Charles Schwab Earnings and revenue fell but beat Wall Street estimates

It’s been a challenging year for Charles Schwab shares. Investors will look to the company’s second-quarter earnings report for signs that relief is on the horizon.

Over the past year, Schwab clients have been moving money from survey accounts to higher-yielding offerings, which are less profitable for the company. This process, known as cash counting, has been a headache for Charles Schwab and will be a major theme in Tuesday’s earnings.

“While we anticipate a slowdown in screening, we expect screening to remain at a high level inhibiting net deposit growth through 2024 given our estimates of $20 billion in organic liquidity generation per quarter,” Bank of America analysts wrote in a July 11 research note. .

Analysts surveyed by FactSet expect non-GAAP earnings per share of 71 cents on revenue of $4.61 billion. In the same quarter last year, Schwab reported earnings of 97 cents on revenue of $5.1 billion.

Charles Schwab stock, which is down about 30% this year, was trading at about $59 a share as of Monday morning. That’s well below the stock’s 52-week high of $86.63. Bank of America analysts have a price target for Schwab stock of $52.

financing costs. Although Charles Schwab is known for its online brokerage platform, the company also operates a large bank that generates significant revenue. Charles Schwab sweeps clients’ uninvested money into bank accounts that only pay 0.48%.

Last year, Schwab made more than $10 billion in net interest income, which is the difference between the interest Schwab earns on bonds and loans and the interest it pays to its funding sources. Net interest income represented about half of the company’s total annual revenue last year.

But as interest rates rose, clients shifted their uninvested money to higher paying options, such as CDs and money market funds. Total client assets in the first quarter of third-party owned and purchased funds were $343.5 billion, up 179% year-over-year, according to Charles Schwab.

Bank deposits, however, have declined. The company’s deposits amounted to $325.7 billion at the end of the first quarter, down from $465.8 billion in the same period a year earlier.

When deposit outflows exceed Schwab’s available funds, the company has to rely on other, more expensive sources of financing, such as CDs and Fed Home Loan loans. Charles Schwab reported that he had issued $41 billion in CDs as of May, up from $6 billion at the start of the year. “Because these financing costs are around 5% or more, this puts pressure on net interest margin (NIM) and bottom line earnings,” Jeff Schmidt, an analyst at William Blair, wrote in a June 14 update.

Bank of America analysts suggest that Schwab may be able to sell some of the securities in its portfolio of available-for-sale securities in the coming quarters, which would allow it to pay a portion of the growing external financing fund. “This action will free up capital, remove some of the pressure on NIM, and accelerate the hypothesis for reinvestment in securities, although we do not believe this catalyst is likely to occur until regional bank equity volatility reaches a low/stable level,” they wrote. . .

There are signs that cash sorting is ebbing. Analysts at UBS point to lower inflows into Schwab’s money market funds. “Month-to-date, the average daily pace of incoming flows is $543 million, which is 41% lower than the historical average of $927 million,” they wrote in a July 14 research note. Moreover, it is 46% lower than the daily average excluding April (a decrease due to tax payments). While money flows in the money market may not provide a perfect indicator for screening, they do indicate a slowdown in the screening process.”

Investors will also be looking for updates on Charles Schwab’s efforts to integrate TD Ameritrade clients and advisors. The company bought TD in 2019, but transitional calculations are a big job that takes time. To date, the company has transferred about 5.5 million retail customer accounts from TD to Schwab. It said it remains on track to move nearly all of its remaining TD customer accounts over the course of 2023 and early 2024.

Charles Schwab is the largest custodian of registered investment advisors in the country, providing RIA with technology, asset management, and other services. The RIA segment is among the fastest growing segments of the wealth management industry.

Charles Schwab, who also runs a large online brokerage, has raised new assets this year. In May, net core new assets brought in by new and existing customers for the company were $20.7 billion, according to Charles Schwab. Customer assets totaled $7.65 trillion at the end of May, up 5% from May 2022, according to Schwab’s. Monthly update.

If the cash count numbers aren’t worse than expected, investors should see positive news in other parts of the company announced on Tuesday.

Write to Andrew Welsch at [email protected]