Schwab reported earnings earlier this week. I am not a shareholder but I am a Schwab customer so I want to check their financials to make sure it’s OK to keep my assets there. After examining their Q1 results, I am not too worried as a customer. With the new BTFP program from the Fed, they should have sufficient liquidity to meet withdrawals. But Schwab’s profitability is highly questionable down the road. As shown above, their net interest income is 2.77B on paper. But they have $326B of securities yielding less than 2% on average. They have been bleeding bank and brokerage deposits too, going from $558B in Q1 2022 to $420B in Q1 2023. If they lose another $100B of short-term low yielding deposits and they fill the hole with short term borrowing at 5%, their interest expense will be an additional $4B+ a year or $1B+ per quarter. Schwab made $1.6B in Q1 2023 and $7.2B in 2022. If this interest expense increase becomes a reality, we are talking about their net income roughly halving. Let’s be generous and assume their net income is $4B in the next 12 months. That’s a forward PE of ~25. If interest rates stay at the current level for a prolonged period of time, I don’t think their current valuation is sustainable.
It is entirely plausible that Schwab’s deposits drop another $100B. Their total bank and brokerage deposits are ~$420B in Q1 but were only ~$265B at the end of 2019. The current short term rate is higher than the rate back in 2019 so I suppose most Schwab clients either moved or will move their deposits to money market funds/treasury bills making close to 5%, and that’s exactly what I did. It’s probably going to be a multi-year process for Schwab to work out those $32B securities yielding 2%. Before that, its profitability will remain constrained.
I agree. I was worried about schw but their market cap relative to HTM losses is still acceptable. They should be doing an equity issuance for sure to beef up their balance sheet.
They are systemically important IMO.
Might want to check out IBKR. They are holding assets all under 6 months and offering 4.3% yield on deposits.
We use them. We have been very happy. Lots of global markets, fx, and increased trading customization capabilities.
Very conservative broker. I've been listening to their earnings calls the last 4 to 6 quarters. I like their founder alot. Very straight forward and forward looking.
Nice analysis. I am also a customer, and just opened Apple’s new super ez 4.15% savings account and put a large chunk of my cash there instead of sitting on my schwab 0.1% checking. Before that I had a 1 month 4.5% CD though I was sweating a bit the no name bank that was underwriting it.