The financial landscape for Charles Schwab Corp. has seen some fluctuations, with a 24% reduction in net interest revenue due to clients reallocating their funds from the bank into higher-yielding financial instruments. Despite persistent elevated interest rates, the company’s leadership is optimistic about the situation.
Peter Crawford, the Chief Financial Officer of Charles Schwab, stated that “cash realignment activity decelerated further during the quarter, even with the brief uptick in August and an increase in long-term interest rates,” as the firm released its third-quarter results.
During the third quarter, the Westlake, Texas-based firm reported a 28% decrease in deposits, amounting to $284.4 billion compared to the previous year, surpassing the average analyst estimate of $268.8 billion, as per a Bloomberg survey. This positive news spurred a 3.7% increase in Schwab’s shares, reaching $53.22 at 10:05 a.m. in New York.
While Charles Schwab experienced a decline in net interest revenue, dropping to $2.2 billion from the previous year due to clients moving their funds to higher-yielding investments, the company managed to attract $46 billion in core net new assets for the quarter and $27 billion in September. This is a decrease of 32% from the same period the previous year. Adjusted earnings per share were reported at 77 cents, slightly exceeding analysts’ estimates of 74 cents.
Net revenues for the firm fell by 16% to $4.6 billion compared to the previous year, which slightly missed analysts’ expectations. During its earnings presentation, Charles Schwab projected an anticipated 8% to 9% decline in revenue for the full year 2023 compared to the prior year. However, the company’s executives noted that the firm stands to benefit from elevated interest rates, primarily due to its various variable-rate products.
The Federal Reserve’s interest rate hikes in the last year and a half, aimed at combatting inflation, have created challenges for Schwab’s banking division, a vital source of revenue. Higher interest rates prompted some clients to move their funds from the bank into other investment vehicles, including money-market funds, a process known as “cash sorting.”
Company leaders have previously mentioned that the worst of the deposit migration is behind them, and they anticipate renewed growth by the end of the year. This positive outlook follows a year-to-date stock decline of approximately 38%, attributed to the turmoil that impacted mid-sized banks earlier in the year.
To bolster its liquidity position, the firm issued around $2.4 billion in senior notes in late August. This move, as Peter Crawford explained, “further bolstered our diversified liquidity profile.” He also indicated that the company is likely to issue more debt “to build up extra liquidity” in preparation for anticipated debt maturities early next year.
Moreover, Charles Schwab has identified opportunities for increased operational efficiency, including leveraging the benefits of enhanced automation. Walt Bettinger, the Chief Executive Officer, emphasized that “once fully implemented, we expect these actions to deliver at least $1 billion of incremental annual expense savings.”
The brokerage is continuing its integration with TD Ameritrade and recently unveiled a revamped trading platform, developed in collaboration with TD Ameritrade’s systems. James Kostulias, the Managing Director and Head of Trading Services at Schwab, praised the new platform, describing it as a “super-charged, holistic retail trading experience” that positions Schwab as the premier destination for retail trading. Kostulias added that trading remains a focal point for the company as it moves forward.
