Charles Schwab Corp. is seeing a decline in its cash-sorting problems as clients begin to move money from the bank into higher-yielding products. Despite elevated interest rates, the firm reported that the deceleration of cash realignment activity is a positive sign. Deposits fell by 28% to $284.4 billion in the third quarter compared to the previous year, surpassing analysts’ estimates. This news caused Schwab shares to rise by 3.7% to $53.22.
However, the firm’s net interest revenue suffered, sinking by 24% to $2.2 billion as clients shifted their cash into higher-yielding products. Schwab also reported a decline of 32% in core net new assets for the quarter, amounting to $27 billion in September. Despite this, adjusted earnings per share were 77 cents, slightly beating analysts’ estimates of 74 cents.
Schwab’s net revenues fell by 16% to $4.6 billion from the previous year, slightly missing analysts’ expectations. The firm expects an 8% to 9% decline in full-year 2023 revenues compared to the prior year. However, executives reassured analysts that Schwab can benefit from elevated rates due to its multiple variable-rate products.
The Federal Reserve’s interest rate hikes have affected Schwab’s banking arm, which is a crucial revenue source for the company. The higher rates led some clients to move their money from the bank to other investment products. However, company executives believe that the worst of the deposit move is over and anticipate growth by the end of the year.
Schwab’s stock has experienced a decline of about 38% year-to-date due to the challenges faced by mid-size banks. To address this, the firm issued approximately $2.4 billion of senior notes in late August, strengthening its liquidity profile. Charles Schwab Corp. also plans to issue more debt in order to build up extra liquidity ahead of some expected debt maturities early next year.
The firm has also identified opportunities for increased efficiency, particularly through increased automation. Schwab’s CEO, Walt Bettinger, expects these measures to result in at least $1 billion of incremental annual expense savings.
In addition, Schwab continues to integrate with TD Ameritrade and has unveiled a revamped trading platform built in part on TD Ameritrade’s systems. James Kostulias, the managing director and head of trading services at Schwab, stated that the new platform provides a superior retail trading experience and solidifies Schwab as the go-to destination for retail trading.
Overall, while Charles Schwab Corp. faces challenges due to cash-sorting problems and declining revenues, the firm remains optimistic about its future growth potential.