Charles Schwab: We Expect Signs of Higher Cost Funding Use in Q1 Earnings, but Business Still Solid

For Charles Schwab's upcoming first quarter of 2023 earnings, we expect to see some signs of accelerated "cash sorting," with low-cost sweep deposits being moved into higher-yielding fixed-income securities and money market funds. The low-cost deposit funding is also being replaced by higher-cost funding sources. When Schwab released its annual report in late February, it had already borrowed an additional $13 billion from the FHLBank system, which more than doubled its FHLBank loan balance of $12.4 billion at the end of 2022. The FHLBank loans carry an interest rate around 5% compared with Schwab's average funding costs from bank deposits of 0.46% in the fourth quarter of 2022. Schwab has also likely incorporated more retail certificates of deposit on its funding base, which also have an interest rate around 5%.