As Charles Schwab’s Stock Plunges, Executives Reassure Investors

Charles Schwab’s share price fell along with other bank stocks, last week’s declines sparked a sell-off

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(SIVB) Silicon Valley Bank. Although Schwab is better known for its brokerage and investment services, the company also offers banking and lending to clients. As investors reallocate cash to earn higher returns, Charles Schwab’s earnings could suffer as a result. The Westlake, Texas-based company had $366.7 billion in deposits at the end of the fourth quarter.

Two statements issued by the company mid-Monday that attested to the firm’s financial strength apparently calmed investors’ nerves as shares began to recover shortly after the issue.

CEO Walt Bettinger and Founder Charles Schwab issued a statement on Monday Emphasizing the company’s diversified business mix, “capital in excess of regulatory requirements, a high-quality and relatively small loan book, and a conservative investment portfolio consisting of 80% U.S. Treasuries and securities backed by various government agencies.”

They further note that the company brought in $41.7 billion in net new assets last month, its second-strongest February ever. He added that more than 80% of client cash held at Charles Schwab’s bank is insured dollar-for-dollar by the FDIC. In addition, the company has access to more than $80 billion in borrowing capacity with Federal Home Loan Bank, which is more than all of its uninsured deposits combined.

“Schwab’s long-standing reputation as a safe harbor in storms remains intact, with record-setting business performance, a conservative balance sheet, a strong liquidity position, and a diverse base of 34 million+ account holders who invest in every day.” invest with Schwab,” the executives wrote. “As such, we remain confident in our approach and our ability to assist clients through all types of economic environments. We stand ready to support our clients with award-winning service and time-tested expertise.”

In an additional statement issued Monday morning, Peter Crawford, Charles Schwab’s chief financial officer, said client bank sweep cash outflows in February were down about $5 billion compared to January. He also said that the daily average withdrawals so far this month are in line with February. “Importantly, these outflows reflect a continuation of client decisions within Schwab to reallocate a portion of their cash into higher-yielding cash options,” Crawford said. “Based on our ongoing analysis of these trends, we still believe that customer cash restructuring decisions will be substantially phased out during 2023.”

Investors may also be concerned about a move by Schwab last year to relabel securities it held on its balance sheet. In January and November 2022, the company reclassified $108.8 billion and $79.8 billion, respectively, of American agency mortgage-backed securities from available for sale to hold-to-maturity. At the time of the transfer, there was $2.4 billion in securities and a total net unrealized loss of $15.8 billion, according to Schwab’s annual report filed with the SEC.

“The unrealized loss at the time of transfer is amortized over the remaining life of the security, offsetting amortization of the security’s premium or discount, and consequently has no impact on net income,” the company said in the filing. The move to reclassify the securities as held-to-maturity will reduce Schwab’s exposure to volatility, according to the company, which could result in unrealized gains and losses due to changes in market interest rates.

As of December 31, Schwab had $147.9 billion in total fair value securities available for sale and $158.9 billion in total fair value securities maturing, according to an SEC filing.

Selling those securities at a loss can take a hit to earnings. But the company has other resources, including $40 billion in cash, external debt facilities and $2 billion in unsecured loans with other banks, William Blair analysts wrote in a March 13 note. “It may also sell $22 billion of US agency MBS and US Treasury securities that mature in less than a year and have at least unrealized losses,” they write. “These funding sources suggest that the company can handle significant outflows (over $100 billion) and remain solvent.”

The CFO’s statement also specifically addressed this concern, saying that “those securities will mature at par, and given our significant access to other sources of liquidity, it is highly unlikely that we will need to sell them prior to maturity.” (as the name suggests)).

Wall Street analysts remain bullish on Charles Schwab’s stock and were quick to point out that there are big differences between SVB and Charles Schwab. Charles Schwab also said in its Monday statement that it has no direct business dealings with Silicon Valley Bank or Signature Bank.

On Monday, Citi analysts Christopher Allen and Alessandro Balbo raised their ratings on the bank’s stock from Hold to Buy. After falling nearly 23% in the last two trading days, the stock is trading at compelling levels, said the pair citing its price-to-earnings ratio.

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Analyst Michael Wong wrote on March 13 that Charles Schwab has several levers to increase its liquidity, although funding costs are rising and that will put pressure on revenue growth. Wong says the shares are undervalued and does not plan to change his fair value estimate of $87.

“Charles Schwab is taking steps to shore up its cash levels, such as borrowing from Federal Home Loan Bank and issuing retail brokerage certificates of deposits,” Wong wrote. “Rates on these sources of funding have recently been above about 4.5% to 5%. It is possible that these funding sources could add more than $2 billion in funding costs in 2023. Under this scenario, we Will still expect revenue to grow by a mid- to upper-single-digit percentage and adjusted earnings per share to grow by more than 10%.

Write to Andrew Welsh at [email protected]