BlackMask Pod Cast:
their is a lot not to like about schwabbie
Charles Schwab Corp. stunned Wall Street in 2019 by slashing trading commissions to zero, forcing its competitors to adapt. The move amounted to a big bet that its bank — rather than its well-known discount brokerage — would keep driving profits. For a while, it worked to perfection. The pandemic hit, interest rates were pinned near historic lows, and Schwab raked in billions as the fees it had forsaken were offset by what the company earned from its banking operation. But last month’s collapse of three US banks, the industry’s worst crisis since 2008, has turned that wager on its head.
Now Schwab, the biggest publicly traded US brokerage, faces one of the most painful moments in its 50-year history. After a rapid surge in interest rates, deposits sank while unrealized losses swelled. The stock plunged 33% in March, its worst month since 1987.
In recent weeks, Wall Street analysts sharply reduced their profit estimates. If they decline too far, Schwab could eventually be forced to sell securities at a loss. Chief Executive Officer Walt Bettinger, 62, and billionaire founder Charles Schwab, 85, issued two joint statements in recent weeks to reassure investors that there’s a “near-zero” chance of that. On April 6, they touted $53 billion of client assets that arrived in March, the second-largest for that month on record. “What we’ll be most keen to see is: did the pace of deposits leaving accelerate?” said Bloomberg Intelligence analyst Neil Sipes. “Can they quantify how much more there is to go?” Some investors decided not to wait. Rajiv Jain’s GQG Partners, which had been among Schwab’s top 15 shareholders at year-end, sold its entire $1.4 billion stake during last month’s turmoil, the Financial Times reported Friday. “We didn’t see an existential risk but they were caught up in the sentiment around banks,” Mark Barker, head of international at the investment firm, told the FT. “With all the inflows to money-market funds Charles Schwab is losing deposits revenue.” Schwab defies easy classification. Known for pioneering cheap stock trading, it grew into one of the largest US banks. The firm weathered seismic changes over five decades, including the dot-com bust, the dawn of low-cost index products and the era of free trading it ushered in. Cash has become even more important since then. While the move to zero-fee trading paved the way for its $26 billion purchase of TD Ameritrade, it also knocked out an income stream that totaled $763 million, or 7.5% of revenue, in 2018.
Because Schwab generates most of its money from customer funds idling in low-yielding accounts — which it “sweeps” into its bank arm — the firm needed somewhere to invest incoming cash as trading surged.
Like Silicon Valley Bank, the largest of the three lenders that imploded last month, Schwab plowed into debt that will take five years or more to mature. Such securities, backed by the US government, are supposed to be among the safest available — a seemingly good fit for a company known for its conservative approach to money-management.
The risk was that interest rates could rise…..DAH!!!!!!!
That’s exactly what started to happen in early 2022, as the Federal Reserve began to hike aggressively. The investments are now underwater, though Schwab won’t have to book a loss unless it’s forced to sell them.
At Fidelity Investments some sweep accounts earn more than 4%, with no extra effort required. Schwab offers 0.45%.
To shore up its business in the short term, Schwab has been relying on loans. The firm said it had $100 billion in cash flow and more than $300 billion available from the Federal Home Loan Bank system, among other options. It has already drawn from that pool. Schwab became the largest borrower from its local branch of the system, the Dallas FHLB, in 2022, according to regulatory filings. Schwab borrowed $12.4 billion from it last year, and an additional $13 billion so far this year, according to its annual report. Against that backdrop, Schwab continued to reward shareholders by increasing dividends and repurchasing shares.“They’re not a typical bank,” said Piper Sandler analyst Rich Repetto. “It’s a unique business model.”