Charles Schwab Survived the Recent Banking Crisis. What Comes Next? Brokerage learns downside of being a bank when interest rates shoot higher Schwab’s banking business was a big winner before the Federal Reserve began hiking rates. DEVIN BLASKOVICH FOR THE WALL STREET JOURNAL By Justin Baer July 20, 2023 5:30 am ET 62 Charles Schwab SCHW 2.48%increase; green up pointing triangle is best known as the largest publicly traded U.S. brokerage firm, but it also runs a large bank that isn’t quite too big to fail. Investors are behaving as if a bit of good news about that bank means this year’s regional-banking crisis might be winding down. Billions of dollars in deposits are still leaving its balance sheet, Schwab said Tuesday, to the tune of a 7% decline from the first quarter and a 31% drop from a year earlier. But the pace of those outflows slowed in May and again in June. By late May, Schwab said, it had stopped issuing higher-rate certificates of deposit or borrowing from the Federal Home Loan Bank system—a sign that the firm’s funding costs might have peaked. Those second-quarter results helped spur a broad advance in the beaten-down banking sector. Schwab jumped 13% on Tuesday and this week has narrowed its year-to-date decline to 21%. Major U.S. banks are on track for their largest weekly gain in more than a year. Performance, year to dateSource: FactSetAs of July 20, 2:43 p.m. ET Jan. 2023Feb.MarchAprilMayJuneJuly-50-40-30-20-100102030%S&P 500Charles Schwab Chief Executive Walt Bettinger insisted that Schwab’s strengths—including its well-respected brokerage business that rakes in client cash when the market rallies, as it has this year—have been obscured by the recent selloff. Bettinger likened Schwab’s 2023 turmoil and its potential to a Bay Area phenomenon in which a well-known patch of artificial land can completely disappear from view in certain weather. “If you didn’t know it was there, you might not even realize Treasure Island even existed,” he said on a call with analysts Tuesday. Exactly what the company looks like when the fog lifts will depend on where rates go, whether the market continues to draw in new investors and how new regulations affect banks such as Schwab. For now shareholders are starting to take a more optimistic view. After all, the U.S. economy continues to beat expectations, the 2023 bull market looks to be strengthening, and Schwab’s banking business was a big winner before the Federal Reserve last year began hiking rates. Chief Executive Walt Bettinger insists that Schwab’s strengths have been obscured by this year’s selloff. PHOTO: DAVID PAUL MORRIS/BLOOMBERG NEWS Michael Cuggino, president of the Permanent Portfolio Family of Funds, which owns Schwab shares, thinks the banking crisis could be over—and if it isn’t, he figures Schwab’s earnings can be cushioned by its other businesses, including its services to financial advisers and asset management. His firm added to its Schwab holdings in March. “I trust that Schwab saw what happened in March and is adjusting their business model to deal with this,” Cuggino said. The reckoning in bank stocks was triggered by the collapses of Silicon Valley Bank, Signature Bank and First Republic, at the hands of rising interest rates. Ever since, traders have been leery of banks other than the largest U.S. firms, such as JPMorgan Chase and Bank of America, which are presumed to benefit from official support in a crisis. Charles Schwab deposits, change from the previous quarterSource: FactSet 2010'15'20-15-10-5051015202530% The collapse of other banks has forced Schwab to examine a strategy that has long keyed its success. Over the past decade, the brokerage firm built a bank large enough to bring in billions of dollars in net interest revenue but small enough to sidestep the regulatory microscope that megalenders such as JPMorgan face. Schwab over the years gathered hundreds of billions of dollars in cash from its brokerage customers, sweeping the money into bank deposits that paid almost nothing when rates were ultralow. Customers started moving their money when the Fed started raising interest rates. Schwab shares plummeted beginning in March, and were sometimes down more than 40% for the year. BANK EARNINGS SCORECARD The Key Number to Watch in U.S. Bank Earnings They regained some ground this week, in part because the year’s stock advance appears to be gaining momentum. If investors broadly continue to embrace a