Charles Schwab earnings beat estimates, but bank deposits decline again

Charles Schwab reported earnings Monday that were better than the latest Wall Street average forecast but still down sharply from a year ago. The brokerage giant reported third-quarter adjusted earnings of 77 cents per share, beating analysts’ expectations of 74 cents. This compares to reported earnings of $1.10 for the same period last year, as Schwab (ticker: SCHW) has faced challenges this year.

Revenue fell 16% year over year to $4.6 billion, while adjusted net income fell 31% to $1.5 billion.

Schwab’s bank deposits, which had been a source of concern for investors, fell again to $284.4 billion from $304.4 billion in the previous quarter and from $395.7 billion for the same period last year.

The company has had a difficult year. Schwab stock, which fell during the regional banking crisis in March, is down about 36% so far this year.

“I realize that the overall backdrop is definitely negative, and that for some, it’s easier to focus on the near-term challenges,” CEO Walt Bettinger said on the post-earnings investor call. “But I encourage you to look at our whole situation.”

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Shares in early trading Monday were up 1.7% at $52.18 about eight minutes into the regular session.

Schwab took a hit this year for cash sorting, a process by which clients move uninvested cash from low-paying bank accounts to higher payment options. Schwab’s bank deposits have been steadily declining for several quarters this year. The company’s expenses have risen because when deposit outflows exceed available cash, it must rely on expensive financing sources to fill the gap, such as Federal Home Loan Funds.

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Executives said cash sorting is declining, and there are signs of that. For example, FHLB loans fell to $31.8 billion from $41 billion in the previous quarter. Bank deposits for September increased month-on-month for the first time since March 2022, Chief Financial Officer Peter Crawford said on Monday.

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The company is also moving TD Ameritrade clients to its platform. Over the summer, net new assets declined due to attrition of individual investors and advisors at TD Ameritrade. Schwab reported total net new assets in the third quarter of $48.2 billion, down from $72 billion in the prior quarter and $114 billion in the same period last year.

There is reason to believe attrition will diminish because many advisors who were TD Ameritrade clients and wanted to leave may have done so before the Labor Day weekend, when Schwab migrated $1.3 trillion in assets from TD Ameritrade to its own platform.

Schwab bought TD Ameritrade in 2020. It has transferred roughly 80% of Ameritrade clients’ assets and accounts, and the attrition is better than Schwab’s initial expectations, Bettinger said.

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“Although expected deal-related attrition has temporarily impacted net new asset inflows, our fundamental growth recipe remains largely intact,” Bettinger said.

Schwab plans to migrate more retail investors to its platform from TD Ameritrade’s later this year and next.

Year-to-date, Schwab has generated $248 billion in net new assets from accounts originally opened at Schwab, the company said. Total client assets fell 2% year over year to $7.8 trillion due to market declines.

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Cash sorting hits Schwab hard. Among the 15 largest bank deposit holders, Charles Schwab recorded the largest year-over-year decline in deposits, according to a recent S&P Global Market Intelligence report.

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“We continue to view screening as the key factor in determining Schwab’s near-term earnings strength based on Schwab’s ability to repay expensive short-term loans and, in the long term, by identifying the right mix of clients’ bank cash and clients’ market funds,” wrote Kenneth P. Worthington. , JP Morgan analyst, in a research note dated October 13: “Monetary Fund.”

Worthington believes cash sorting will slow this year, but he also lowered his earnings estimates because his previous forecast looked “less achievable given the additional borrowing around this sorting boom.” It lowered its earnings estimates for 2024 and 2025 to $4.25 and $5.44 from $4.82 and $6.00, respectively.

Worthington is an overweight on Schwab stock and has a December 2024 price target of $92.

Write to Andrew Welsch at [email protected]

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