Charles Schwab: the fog is lifting on deposit outflows but not on earnings

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Charles Schwab’s chief executive Walt Bettinger likens the US banking turmoil that has engulfed the $97bn brokerage giant this year to the “dense fog” that obscures the view of Treasure Island in San Francisco. Concerns about deposit outflows, unrealised losses on its securities portfolio and higher interest rates mask the true earnings potential of his company, he argues.

Now it seems the fog is starting to lift. Shares in the company jumped 5 per cent on Monday after it said the pace of deposit flight was slowing. Encouragingly, bank sweep deposits increased month-over-month in September for the first time since March 2022. This is idle client money that the firm “sweeps” from brokerage accounts to its bank, where it can reinvest in higher-yielding products. 

But investors who have stuck with Schwab this year should not take that as a sign they will be immediately rewarded with a treasure chest. Higher funding costs and the need to repay pricey loans it took out from the Federal Home Loan Bank (FHLB) system will weigh on Schwab’s profit for at least another year.

Its shares remain down 34 per cent this year. Bank deposits are 28 per cent lower than the year ago period. The good news is the money is not leaving the Schwab platform. Many clients are moving their uninvested cash out of its low-yielding bank deposit programmes into money-market funds. 

The bad news is the fees it nets on these funds are less than what it would earn by putting clients’ idle cash to work itself. That — along with interest expense that rose 315 per cent during the quarter — explains why revenues were 16 per cent lower at $4.6bn. Net income fell 44 per cent. 

Schwab is right to prioritise paying down its FHLB loans. It has $31.8bn outstanding and is paying an interest rate of about 5.2 per cent. But this will come at the expense of a speedy return to earnings growth. Investors will need to be patient.