Charles Schwab Earnings: What to Watch

Charles Schwab reported strong overall first-quarter results, but continued headaches from so-called cash sequestration.

The company reported first-quarter net income of $1.6 billion, up 14% from $1.4 billion in the same period a year ago, according to the company’s earnings report released Monday.

However, bank deposits fell to $325.7 billion, an 11% drop from the same period a year ago, and a sign that customers continue to shift money from low-paying bank accounts to higher-yielding options in a process known as cash sorting.

“We saw a decline in the average daily pace of bank sweep movements from January to March, although bank deposits fell 11% versus the previous year-end as clients realigned their allocations across our comprehensive transaction and investment money solutions. The banking system allows for a temporary spike in activity at the onset of turmoil,” CFO Peter Crawford said in a statement.

This is breaking news. Read Schwab’s earnings preview below and stay tuned for more analysis soon.

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Two key words to watch for when Charles Schwab reports earnings on Monday, April 17th? Sorting of money.

It’s a Wall Street term that describes the process of investors shifting money from low-paying bank accounts to higher-yielding options like market funds. As interest rates rise, the cash flow is happening at a brisk pace, and that could dampen Schwab’s results.

William Blair analyst Jeff Schmidt expects Schwab’s cash-strapped woes and higher costs to reduce earnings per share by about 90 cents in 2023. Analysts polled by FactSet expected first-quarter EPS of 90 cents, compared with 77 cents in the same quarter. Before. Shares of Schwab closed Friday at $50.77, down 39% year to date.

Although best known for its discount brokerage services, Charles Schwab also operates a bank. The firm deposits uninvested funds from clients’ brokerage accounts into bank accounts known as sweep accounts. In years of record low interest rates, consumers are not paying much attention to what they earn in cash. Now, that has changed.

Schwab held $367 billion in customer cash deposits at the end of the fourth quarter, down 17% from a year earlier and down 7% from the third quarter. If deposit outflows exceed Schwab’s cash on hand or earnings from other assets, the company taps other sources, such as federal home loan bank loans, but that can be a costly solution.

Shares of Charles Schwab have been caught up in the rout of regional bank stocks in recent months.

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Investors worried that Schwab’s securities portfolio (mostly mortgage-backed securities) had lost $14 billion.

“Money sorting should continue to be a drag on results as customers continue to shift to higher-yielding cash products,” William Blair’s Schmidt wrote on Friday. “We expect sweep cash to decline to $62 billion in the quarter versus $40 billion – $50 billion in the past few quarters.”

Schmidt has an Outperform rating on the stock.

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“Uncertainty over cash deployment may limit equity range over the next few quarters,” he writes. “However, we believe the stock price has moved to a point where the risk/reward dynamic has shifted in favor of investors.”

Morningstar analyst Michael Wong recently lowered his fair estimate for Schwab to $70 from $87. He expects to see signs of accelerated cash flow, but nothing “dangerous.” He also notes that weekly money-market fund flow data for Schwab was fairly steady in the $4 billion to $7 billion range for March.

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“We rate the stock as undervalued relative to our $70 fair estimate and believe the discount is related to market uncertainty about the company’s earnings power and concerns about access to funding and capital,” Wong wrote on April 13.

Write to Andrew Welsch at [email protected]

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