Shares of Charles Schwab SCHW have gained 2.5% in response to upbeat revenue guidance for the third quarter of 2024. The company also posted an increase in total client assets for August.
Favorable Q3 Trends
Management expects total revenues to rise 2-3% sequentially, driven by “healthy investor engagement across Schwab’s modern wealth platform and the continued slowing of rate-related client cash realignment activity.” Further, the adjusted pre-tax profit margin is projected to be at least 40% in the ongoing quarter.
Last quarter, SCHW’s total revenues declined 1% to $4.69 billion sequentially mainly due to lower bank deposit account fees. During the July Business Update, management noted that higher funding costs are weighing on its performance.
Hence, as it deals with the low-yielding assets bought during the pandemic, Schwab intends to shrink itself to sustain profits and rely more on off-balance sheet arrangements to house deposits. This is expected to provide flexibility with its funding, though it will likely result in significant earnings volatility during future rate cycles.
This led to bearish investor sentiments. The company shares are down 5.5% since the release of the second-quarter results on July 16. The industry is down 5% during the same time frame.
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Additionally, the increased funding costs and the presence of low-yielding assets on its balance sheet have been hurting Schwab’s net interest margin (NIM). The company projects NIM to reach around 2.2% by the fourth quarter of 2024, with average interest-earning assets contracting 5-10% year over year. The interest rate cuts by the Federal Reserve will exert pressure on NIM expansion in the near term. Earlier, the company had guided NIM to be in the 2.25-2.65% range.
The company also offered an update on transactional sweep cash (client funds yet to be invested). Driven by seasonality observed during the current rate cycle in August, transactional sweep cash of $366.8 billion declined modestly from the prior month. Further, as of mid-September, SCHW noted that quarter-to-date net changes in transactional sweep cash are favorable compared with the first half of 2024. This enables a lower level of outstanding supplemental funding at the bank from the prior-quarter level.
SCHW Posts a Rise in August Client Assets
SCHW’s total client assets in August 2024 were $9.74 trillion, up 2% from July 2024 and 20% from August 2023. Client assets receiving ongoing advisory services were $4.93 trillion, rising 2% from the prior month and 20% year over year.
The company’s core net new assets (NNAs) of $32.8 billion were up 13% from $29 billion recorded in the prior month. Further, NNAs jumped substantially from $4.9 billion in the year-ago month. Last year, core NNAs included “the impact of the anticipated attrition ahead of our September 2023 client conversion weekend – the largest of the five total transition weekends.”
Schwab’s average interest-earning assets of $420.2 billion in August 2024 increased 1% from July 2024 but declined 7% year over year. Average margin balances were $73.3 billion, relatively unchanged from the previous month and up 14% year over year. Average bank deposit account balances totaled $82.8 billion in August, down 1% from last month and 19% from August 2023.
Schwab opened 324,000 new brokerage accounts in August 2024, down 1% sequentially but up 4% from the year-earlier month.
Schwab’s active brokerage accounts totaled 35.9 million at the end of August 2024, which was stable on a sequential basis and up 4% from the year-ago month. Client banking accounts were 1.94 million, stable sequentially and up 8% from the July 2023 figure. The number of workplace plan participant accounts was stable with the prior month and up 7% year over year to 5.37 million.
Our Take on Schwab
Schwab remains fundamentally solid. The company became a brokerage behemoth following the acquisition of TD Ameritrade in 2020. It anticipates its long-term 5-7% annual growth in NNAs, with 3-5% growth expected from existing clients and 2-3% improvement driven by new clients.
Further, the demand for Schwab’s managed investing solutions, where it has massively invested over the last few years, continues to increase. Further, as the central bank lowers interest rates, the company is expected to benefit from reduced pressure on its sweep balance. Also, Schwab will be able to recoup paper losses on its securities book.
All these are expected to support Schwab’s organic growth over time. Also, its plan to shift from a traditional balance sheet-driven business model over the next several years will help lower capital needs and improve the liquidity profile.
Nonetheless, one should watch for further clarity on the company’s strategic path forward before making any investment decision.
At present, Schwab carries a Zacks Rank of 3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Better-Ranked Brokerage Stocks
A couple of better-ranked brokerage stocks are Robinhood HOOD and Interactive Brokers IBKR. At present, both carry a Zacks Rank #2 (Buy).
The Zacks Consensus Estimate for HOOD’s current-year earnings has been revised 38.2% upward to 76 cents in the past 60 days. The company’s shares have risen 74.3% year to date.
The Zacks Consensus Estimate for IBKR’s current-year earnings has been revised almost 1% upward to $6.81 in the past two months. The company’s shares have risen 55.1% year to date.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
