Charles Schwab generated a profit of $1.6 billion in the first quarter of the year, he said Monday, faring better than Wall Street had expected and apparently alleviating recent concerns about his financial health. Schwab shares, which plunged after the company was dragged into banking turbulence following the collapse of Silicon Valley Bank last month, rose after the report.
Still, the outlook was mixed: A significant portion of Schwab’s clients transferred their deposits to higher-interest-paying accounts, which could put pressure on the company’s earnings for the foreseeable future.
Although Schwab is best known for its gigantic brokerage business, it also has a large banking arm. The bank’s balance sheet contained billions of dollars in bonds that fell in value when the Federal Reserve rapidly raised interest rates. Silicon Valley Bank had similar bonds, and when forced to sell some at a loss, nervous depositors demanded the money from him in a classic bank run.
That spooked investors in Schwab, who worried the company could face similar pressures; its shares fell, prompting its top executives to rush to defend its financial position. Schwab’s shares rose nearly 4 percent on Monday but were still down more than 35 percent since the start of the year.
“I certainly hope that at this point,” Walt Bettinger, Schwab’s chief executive, said on a conference call, “speculation that we would find ourselves in a position where we would be forced to sell securities that have temporary losses on paper has been lying down.
Schwab’s profit in the first three months of the year rose 14 percent from a year earlier, while revenue rose 10 percent. Although its earnings beat expectations, analysts had been steadily lowering their forecasts since January.
“Schwab’s first-quarter earnings should allay much of the concern about the company,” said Michael Wong, Morningstar’s director of equity research and financial services.
Customer deposits fell significantly in the first quarter, falling $41 billion, or 11 percent, from the prior quarter. But client holdings in Schwab’s money market funds increased by nearly $80 billion, or 28 percent. The company opened one million new brokerage accounts in the first quarter, generating $132 billion of new net assets.
“So the customers who withdrew deposits seemed to stay in the Schwab ecosystem,” Wong said.
JPMorgan Chase, the nation’s largest bank, reported a small increase in first-quarter deposits last week, while Citigroup and Wells Fargo reported modest outflows. Banks like Schwab also posted higher-than-expected profits because they were able to charge more for loans than they paid in deposits when the Federal Reserve raised interest rates.
About half of Schwab’s revenue last year came from so-called net interest income, which was $2.7 billion in the first quarter, down 9 percent from the fourth quarter but up 27 percent from the previous quarter. the same period in 2022.
Most of that is generated from your clients’ uninvested cash. Schwab pays clients interest of, say, half a percent on their assets and then invests the money at higher rates, pocketing the difference. But as customers transfer deposits to higher-yielding accounts at Schwab or elsewhere, the company’s cost of financing rises and reduces profits.
Schwab executives acknowledged that these higher costs would continue to hurt earnings for the foreseeable future, but that it was a manageable challenge and one that it expected to lessen in the coming quarters.
For now, said Peter Crawford, Schwab’s chief financial officer, the company will halt share buybacks “in light of recent events within the US banking sector and the resulting regulatory uncertainty.”