Rising interest rates have resulted in significant deposit outflows at Charles Schwab. Here's where the company stands today.
Charles Schwab (SCHW 1.71%) 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
The rapid rise in interest rates that precipitated the banking crisis contributed to a challenging last 18 months for Schwab, as clients moved bank cash to higher yielding instruments. This led to a significant, albeit short-term, earnings headwind. As we move into 2024, we believe the worst is behind them.
At what age should you get out of the stock market? ›
There are no set ages to get into or to get out of the stock market. While older clients may want to reduce their investing risk as they age, this doesn't necessarily mean they should be totally out of the stock market.
What is the safest investment if the stock market crashes? ›
If you are a short-term investor, bank CDs and Treasury securities are a good bet. If you are investing for a longer time period, fixed or indexed annuities or even indexed universal life insurance products can provide better returns than Treasury bonds.
Should you invest in Charles Schwab stock? ›
Overall, Charles Schwab Corp stock has a Growth Grade of A, Momentum Grade of A Earnings Estimate Revisions Grade of D. Whether or not you should buy Charles Schwab Corp stock will ultimately depend on your individual goals, risk tolerance and allocation.
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.
How financially secure is Charles Schwab? ›
Protected up to US$600 million
The combined total of our SIPC coverage and our "excess SIPC" coverage means Schwab provides protection up to an aggregate of US$600 million, limited to a combined return of US$150 million per customer, up to US$1.15 million of which may be in cash.
Should a 70 year old be in the stock market? ›
Conventional wisdom holds that when you hit your 70s, you should adjust your investment portfolio so it leans heavily toward low-risk bonds and cash accounts and away from higher-risk stocks and mutual funds. That strategy still has merit, according to many financial advisors.
How much should a 60 year old have in stocks? ›
For years, a commonly cited rule of thumb has helped simplify asset allocation. According to this principle, individuals should hold a percentage of stocks equal to 100 minus their age. So, for a typical 60-year-old, 40% of the portfolio should be equities.
Should a 65 year old be in the stock market? ›
Near and current retirees are often encouraged to invest their money so it's able to grow. If you're 65, it means you may want to keep a notable portion of your portfolio in safer assets. It can still make a lot of sense for a 65-year-old to own stocks.
Do I lose all my money if the stock market crashes? ›
Do you lose all the money if the stock market crashes? No, a stock market crash only indicates a fall in prices where a majority of investors face losses but do not completely lose all the money. The money is lost only when the positions are sold during or after the crash.
The odds are the value of your retirement savings may decline if the market crashes. While this doesn't mean you should never invest, you should be patient with the market and make long-term decisions that can withstand time and market fluctuation.
Is it better to have cash or property in a recession? ›
Cash. Cash is an important asset when it comes to a recession. After all, if you do end up in a situation where you need to pull from your assets, it helps to have a dedicated emergency fund to fall back on, especially if you experience a layoff.
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.
Why is Charles Schwab stock declining? ›
Charles Schwab's stock falls as earnings and revenue per trade decline - MarketWatch.
What is Charles Schwab ranked? ›
WESTLAKE, Texas--(BUSINESS WIRE)-- Charles Schwab has been recognized as the Best Investing Platform Overall by U.S. News & World Report in their 2024 U.S. News Money Awards – the second year in a row Schwab has received the best ranking overall from U.S. News.
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 Charles Schwab safe now? ›
All deposit accounts held at Charles Schwab Bank, SSB are FDIC-insured, including Schwab Bank Investor Checking™ accounts and Schwab Bank Investor Savings™ accounts.
What happens if Schwab goes out of business? ›
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.
What is happening to Schwab? ›
Schwab (SCHW) Reports Sequential Fall in April Net New Assets. Schwab's (SCHW) core net new assets of $1 billion for April 2024 decline 98% from the previous month but increase 143% from the prior-year month.
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