As Charles Schwab Stock Tumbles, Executives Reassure Investors

Charles Schwab’s share price tumbled alongside other bank stocks, a selloff sparked last week by the fall of SVB Financial Group ’s (SIVB) Silicon Valley Bank. Although Schwab is better known for its brokerage and investing services, the company also offers banking and lending to customers. As investors reallocate cash to earn higher yields, 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 put out by the company Monday midmorning that attest to the firm’s financial strength apparently soothed investor nerves as the stock started recovering shortly after their release.

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

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

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

In an additional statement released Monday morning, Charles Schwab Chief Financial Officer Peter Crawford said client bank sweep cash outflows in February were about $5 billion lower than January. He also said daily average outflows so far this month are consistent with February. “Importantly, these outflows reflect a continuation of client decisions to reallocate a portion of their cash into higher yielding cash alternatives within Schwab,” Crawford said. “Based on our ongoing analysis of these trends, we still believe client cash realignment decisions will largely abate during 2023.”

Investors may have also been concerned about a move by Schwab last year to relabel securities held on its balance sheet. In January and November 2022, the company reclassified $108.8 billion and $79.8 billion, respectively, of U.S. agency mortgage-backed securities as held-to-maturity from available-for-sale. At the time of transfer, the securities had a total net unrealized loss of $2.4 billion and $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 the amortization of the security’s premium or discount, and resulting in no impact to net income,” the company said in the filing. The move to reclassify the securities as held-to-maturity will reduce Schwab’s exposure to fluctuations that can result from unrealized gains and losses due to changes in market interest rates, according to the company.

As of Dec. 31, Schwab had $147.9 billion in total fair-value available-for-sale securities and $158.9 billion in total fair-value held-to-maturity securities, according to its SEC filing.

Having to sell those securities at a loss could deal a blow to earnings. But the company has other resources it can tap, including $40 billion in cash on hand, external debt facilities, and $2 billion in unsecured lines of credit with other banks, analysts at William Blair wrote in a March 13 note. “It could also sell $22 billion of U.S. agency MBS and U.S. Treasury securities that mature in less than one year and have minimal unrealized losses,” they write. “These funding sources suggest the company could handle significant outflows (over $100 billion) and remain solvent.”

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

Wall Street analysts have remained 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 didn’t have any direct business with Silicon Valley Bank or Signature Bank.

On Monday, Citi analysts Christopher Allen and Alessandro Balbo raised their rating on the bank’s stock to Buy from Hold. After a roughly 23% decline over the past two trading days, the stock is trading at compelling levels, the duo said, citing its price-to-earnings ratio.

And Morningstar analyst Michael Wong wrote March 13 that Charles Schwab has multiple levers to increase its liquidity, though funding costs are increasing and that will pressure revenue growth. Wong says the shares are undervalued and doesn’t plan to change his $87 fair-value estimate.

“Charles Schwab has been taking steps to increase its cash levels, such as borrowing from the Federal Home Loan Bank and issuing retail brokered certificates of deposits,” Wong wrote. “The rates on these sources of funding have recently been around 4.5% to upward of 5%. It’s possible that these funding sources could increase funding costs by over $2 billion in 2023. Under this scenario, we would still expect revenue to grow a mid- to upper-single-digit percentage and adjusted earnings per share to grow over 10%.”

Write to Andrew Welsch at andrew.welsch@barrons.com