Charles Schwab made a profit of $1.6 billion in the first quarter of the year, it said Monday, better than Wall Street had expected and seems to allay recent concerns about its financial health. Schwab’s shares, which were swept into the banking turmoil following the collapse of Silicon Valley Bank last month, rose after the report.
Still, the outlook was mixed: A significant portion of Schwab’s customers were shifting their deposits to accounts that paid more interest, which could weigh on the company’s profits for the foreseeable future.
Though Schwab is best known for its massive brokerage business, it also has a large banking arm. The bank’s balance sheet contained billions of dollars in bonds that fell in value as the Federal Reserve quickly hiked interest rates. Silicon Valley Bank held similar bonds, and when it was forced to sell some at a loss, nervous depositors called for their money in a classic run on the bank.
That spooked Schwab’s investors, who feared the company might face similar pressures; its stocks fell, rousing its top executives to rush to defend its financial position. Schwab’s shares were up nearly 4 percent on Monday but were still down more than 35 percent year-to-date.
“I would certainly hope that by this point,” Schwab chief executive officer Walt Bettinger said, “speculation that we would find ourselves in a position where we would be forced to sell securities with temporary paper losses has gone to bed.” brought.”
Schwab’s profit rose 14 percent year-over-year in the first three months of the year, while revenue rose 10 percent. Although earnings beat expectations, analysts had steadily lowered their forecasts since January.
“Schwab’s first-quarter earnings should allay many concerns about the company,” said Michael Wong, Morningstar’s director of equity research, financial services.
Customer deposits declined significantly in the first quarter, down $41 billion, or 11 percent, sequentially. But customer holdings in Schwab’s money market funds increased by nearly $80 billion, or 28 percent. The company opened one million new brokerage accounts in the first quarter, which generated $132 billion in net new money.
“So customers who were withdrawing deposits seemed to stay in the Schwab ecosystem,” Mr Wong said.
JPMorgan Chase, the country’s largest bank, last week reported a modest increase in deposits in the first quarter, while Citigroup and Wells Fargo reported modest outflows. Banks, too, like Schwab, announced larger-than-expected gains because they were able to charge more for loans than they paid out on deposits when the Fed hiked rates.
About half of Schwab’s revenue last year came from so-called net interest income, which was $2.7 billion in the first quarter, down 9 percent from the fourth quarter but up 27 percent from the same period in corresponds to the year 2022.
Most of it is generated from the uninvested money of its customers. Schwab pays customers interest of, for example, half a percent on their assets and then invests the money at higher interest rates and collects the difference. But when customers reallocate deposits to higher-yielding accounts at Schwab or elsewhere, it increases the company’s funding costs and eats away at profits.
Schwab executives acknowledged that these higher costs would continue to weigh on profits in the immediate future, but said it was a manageable challenge — and one that’s expected to ease over the next few quarters.
For now, Peter Crawford, Schwab’s chief financial officer, said the company will suspend share buybacks “in light of recent events in the U.S. banking sector and the resulting regulatory uncertainty.”