Charles Schwab Corp.’s stock soared 12% Tuesday to put it on track for its biggest one-day increase since March of 2020, after the discount brokerage’s second-quarter earnings fell from a year ago but still topped consensus estimates.
Chief Executive Walt Bettinger acknowledged a “somewhat unsettled backdrop,” but said Schwab gathered $52 billion in core net new assets in the quarter, bringing the year-to-date total to more than $180 billion.
“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,” he said in a statement.
The company
SCHW,
posted net income of $1.294 billion, or 64 cents a share, for the quarter, down from $1.793 billion, or 87 cents a share, in the year-earlier period. Adjusted per-share earnings came to 75 cents, ahead of the 71-cent FactSet consensus.
Revenue fell 9% to $4.656 billion, ahead of the $4.610 billion FactSet consensus.
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Bank deposits fell to $304.4 billion from $442.0 billion a year ago. The company’s clients have been engaged in a practice called “sorting,” where they are moving cash out of sweep accounts and into higher-paying products. When that process exceeds cash on hand, the company has to borrow from other funding sources that can be more expensive.
Still, Chief Financial Officer Peter Crawford said the daily outflows that have hurt the company over the last year as clients react to higher interest rates by seeking out better-paying options, began to slow.
“While anticipated client cash realignment, along with net equity buying during June, pushed cash levels lower, we observed a continued and substantial deceleration in the daily pace of cash outflows versus prior months,” he said.
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“The continuation of this trend through the end of the quarter further strengthens our conviction that this realignment activity will inflect before the end of 2023, unlocking growth in client cash held on the balance sheet.”
On a call with analysts, Crawford said the company has not had to make any short-term borrowings from either CDs or Federal Home Loan Bank loans since late May and can now cover cash needs with organic sources.
“And as client cash realignment continues to slow and eventually reverses, we’d expect our supplemental funding balances to continue to decline over the next 18 months and be mostly paid off by the end of 2024,” he said, according to a FactSet transcript. “And this means that they should not really be a factor in our earnings picture in 2025 and beyond.”
Elsewhere, the company’s net interest income fell 10% to $2.3 billion as net interest margins fell 32 basis points from the first quarter to 1.87%.
Net interest revenue rose to $4.1 billion from $2.7 billion a year ago, while interest expenses jumped to $1.8 billion from $166 million.
The company also made progress with the conversion of client accounts from TD Ameritrade into Schwab accounts, with about 30% of accounts converted so far, said Bettinger. That comes after a major effort over the Memorial Day holiday weekend.
Schwab expects to move almost all of the rest over by year-end and to transition the final group in the first half of 2024, he said.
The stock has fallen 30% in the year to date, while the S&P 500
SPX,
has gained 17.8%.
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