Charles Schwab's downturn in deposits appears to be successfully compensated. The post With Declining Depoists, is Schwab’s Business Model at Risk? appeared first on Tokenist.
Although mainly known as a broker, Charles Schwab’s financial products range from mutual funds to banking services. And just like Silicon Valley Bank, Schwab relies on customer deposits to earn yields. Is Schwab going to pay for this model in this hiking cycle?
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Schwab Beats Low Expectations
In the case of Schwab, its total bank deposits shrunk by 11%, going down from $366.7 billion in Q4 2022 to $325.7 billion in Q1 2023. This quarterly $41 billion deposit outflow is significant as a trend because Schwab’s revenue is mainly dependent on interest.
However, Schwab’s overall revenue increased this quarter by 9%, by $444 million. The bulk of the revenue comes from interest, at $4 billion out of a total $5.1 billion, aligned with market estimates. Schwab’s share in interest revenue went up significantly from 2022, at a 53.5% increase. The net interest revenue rose by 27%, from $2.18 billion to $2.77 billion.
Regarding net income, Schwab is also positive, up 14% from last year’s $1.4 billion to $1.6 billion this quarter. Overall, Schwab managed to beat market estimates in two ways:
- Adjusted earnings per share (EPS) at 93 cents outperformed FactSet’s consensus of 90 cents.
- Although the $41 billion deposit outflow is significant, as annualized 30% decrease, it was still less than expected.
Is Schwab’s Business Model at Risk?
As is evident from Schwab’s revenue breakdown, the most prominent publicly-traded US brokerage relies on low-yield customer deposits, which it then deploys into sweep accounts. The primary function of these sweep accounts is to utilize idle cash by automatically transferring it into various investments, typically higher-yielding money market accounts.
In Scwab’s case, they paid 0.45% interest on sweep accounts. However, as the Fed turned monetary gears from a near-zero interest environment to nearly 5%, customers are no longer incentivized to keep their funds.
With that said, Schwab did benefit from the Fed’s hiking cycle by expanding its net interest margin by 81 bps in Q1 2022, as the bank’s spread between interest income and interest expense. As noted, Schwab’s net interest revenue increased by 27%, to $2.8 billion, due to earning higher interest on their investments.
For now, Charles Schwab (SCHW) stock is neutral, at a 0.9% move over the week, staying steady at $52.19 per share. Year-to-date, Schwab shares lost 36.2% of their value.
Do you prefer more gamified stock trading apps like Robinhood or more ‘serious’ platforms like Charles Schwab? Let us know in the comments below.