As a result of the transfer, Schwab now holds more than $150 billion worth of debt assets with a weighted-average yield to maturity of 1.74%, which is significantly lower than the current benchmark 10-year Treasury yield of approximately 3.8%. However, this decision doesn't reverse the asset duration exposure. The purpose behind this move was to safeguard stockholders from potential unrealized "paper" losses. In 2022, Schwab made a decision to transfer $189 billion of agency mortgage-backed securities from the "available-for-sale" category to the "held-to-maturity" category on its balance sheet. Speaking about Schwab's fundamentals, I would also like to quickly point investors' attention to the company's balance sheet duration risk, which also connects to the funding pressure. With that frame of reference, analysts (based on consensus estimates) expect a sharp drop in Schwab's earnings power, with FY 2024 earnings estimates now at ~$3.9/ share, as compared to $5.9/share estimated 6 months ago - and revisions are still trending down. Reflecting on the higher funding costs, SCHW management anticipates a 35 basis points headwind to Q2 net interest margin, likely resulting in a ~11% revenue decline versus Q1. In May, Schwab also announced the issuance of $1.3 billion worth of fixed-to-floating rate senior notes due in 2034 with an interest rate of 5.853%, and a $1.2 billion of fixed-to-floating rate senior notes due in 2029 with an interest rate of 5.643%. (See below chart from UBS' Brennan Hawken, CPA, et al., published in the WM Rate Monitor dated 9th June) Needless to say, accessing these short-term funding sources applies pressure on earnings, with SCHW CD rates not trending well above 5% across 1-18 months tenures. In May, Schwab issued about $5 billion worth of CDs, bringing the total to $41 billion (as compared to $6 billion at the beginning of the year). The number suggests that the average daily outflows of cash were about $0.3 billion (as compared to $1.2 billion/ day in April).Ĭash Sorting Activity, Schwab YTD 2023 Funding Pressure & Earnings HeadwindsĪs Schwab clients are drawing down their cash balances, the company is pressured to access more expensive funding costs, including borrowing from the Federal Home Loan Bank (FHLB) and issuing retail certificates of deposit (CDs). Although the "cash sorting" activity decelerated in May, the percentage of client cash as a proportion of assets nevertheless fell, to 11.5% at the end of May, versus 12% in May 2022. Perhaps the most important May metric related to cash balancing by clients. At the end of May 2023, Schwab's total client assets amounted to $7.65 trillion, up 5% YoY versus May 2022 but, also below the 3-year historical average growth of 7-10%. Investors should consider, however, that the asset growth for May 2023 was below the $30 billion average inflow that Schwab has received during the past three years. Seeking Alpha Key Insights - Monthly Activity Report for Mayįor May, SCHW communicated growth in core net new assets, reporting a total of $20.7 billion inflow brought in by new and existing clients, and $24.5 billion excluding mutual fund clearing. Accounting for the earnings pressure, paired with duration-related balance sheet risk, I see SCHW stock as slightly overvalued versus quality peers such as JPMorgan ( JPM ), UBS ( UBS ), or Morgan Stanley ( MS ).įor reference, Charles Schwab stock has strongly underperformed the broad market since early 2023 - SCHW stock is down about 34% YTD, versus a gain of 15% for the S&P 500 ( SP500 ). Notably, SCHW consensus estimates for FY 2024 earnings are now at ~$3.9/ share, down approximately 35% since the start of the year, and suggesting a FWD P/E of close to 14x. To manage the liquidity headwinds, Schwab is relying on more expensive short-term funding sources to compensate for declining deposit levels, which is exerting pressure on the company's earnings. While cash sorting continues to decelerate, the report also highlighted a persistent slowdown in cash inflows. Charles Schwab ( NYSE: SCHW) recently published its Monthly Activity Report for May 2023, giving investors a peek into key financial indicators regarding client activity and asset levels.
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