Charles Schwab Earnings: What to Watch

Text size

The two most important words to watch when

Charles Schwab

reports earnings Monday, April 17? Cash sorting.

That’s a Wall Street term that describes the process of investors moving money out of low-paying bank accounts into higher-yielding options like money-market funds. Cash sorting has been happening at a brisk pace because of rising interest rates, and it likely will crimp Schwab’s results.

William Blair analyst Jeff Schmitt expects Schwab’s cash sorting woes and higher costs to reduce its earnings per share by nearly 90 cents in 2023. Analysts surveyed by FactSet expect EPS of 90 cents for the first quarter, up from 77 cents in the same quarter a year ago. Shares of Schwab closed Friday at $50.77, down 39% year to date.

Though best known for its discount brokerage services, Charles Schwab also operates a bank. The company deposits uninvested cash from clients’ brokerage accounts into so-called sweep accounts at the bank that yield just 0.45%. During the years of record-low interest rates, customers didn’t pay much attention to what they earned on cash. Now, that has changed.

Schwab had $367 billion in client cash deposits at the end of the fourth quarter, down 17% from a year earlier and down 7% from the third quarter. When deposit outflows exceed Schwab’s cash on hand or revenue generated from other assets, the company taps other sources, such as Federal Home Loan Bank loans, but that is an expensive solution.

Shares of Charles Schwab got caught up in last months’ rout of regional bank stocks. 

Investors also appeared concerned about $14 billion of unrealized losses in Schwab’s securities portfolio (mostly mortgage-backed securities), although the company has said it would not need to realize those losses and had access to ample sources of liquidity. 

“Cash sorting should be a drag on results as clients continue to shift to higher-yielding cash products,” Schmitt of William Blair wrote on Friday. “We expect sweep cash to decline $62 billion in the quarter versus $40 billion-$50 billion in the last few quarters.”

That said, Schmitt has an Outperform rating on the stock.

“Uncertainty over cash sorting could keep the stock range bound over the next few quarters,” he writes. “However, we believe the stock price has moved down to a level in which the risk/reward dynamic has shifted in the investor’s favor.”

Morningstar analyst Michael Wong recently lowered his fair value estimate for Schwab to $70 from $87. He expects to see signs of accelerated cash sorting, but nothing “alarming.” He also notes that weekly money-market fund flow data for Schwab was fairly steady in the $4 billion to $7 billion range for March.

“We assess shares are undervalued compared with our $70 fair value estimate and believe the discount is more related to market uncertainty over the company’s earnings power and less about concerns over its access to funding and capital,” Wong wrote April 13.

Write to Andrew Welsch at [email protected]