The tide is turning for Schwab
Stock Update - 3Q24 Results
Charles Schwab delivered a better than expected 3Q24 result with net revenue rising 5% to $4.8b and adjusted EPS flat at 0.77c. Net new assets increased by $95b, bringing total assets to $10t, a 10x increase since outgoing CEO Walt Bessinger took over in 2008. While the business has evolved significantly, its core priority remains the same; to serve the needs of its customers who are individual investors and advisors.
CEO Walt Bessinger explained it well at the end of the call, “But if I could, I'd like to go back to the very first conversation that Chuck Schwab had with me about the possibility of being CEO of the company someday. This conversation actually happened several years before I formally became CEO.
And during that conversation, I asked Chuck this question. If I do become CEO someday, what would be the most important objective that you would like me to achieve during my time as CEO? Now I fully expected Chuck to reply with maybe a certain level of client assets or client accounts, maybe a level of market capitalization or even the stock price. But for those of you who know Chuck well, you can probably suspect that his answer was none of those. Instead, Chuck shared that his definition of success would be if I did my part during my tenure to ensure that there would be a strong independent Schwab 50 years hence.
Importantly, because, in Chuck's words, investors need and deserve what we offer them. First, great service, great value, quality execution, professional advice, low cost mutual funds and ETFs, access to independent investment advisors and so much more. And thanks to our employees, our 43 million clients and our long-term stockholders, Chuck has personally shared with me mission accomplished.”
Schwab is well placed to return to historical growth trends following a challenging couple of years. The operating environment is improving with cash realignment slowing, the TD Ameritade integration finalised and capital levels approaching target levels.
The near-term driver is net interest income, which represents around 50% of revenue, and is influenced by client cash levels and interest rates. As explained in our previous note here, a declining interest rate environment is likely a net positive for cash levels, which we have started to see in September’s $17b cash inflow. In contrast, consensus continues to expect cash levels to fall as a percentage of total assets, reaching all time lows by FY26. We believe this is unlikely given the above.
As interest rates decline, expectations for net interest margins (NIM) have also moderated, with management projecting it to land slightly below the 3% target by the end of FY25. Despite this, NIMs should track significantly higher than the current 2.1% levels. With improving cash levels and a rising NIM, the business is well positioned to achieve 20% earnings growth over the coming years.
In addition, Schwab’s Tier 1 Leverage Ratio increased year over year from 4.1% to 6.7%, approaching the target range of 6.75% to 7.00%. As earnings improve and capital constraints reduce, Schwab can repay costly short-term debt funding and explore other capital management initiatives.
Overall, the worst appears to be behind Schwab. Latent earnings power, currently dampened by short-term headwinds, is expected to be unlocked over the coming years. With a smooth management transition in progress, the business is well-positioned for its next phase of long-term growth.