Who would have thought that the redemption story of 2023 would be Charles Schwab (SCHW)?
I'm only half exaggerating when I ask that question. There was a time in early March when the online broker and bank were left for dead. However, the company reported better-than-expected Q2 2023 earnings before the markets opened this morning, which lit a fire under SCHW stock.
Up 12% in early afternoon trading, if Schwab’s stock stays on a roll, it could finish the year in positive territory. That’s something when you consider it lost 32% of its value between March 8 and 13 after Silicon Valley Bank caused a deposit exodus at all but the biggest financial institutions.
In early March, after Schwab’s slide, I was convinced its shares were a smart buy. With today’s gains, it looks as though the bad times are behind them.
Investors must ask themselves: Is it too late to buy Schwab? I don’t think so. Here’s why.
The Q2 2023 Results Broken Down
If you didn’t know what an analyst was, Schwab’s second-quarter results would be disappointing, with revenues off 9%, to $4.66 billion, with an adjusted profit of $1.49 billion, 25% less than a year ago. Worse still, its pre-tax profit margin was 42.0%, 750 basis points lower than Q2 2022.
Alas, analysts do exist, and they were even more pessimistic about its results—the consensus called for $4.61 billion in revenue and $0.71 in earnings per share. Schwab’s revenues were $50 million higher than analyst expectations, with a four-cent beat on the bottom line.
“During the second quarter, we gathered $52 billion in core net new assets – bringing year-to-date asset gathering to over $180 billion and keeping us squarely within our long-term organic growth range of 5% – 7%,” stated CEO Walt Bettinger.
“While we observed signs of typical tax seasonality, as well as softer investor sentiment at the beginning of the quarter, we still attracted nearly 1 million new brokerage accounts and finished the period serving $8.02 trillion in total client assets across 34 million accounts.”
The most important fact from Schwab’s results is the continuing deceleration of its cash outflows through the end of June. In mid-June, CFO Peter Crawford pointed out that the net outflows of cash from bank sweep deposits and Bank Deposit Account balances fell for four consecutive months from $1.52 billion per day in January to $350 million in May. That continued throughout June.
Before long, it should start seeing cash inflows rather than outflows. That alone ought to be good for the share price.
The State of Its Deposits
Schwab finished the second quarter with $304.4 billion in deposits on its balance sheet. That was 31% less than a year ago and 7% lower sequentially from the first quarter. The last quarter where its deposits increased sequentially was Q1 2022 when it hit $465.8 billion, and its total assets peaked at $681.0 billion.
Interestingly, its pre-tax profit margin in the first quarter of 2022 was 39.4%, 310 basis points higher than in Q1 2023 but considerably lower than its 48.7% pre-tax margin in Q3 2022.
While its interest revenue in the second quarter was 51.4% higher than a year earlier, its interest expense to get that revenue was also considerably higher, up nearly 1,000% year-over-year, to $1.81 billion from $166 million.
“Net interest revenue declined 10% from the prior year to $2.3 billion as the incorporation of higher cost liabilities brought our net interest margin down by 32 basis points sequentially to 1.87%,” Crawford stated in the company’s press release.
Consider that in Q2 2023, the company’s Federal Home Loan Bank borrowings went from nothing a year ago to $46.8 billion, or 10.3% of its $453.1 billion in total interest-bearing liabilities. They came with a 5.13% average interest rate, which had to be paid to solidify its balance sheet after a 31% year-over-year decline in its bank deposits.
At the end of the day, Schwab’s net interest margin (NIM) was 1.87%, 25 basis points higher than a year ago. In the first six months through the end of June, its NIM was 2.03%, 53 basis points higher.
Despite the misery of the year's first half, it’s still doing a good job of making money from its clients in a difficult banking environment.
With some suggesting that we are indeed in a new bull market, it is more than possible for Schwab’s stock to rise 20% over the next five months.
As Schwab’s CEO and CFO stated in its press release, the company continues to operate from a position of strength. Its diversified revenue streams ensure it can drive profitability in almost any environment.
Rather than focusing on the deposits that left, investors ought to focus on the $180 billion in net new assets it’s managed to gather so far in 2023, despite a run on deposits earlier in the year.
Schwab remains an excellent buy in 2023 and beyond.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
