Rising interest rates have resulted in significant deposit outflows at Charles Schwab. Here's where the company stands today.
Charles Schwab (SCHW -0.68%) has had a difficult go of it in the higher interest rate environment. Since the Federal Reserve began raising rates amid inflationary pressures in March 2022, Schwab has seen significant deposit outflows, leading the company to tap the Federal Home Lending Bank (FHLB) and other resources to smooth outflows.
Over recent months, the deposit outflows at Schwab have slowed, and the fourth quarter showed more of the same. With the stock up 37% from its low last May and the prospect of interest rate cuts in 2024 on the table, is Schwab's stock still a buy?
Charles Schwab's strength leaves it vulnerable during rising interest rates
Charles Schwab has delivered solid returns for investors for decades thanks to its limited credit exposure and cost-efficient business model. The financial services company has historically relied on low-cost deposits that have led to a solid return on equity above its peer averages.
As a crucial component of its business model, Schwab relies heavily on deposits, most of which are in savings accounts that clients have yet to invest, to drive strong profit margins. While this has worked well for the company over the past decade, Charles Schwab has also struggled during periods of rising interest rates.
In 2017, the Federal Reserve began gradually increasing its federal funds rate, which eventually posed a problem for Charles Schwab called "client cash sorting." Rather than keep deposits in low-yielding accounts, many customers shifted funds to high-yield savings, CDs, or other relatively safe assets with appealing yields, which reduced its balance sheet and a sizable amount of those low-cost funds it relied on.
So when the Federal Reserve began raising interest rates in March 2022, Schwab faced client cash sorting problems again. The difference this time is that interest rates were rising in response to inflation, which was increasing year over year at its fastest rate in 40 years.
The pace of Schwab's deposit outflows has slowed down significantly
From August 2022 through March 2023, Charles Schwab lost deposits due to client cash sorting at a pace of $5.6 billion per month as yields on savings accounts or other safe short-term assets like certificates of deposits rose. These deposit outflow pressures slowed significantly following the regional banking crisis. From June through December last year, Schwab's deposits continued to decline, but at the pace of $1.1 billion monthly.
Chart by author.
The pace of Schwab's outflows is moderating, which is helped by the Federal Reserve's recent pause on its interest rate hiking campaign. With rates moderating and possibly coming down, Schwab could see those deposit pressures begin to diminish. That would be a welcome sign for the company, which will look to reduce higher-cost funding sources, like retail certificates of deposit and FHLB advances.
Is Charles Schwab stock a buy?
Charles Schwab is still managing its outflows, and the primary risk to the company is interest rates remaining higher for longer than anticipated. That could result in more outflows and put pressure on the share price. However, it seems more likely rates will go down. According to the CME FedWatch Tool, markets are pricing in five interest rate cuts by year-end.
SCHW PE Ratio data by YCharts
With the prospect of interest rate cuts, Charles Schwab's valuation is quite reasonable. The stock trades at a price-to-earnings ratio of 24.6, which is close to its 10-year average. However, based on one-year forward earnings, it trades at just 14.2.
Given its reasonable valuation, Charles Schwab looks like a good stock to buy today and add to through the year if interest rates do indeed fall, which would take significant pressure off its declining deposit base.
Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Charles Schwab. The Motley Fool recommends CME Group and recommends the following options: short March 2024 $65 puts on Charles Schwab. The Motley Fool has a disclosure policy.
FAQs
On a conference call, executives said financial results should improve in the year ahead, setting Schwab up for growth in 2025 and beyond. But they described 2024 as “transitional” and dependent on factors that are difficult to predict: the trajectory of interest rates, the stock market and the behavior of new clients.
Is Charles Schwab a good buy right now? ›
SCHW Stock Forecast FAQ
Charles Schwab has a conensus rating of Moderate Buy which is based on 9 buy ratings, 5 hold ratings and 1 sell ratings. The average price target for Charles Schwab is $74.07. This is based on 15 Wall Streets Analysts 12-month price targets, issued in the past 3 months.
What is the outlook for Charles Schwab stock? ›
Future Growth
Charles Schwab is forecast to grow earnings and revenue by 14.9% and 8.2% per annum respectively. EPS is expected to grow by 15.8% per annum. Return on equity is forecast to be 19.2% in 3 years.
