Charles Schwab (SCHW), the venerable brokerage firm, finds the tail wagging the dog these days in the markets. Federal Reserve actions on interest rates over the past several years have squeezed the firm’s margins, a trend that analysts believe will stay in force for some months to come.

Charles Schwab engages, through its subsidiaries, in securities brokerage, banking, and related financial services. At Dec. 31, 2011, the company had $1.68 trillion in client assets, 8.6 million active brokerage accounts, 1.5 million corporate retirement plan participants, and 780,000 banking accounts.

Significant business subsidiaries of the company include: Charles Schwab & Co., a securities broker-dealer with more than 300 domestic branch offices in 45 states, as well as a branch in each of the Commonwealth of Puerto Rico and London, U.K., and which serves clients in Hong Kong through a subsidiary; Charles Schwab Bank, a federal savings bank located in Reno, Nev.; and Charles Schwab Investment Management, the investment advisor for Schwab’s proprietary mutual funds and exchange-traded funds.

The company provides financial services to individuals and institutional clients through two segments: investor services and institutional services.

The investor services segment provides retail brokerage and banking services to individual investors. The institutional services segment provides custodial, trading, and support services to independent investment advisors and provides retirement plan services, specialty brokerage services, and mutual fund clearing services.

“The Fed's extraordinary decision to purchase about three-quarters of our nation's debt issuance by the Treasury during 2011, largely under Operation Twist, negatively impacted our revenue. The 10-year Treasury yield, which is the closest proxy for the yield we're able to earn on our balance sheet investments given the conservative approach we take to investing, that fell somewhere between 100 and 125 basis points during 2011,” Schwab President and CEO Walter W. Bettinger told analysts

“When you apply that to the $110 billion or so balance sheet that we have at Schwab, the revenue impact certainly created the bump in the road.”

Charles Schwab has a market cap of $15.56 billion in a sector, capital markets, where the average company size is $7.14 billion. Its trailing 12-month P/E ratio is 18.52 and its five-year projected price-to-earnings-growth (PEG) ratio is 1.42, compared to 1.23 for the sector.

Its projected earnings per share growth for the coming year is 8.70 percent, compared to a sector average of 26.30 percent.

Stable revenues

Analysts are mixed on SCHW, with buy or outperform calls from Sandler O’Neill and Goldman Sachs and sell or underperform ratings from Raymond James and Ned Davis Research.

“SCHW's results are heavily dependent on short-term interest rates, given that 37 percent of its top line came from net interest income in 2011. We view favorably its stable asset-based revenues, but we think earnings growth will remain in line with peers until the Federal Reserve raises short-term interest rates, which we do not expect to happen in 2012 or 2013,” Standard & Poor’s Equity Research analysts said in mid-July, rating the stock a hold.

Charles Schwab next reports on Oct. 17.