Rising interest rates have resulted in significant deposit outflows at Charles Schwab. Here's where the company stands today.
Charles Schwab (SCHW 1.14%) 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
Fair Value Estimate for Charles Schwab Stock
With its 3-star rating, we believe Schwab's stock is fairly valued compared with our long-term fair value estimate of $73 per share. Our fair value estimate implies a price/2025 earnings multiple of about 22.5 times and a price/book multiple of about 3.7 times.
What is the problem with Schwab? ›
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.
What is the outlook for Charles Schwab stock? ›
Based on 16 Wall Street analysts offering 12 month price targets for Charles Schwab in the last 3 months. The average price target is $81.07 with a high forecast of $92.00 and a low forecast of $70.00. The average price target represents a 3.41% change from the last price of $78.40.
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.
Are my stocks safe at Charles Schwab? ›
Your securities are protected at Schwab.
The securities in your Schwab account—including fully paid securities for stocks and bonds and excess margin securities—are segregated in compliance with the U.S. Securities and Exchange Commission's Customer Protection Rule.
Is Charles Schwab in trouble in 2024? ›
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.
How financially stable is Charles Schwab? ›
Fitch Ratings - Chicago - 29 Jan 2024: Fitch Ratings has affirmed The Charles Schwab Corporation's (Schwab) Long- and Short-Term Issuer Default Ratings (IDRs) at 'A'/'F1', and its Viability Rating (VR) at 'a'. The Rating Outlook is Stable.
How trustworthy is Charles Schwab? ›
There are hundreds of branches across the country and thousands of financial consultants, both in branches and available online. Search tools allow clients to filter for branch locations as well as financial consultants. Charles Schwab Corp. has an A+ rating with the Better Business Bureau.
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.
Largest shareholders include Toronto Dominion Bank, Vanguard Group Inc, BlackRock Inc., Dodge & Cox, Price T Rowe Associates Inc /md/, State Street Corp, DODGX - Dodge & Cox Stock Fund, VTSMX - Vanguard Total Stock Market Index Fund Investor Shares, Jpmorgan Chase & Co, and VFINX - Vanguard 500 Index Fund Investor ...
Is Charles Schwab a good investment right now? ›
The current elevated interest rate environment has hit some finance stocks especially hard, and Charles Schwab (SCHW 1.08%) is among them. The stock peaked in early 2022, right before the Federal Reserve began raising rates in a bid to get inflation back under control. Since then, shares have declined 31%.
Is Charles Schwab a Republican? ›
Political and economic views
Schwab is a Republican, who has donated heavily to the party (including the National Republican Senatorial Committee and the National Republican Congressional Committee). Schwab opposes a wealth tax.
Is Schwab in danger of closing? ›
Charles Schwab's threat of distress is under 24% at this time. It has slight chance of undergoing some form of financial crunch in the near future.
Is it safe to invest with Schwab? ›
Most Schwab brokerage accounts have a Bank Sweep Feature that automatically sweeps cash balances to Schwab Bank and for that reason the cash is insured by the Federal Deposit Insurance Corporation (FDIC).
Should I invest with Charles Schwab or Vanguard? ›
Overall, we found that Schwab is a great choice for self-directed investors and traders who want access to multiple platforms, plenty of tools, and full banking capabilities. Vanguard works well for buy-and-hold investors who may not be as tech-savvy and who want access to professional advice.
Is Charles Schwab a good dividend stock? ›
Over the past three years, Charles Schwab Corp's annual dividend growth rate was 11.60%. Extended to a five-year horizon, this rate increased to 13.80% per year. And over the past decade, Charles Schwab Corp's annual dividends per share growth rate stands at an impressive 18.00%.