How solid is Charles Schwab? ›
Charles Schwab has delivered solid returns for investors for decades thanks to its limited credit exposure and cost-efficient business model. The financial services company has historically relied on low-cost deposits that have led to a solid return on equity above its peer averages.
Should I keep my money in Charles Schwab? ›
Yes, in addition to SIPC, Schwab clients receive an extra level of coverage through "excess SIPC" insurance protection for securities and cash. This helps ensure claims will be covered in the event of a brokerage firm failure and funds covered by SIPC protections are exhausted.
Is Schwab in danger of closing? ›
Charles Schwab's threat of distress is under 34% at this time. It has slight chance of undergoing some form of financial crunch in the near future.
Will Charles Schwab stock recover? ›
In Fiscal Year 2023, Charles Schwab added 3.8 million new brokerage accounts, and the company's total client assets expanded by $306 billion to $8.52 trillion. That's a great sign for Schwab, and if interest-rate cuts come as expected in 2024, the company's recovery could quickly pick up steam.
Are my stocks safe with Charles Schwab? ›
Are my assets at Charles Schwab–Affiliated Banks protected by the FDIC? Yes. The Federal Deposit Insurance Corporation (FDIC) is an independent agency that is backed by the full faith and credit of the United States government. Its purpose is to protect depositors' funds placed in banks and savings associations.
What is better than Charles Schwab? ›
After testing 18 of the best online brokers, our analysis finds that Fidelity (98.7%) is better than Charles Schwab (96.6%).
What happens to my stock if Charles Schwab fails? ›
This is to ensure that even if a brokerage company fails, its customers' assets will be safe. Thus, Schwab holds your cash and investments separate from their own assets and these can simply be returned to you in a liquidation.
As of May 2021, his net worth is estimated by Forbes to be $10.6 billion, making him the 210th richest man in the world.
Who is buying Schwab stock? ›
NYSE:SCHW is held by these investors
| Guru | Portfolio Date | Current Shares |
|---|
| Ron Baron | 2023-12-31 | 8,127,538 |
| Yacktman Asset Management | 2023-12-31 | 6,316,361 |
| Bill Nygren | 2023-12-31 | 5,883,000 |
| T Rowe Price Equity Income Fund | 2023-12-31 | 3,980,000 |
13 more rowsAny securities, other than cash, are on Schwab's custodial side of the business, belong to you, and cannot be taken away from you, even if Schwab was to go bankrupt. Cash, which is on the bank side of the business, has several layers of insurance.
Is Charles Schwab in debt? ›
Charles Schwab long term debt for 2023 was $26.128B, a 25.45% increase from 2022.
What is the average account balance at Charles Schwab? ›
WESTLAKE, Texas-- According to Charles Schwab's SDBA Indicators Report, an industry-leading benchmark on retirement plan participant investment activity within self-directed brokerage accounts (SDBAs), the average account balance across all participant accounts finished at $287,769 for the third quarter of 2023, up by ...
What is the prediction for stock market in 2024? ›
The consensus 12-month analyst price target for the S&P 500 is 5,614, representing about 6.8% upside from current levels.
What is the outlook for investments in 2024? ›
For all of 2024, we foresee below-trend economic growth of 0.5%–1% from the effects of contractionary monetary and fiscal policy. But recent easing in financial conditions, particularly mortgage rates, should relieve pressure on households and pose an upside risk to our forecast.
What stocks are expected to do well in 2024? ›
10 Best Growth Stocks to Buy for 2024
| Stock | Expected Change in Stock Price* |
|---|
| Tesla Inc. (TSLA) | 61% |
| Mastercard Inc. (MA) | 14.2% |
| Salesforce Inc. (CRM) | 7.2% |
| Advanced Micro Devices Inc. (AMD) | 11.3% |
6 more rowsMar 25, 2024
Net Income
| Dec 2023 |
|---|
| Revenue or Sales | 6.29 B |
| Total Investment Income | 17.00 M |
| Trading Account Income | 767.00 M |
| Total Expense | 4.35 B |
5 more rows
