In 2019, Charles Schwab Corp. made a bold move by cutting trading commissions to zero, putting pressure on its competitors to adapt. Schwab hoped that its bank, rather than its discount brokerage, would be the key to driving profits. The strategy worked perfectly when the pandemic hit, and Schwab made billions as the fees it had waived were offset by profits from its banking operation. However, last month’s crisis, which saw three U.S. banks collapse, changed everything for Schwab. As interest rates rapidly surged, deposits sank and unrealized losses swelled, leading to a 33% stock drop in March, the worst for the company since 1987.
Schwab’s longer-term prospects will be in the spotlight when it reports first-quarter results, as investors are concerned about deposits. If they drop too low, Schwab might be forced to sell securities at a loss. However, CEO Walt Bettinger, 62, and founder Charles Schwab, 85, have assured investors in recent statements that there’s almost no chance of that happening, pointing out that $53 billion of client assets arrived in March, the second-highest amount for that month on record.
In 2019, Charles Schwab Corp. made headlines by eliminating trading commissions, putting pressure on competitors to follow suit. The move was a bet that Schwab’s banking arm would continue to drive profits, and this strategy appeared to work as the company benefited from its banking operation after the pandemic hit and interest rates remained low. However, the recent crisis in the US banking industry has turned this strategy on its head, causing deposits to decline while unrealized losses grew. Schwab’s stock fell 33% in March, prompting analysts to reduce their profit estimates.
Deposits are a key focus, and if they continue to decline, Schwab could be forced to sell securities at a loss. Some investors have already sold their stakes in Schwab. The company generates most of its revenue from customer funds in low-yielding accounts, and it needed to find a place to invest incoming cash as trading surged. Schwab invested in debt backed by the US government, which was considered safe, but the risk was that interest rates could rise. Schwab’s first-quarter results, to be released on Monday, will be closely watched by investors.
In early 2022, the Federal Reserve began to hike interest rates aggressively, causing Schwab’s investments to become underwater. Schwab’s founders maintain that they have taken little risk in their portfolio, stating that over 80% of deposits are FDIC-insured.
Schwab spokeswoman Mayura Hooper also highlighted that the company offers many ways for clients to maximize their cash. However, independent advisors who use Schwab’s platform are increasingly focused on getting better returns for clients’ cash, such as by moving customer money from Schwab sweep accounts to its higher-yielding money-market funds. Schwab currently offers a yield of 0.45%, whereas some Fidelity sweep accounts earn over 4%.
Schwab has relied on loans to shore up its business in the short term, with $100 billion in cash flow and over $300 billion available from the Federal Home Loan Bank system. Schwab has already borrowed $12.4 billion from its local branch of the system and an additional $13 billion so far this year. Despite these challenges, Schwab has continued to reward shareholders by increasing dividends and repurchasing shares. Most Wall Street analysts have a “buy” rating on the company’s stock, as Schwab remains a unique business model in the US financial system.
