Charles Schwab reported earnings on Monday that were above Wall Street’s recent average forecasts, but still well below last year’s. The brokerage giant reported third-quarter adjusted profit of 77 cents per share, beating analysts’ expectations of 74 cents. This compares to a reported profit of $1.10 for the same period a year ago, as Schwab (ticker: SCHW) has faced challenges this year.
Revenue fell 16% year over year to $4.6 billion, while adjusted net income fell 31% to $1.5 billion.
Schwab’s bank deposits, worrying investors, fell again, to $284.4 billion from $304.4 billion in the previous quarter and from $395.7 billion in the year-ago period.
The company has had a difficult year. Schwab shares, which plunged during the regional banking crisis in March, are down about 36% so far this year.
“I understand that the overall environment is decidedly negative and that it is easier for some to focus on the near-term challenges,” CEO Walt Bettinger said at the investor conference after the results were released. “But I would encourage you to consider our entire position.”
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Shares rose in early trading Monday, rising 6% to $54.41 around 11 a.m. That’s still well below its 52-week high of $86.63.
Schwab has struggled this year with cash sorting, a process in which customers move uninvested cash from low-paying bank accounts to higher-paying options. Schwab’s bank deposits have fallen steadily for several quarters this year. And the company’s expenses have increased because when deposit outflows exceed cash on hand, it relies on costly sources of financing to fill the gap, such as loans from the Federal Home Loan Bank.
Net interest income fell from $2.9 billion to $2.2 billion due to higher interest expense, a decline of 24% year-over-year.
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Executives have said cash sorting is slowing, and there are signs of it. For example, FHLB borrowings fell to $31.8 billion from $41 billion in the previous quarter. Chief Financial Officer Peter Crawford said on Monday that bank deposits rose month-on-month in September for the first time since March 2022.
Crawford said the company is focused on repaying its short-term borrowings over the next few quarters and will likely take on more debt to build additional liquidity.
“There is no doubt that we have navigated a difficult environment,” Crawford said.
The company has also migrated TD Ameritrade customers to its platform. Over the summer, net new assets declined due to the exodus of retail investors and advisors from TD Ameritrade. Schwab reported total net inflows of $48.2 billion for the third quarter, down from $72 billion in the previous quarter and $114 billion in the same period last year.
There is reason to believe attrition will ease, as many advisors who were TD Ameritrade clients and wanted to leave likely did so before Labor Day weekend, when Schwab sold $1.3 trillion worth of assets. Dollar migrated from TD Ameritrade to its own platform.
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Schwab bought TD Ameritrade in 2020. The company has moved about 80% of Ameritrade customers’ assets and accounts, and the attrition is better than Schwab’s original expectations, Bettinger said.
“While the expected business-related outflow has temporarily weighed on net new money inflows, our underlying growth recipe remains very much intact,” Bettinger said.
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Schwab plans to migrate more retail investors from TD Ameritrade to its platform this year and next. The company decided not to hire some Ameritrade advisors who weren’t a good fit for Schwab, Bettinger said. He added that there is an adjustment period as Ameritrade customers become familiar with Schwab’s systems. Schwab is also making improvements, he said.
“To date, we have completed this remodel with a level and level of accuracy that I have never seen in any remodel,” Bettinger said.
Year to date, Schwab has raised $248 billion in net new money from accounts originally opened at Schwab, according to the company. Total customer assets fell 2% to $7.8 trillion due to market declines. The company added 894,000 new brokerage accounts.
The company also announced plans Monday to integrate TD Ameritrade’s thinkorswim trading platform, which is popular with active traders, into Schwab’s platform.
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Cash sorting is hitting Schwab hard. Charles Schwab experienced the largest year-over-year deposit decline among the 15 largest bank deposit holders, according to a recent report from S&P Global Market Intelligence.
“We continue to view sorting as a key factor in determining Schwab’s near-term earnings power, based on Schwab’s ability to repay expensive short-term loans, and in the longer term by determining the right mix of customer bank money and customer money market fund money,” wrote Kenneth B. Worthington, an analyst at JP Morgan, in an Oct. 13 research note.
Worthington expects cash sorting to slow this year, but also cut its earnings estimates as its previous forecasts “look less achievable given the additional borrowing associated with this sorting surge.” He cut his 2024 and 2025 earnings estimates to $4.25 and $5.44 from $4.82 and $6.00, respectively.
Worthington is overweight on Schwab shares and has a $92 price target for December 2024.
Write to Andrew Welsch at [email protected]