Should You Invest in Charles Schwab Stock?

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Charles Schwab (NASDAQ:SCHW), the financial services and brokerage giant, topped third-quarter earnings estimates as its stock price surged 5.8% Monday after the earnings release.

However, Schwab’s stock price is down about 35% year to date, and its earnings and revenue were significantly lower than they were in the same quarter a year ago. Will Schwab bounce back or is this a stock to avoid? Let’s take a deeper dive.

An improving deposit picture

While Schwab beat earnings estimates, its revenue and net income totals were down precipitously from the same period a year ago. Schwab posted $4.6 billion in revenue for the quarter, down 16%, while its adjusted net income, excluding restructuring and acquisition costs, dropped 30% to $1.5 billion, or $0.77 per share.

There were a few major reasons for the drop, starting with net interest income (NII). As Schwab also has a banking arm, it saw a 29% drop in NII due to significantly higher interest paid out on deposits due to the higher interest rates. Additionally, deposit balances were down 31% to $291 billion, and this drawdown on deposits has been a concern.

The decrease in deposits has contributed to higher net interest expenses as some customers moved their money to higher interest-generating accounts like money markets. It also reduces the amount of capital Schwab can use to invest in other higher interest-earnings products. Both issues result in a drag on earnings.

However, it appears that one of the catalysts for Schwab’s post-earnings spike was an improving deposit scenario. Bank deposits were only down 7% from the second quarter, which is far less than the year-over-year decline. It was buoyed by an increase in bank sweep deposits, which are unused cash from brokerage accounts that are swept into deposit accounts. Schwab recorded increasing bank sweep deposits for the first time since March 2022.

The firm also received a boost from its asset management business, as the rising stock market lifted its asset management fees by some 17% year over year to $1.2 billion. In addition, it gained $46 billion in net new client assets in the quarter, including $27 billion in September alone.

“Year to date, we have attracted $248 billion of core net new assets from accounts originally opened at Schwab — an annualized Schwab-originated organic growth rate of over 6%. As of Sept. 30, investors have entrusted us with a total of $7.82 trillion in client assets across 34.5 million accounts,” Co-chair and CEO Walt Bettinger said.

Some positive momentum

It has been a difficult year for Schwab, but investors were no doubt pleasantly surprised by the positive momentum and growth the company exhibited with its deposits and new client acquisitions. However, Schwab should also stand to benefit from the integration of the TD Ameritrade business, which it acquired a couple of years ago.

Over Labor Day weekend, Schwab systems were hard at work, transitioning $1.3 trillion in client assets from TD Ameritrade to the Schwab brokerage platform. This included some 7,000 registered investment advisors (RIA) and 3.6 million retail accounts. Schwab has now shifted 80% of TD Ameritrade assets and accounts to its platform.

Once fully integrated next year, the firm expects to realize $1 billion in annual expense savings through increased efficiencies and streamlined operations while providing added scale for one of the nation’s largest brokerage firms. We’re seeing the integration benefits already, as Schwab announced this week that its combined Think or Swim advanced trading platform is now available to traders.

As mentioned earlier, Schwab has struggled this year, with its stock down by about 35%, and it has averaged an 8.4% annualized return over the past 10 years as of Oct. 17. Both numbers trail the S&P 500 in those respective periods.

However, the stock is reasonably valued with a price-to-earnings ratio of 15, down from 23 a year ago at this time. Further, it has a forward P/E ratio of 13.

Thus, while Schwab has faced some headwinds, with the TD Ameritrade integration near completion, interest rates plateauing, and a recession looking less likely than many experts previously expected, it’s in a great position as the market’s dominant player to bounce back.

Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.