investors. This includes a strong focus on asset/wealth management products and banking products and away from traditional trading products. Fitch views this strategic approach positively from a credit perspective.

Schwab's franchise supports its ratings and is a key differentiator compared to peer institutions. Fitch believes Schwab's strong franchise has contributed to improving wallet share with customers, creating sticky, profitable and long-term relationships that afford Schwab increased opportunities to capture incremental revenue through cross-selling.

Schwab's key value proposition to clients is its ability to offer low cost products with good customer service. Schwab seeks to increase customer wallet share by improving customer interfaces through the use of technology to stay ahead of competitors. Examples of this include the introduction of the Schwab Index Advantage (SIA) offering and the Schwab Intelligent Portfolios (SIP) among others.

Schwab's revenue composition reflects a balanced business model with asset management and other fee revenue constituting 47% of overall revenue; net interest income (NII) that comprises 40% of overall revenue; and more volatile trading revenue that constitutes only 13% of overall revenue in 2015. Moreover, Fitch believes the recurring nature of the asset management revenue and NII should add stability to Schwab's operating performance over time.

Fitch believes Schwab has strong earnings upside potential given its positive sensitivity to higher short-term interest rates. This is due to a relatively short duration investment portfolio which should reprice more quickly than deposits in a higher short-term interest rate environment. At certain points in the interest rate cycle, Fitch estimates this could drive NII to over 55% of overall revenue. Rising rates would also benefit Schwab's money market fund platform, where fee waivers are currently impacting the profitability of the business.

Given that the bulk of this potentially higher profitability should drop directly to the bottom line, it has the potential to also significantly boost the company's profit margin (35.7% in 2015) and its return on equity, which was 11.5% in 2015. While this earnings improvement would not necessarily impact ratings since it is viewed as a cyclical dynamic rather than a structural one, Fitch notes that this may allow Schwab's management to more significantly invest in technology products to further extend the company's competitive advantages.

Schwab's leverage as measured by adjusted debt to earnings before interest, depreciation and amortization (EBITDA) ticked up to an annualized 0.94x in the fourth quarter of 2015 as recent debt issuances that have been largely held in high quality liquid assets (HQLA) couldn't be fully offset by improved earnings performance. Nevertheless, Schwab's leverage is solidly in line with its rating category.

Fitch also places significant weight on Schwab's Tier 1 Leverage ratio in its analysis given the growing size of Schwab Bank. As of year-end 2015, Schwab's Tier 1 leverage ratio was satisfactory at 7.1%, particularly given Fitch's view of the comparatively low risk of the bank balance sheet. It is noteworthy that Schwab plans to move more of its money market fund balances into deposit products, and as such recently issued preferred stock to maintain its Tier 1 Leverage ratio near its 7.0% target.

Fitch also notes the current proposals from the Department of Labor (DOL) regarding holding retirement advisors to a fiduciary standard. If implemented as currently proposed, Fitch anticipates that the proposals could require additional disclosures and/or changes to processes or fee structures, but have less impact on larger players with scale and larger, more affluent customers. As such, Fitch does not expect this to impact ratings at this time.

SUPPORT RATING AND SUPPORT RATING FLOOR

Schwab has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, Schwab is not systemically important and therefore, sovereign support is unlikely. The company's IDRs do not incorporate any support.

PREFERRED STOCK

Preferred stock issued by Schwab is notched down from the holding company rating in accordance with Fitch's assessment of the instrument's non-performance and relative loss severity risk profiles. Schwab's preferred stock issuances are notched five notches from the IDR, which includes two notches for non-performance and three notches for loss absorbing capacity.

RATING SENSITIVITIES

IDRs AND SENIOR DEBT

Given the evolution of Schwab's business model noted above, there could be some modest upside to ratings should Fitch observe greater revenue stability through various market cycles, combined with sustained capital and liquidity levels.

Fitch continues to believe that the most significant rating risk for Schwab is a large operational or technological security loss specific to the firm that causes clients to leave the firm. Operational and technological security losses are inherently difficult to predict and measure and do serve as an upwards rating limitation.

Additionally, with the expanding lending platform, underwriting discipline and asset quality are also increasingly important rating drivers. To date, credit performance of the loan portfolio has been excellent. However, the growth of Schwab Bank bears monitoring. While not anticipated, should the company begin to reach for yield in its investment portfolio such that it increases the credit or interest rate risk profile of the balance sheet this could be viewed negatively.

Fitch also acknowledges that Schwab -- as well as other industry participants -- derive some revenue from payment for order flow, which is akin to receiving rebates from directing client trades to a certain market makers. While this may provide more efficient execution for clients, given current industry scrutiny, it is possible that regulatory changes could cause Schwab and others to have to either enhance disclosures and/or adjust routing practices. While not expected, to the extent that this regulatory scrutiny caused lost revenue or regulatory findings that contributed to reputational damage to the industry, this could negatively impact Schwab's ratings or the Rating Outlook.

SUPPORT RATING AND SUPPORT RATING FLOOR

Should Fitch's views on the perceived likelihood of extraordinary support extended to Schwab change, a change in the Support Rating and Support Rating Floor could occur. Presently, Fitch does not anticipate this scenario.

PREFERRED STOCK

Schwab's preferred stock rating is primarily sensitive to any change in the company's IDR. The existing notching would be maintained in conjunction with any change in the IDR, at least for so long as the IDR is investment grade.

Fitch has affirmed the following ratings

Charles Schwab Corporation:
--Long-term IDR at 'A';
--Short-term IDR at 'F1';
--Senior unsecured notes at 'A';
--Short-term debt at 'F1';
--Preferred stock at 'BB+';
--Support at '5';
--Support floor at 'NF'.

The Rating Outlook is Stable.