rising stock market, Schwab’s capacity to ride out the ups and downs of the banking crisis will be enhanced. Schwab has added more than $180 billion in new-client assets and two million brokerage accounts so far this year, in line with its long-term growth target. Executives say that most of the cash that customers moved from bank deposits stayed in other Schwab accounts. And customers’ shift to higher-yielding investments should abate by the end of 2023, executives said Tuesday. Schwab executives bristle at any comparison to the regional banks that failed this year. Declining deposits, higher borrowing costs and the prospect of stiffer regulation might weigh on earnings in the short run, they acknowledge. Earnings and revenue fell in the second quarter from a year earlier, and Wall Street estimates have come down. Schwab has ample liquidity and remains profitable enough to power through those challenges, the firm said. Executives said they wouldn’t need to raise additional capital or sell securities. The deposit flood Schwab was a pioneer in bringing Wall Street to everyday Americans. Its 50-year push to lower their trading costs won over generations of individual investors. One question now is how important the banking business is to the firm’s future. Schwab launched its bank in 2003 as a way for customers to get debit cards, checks and sometimes mortgages from the same firm that oversaw their investments. Its banking ambitions appeared limited, at least at first. In 2008, Schwab held about $24 billion in deposits, to JPMorgan’s $1 trillion. The company gobbled up deposits in the low-rate years that followed, peaking at about $465 billion in early 2022 and making Schwab one of the biggest banks in the U.S. It was a boon for shareholders and, at times, a sore spot for customers. For years, Schwab swept brokerage customers’ spare cash into money funds, “or sweep accounts.” Over time, though, Schwab increasingly shifted that money into its own bank as deposits, which usually pay lower interest. Schwab said the practice allowed it to lower customer fees on other services. YOU MAY ALSO LIKE 0:49 Paused 0:16/5:30 The Federal Deposit Insurance Corporation is doing what it was designed to do when banks like Silicon Valley and Signature go under: cover insured deposits. Here’s how the FDIC works and why it was created. Photo illustration: Madeline Marshall Schwab laid out its strategy in a 2017 presentation to Wall Street. Every $10 billion the company moved into bank deposits would add about $120 million in interest revenue, Bettinger said then. The growth made Schwab look more like a bank, and less like a broker dependent on customers’ trading activity. Net interest revenue became the big driver of Schwab’s results, last year accounting for more than half of total revenue. SHARE YOUR THOUGHTS How do you think Charles Schwab will respond to the impact of rising rates on its bank? Join the conversation below. The bank also enabled Schwab to outflank brokerage rivals. In 2019, Schwab announced it would eliminate commissions on stock trades—the first big traditional brokerage to do so. Days later, TD Ameritrade, E*Trade and Fidelity Investments followed suit. But TD Ameritrade and E*Trade depended far more on trading fees than Schwab did. Within months, both agreed to sell themselves—TD to Schwab, E*Trade to Morgan Stanley. Looking ahead When Covid hit, Schwab found itself in the best of both worlds. Newbie investors, stuck at home, flooded its platform. The Fed again slashed rates to near zero, assuring that many of those new customers would leave their cash in deposits. Most of them did. But when the Fed started raising rates, the flow of deposits onto Schwab’s balance sheet reversed. The question for investors is what might happen the next time market conditions change sharply—and how firms such as Schwab will respond.
No. His GF was politically connected. " federal regulators announced a $5 million settlement with Jon S. Corzine, who ran MF Global when it collapsed into bankruptcy in 2011 and lost more than $1 billion in customer money." Nice deal.
%% And most likely better than fine; money market interest also , good brokerage customer service. Personally I rate SCHW + IBKR as 2 of the best. And I've done business with many of them.
If only there were examples Schwab could have learned from? Like Caplan did to Etrade. https://www.reuters.com/article/us-etrade-citadel-idUSWNAS336520071129