Charles Schwab Earnings: Balance Sheet and Client Metrics Fine, but Funding Costs Trending Higher

There were no real signs of balance sheet stress or client attrition in Charles Schwab’s first-quarter earnings, but we expect the trajectory of earnings to look like a check mark with a near-term decline and longer-term uptrend. Charles Schwab reported net income to common shareholders of $1.5 billion, or $0.83 per diluted share, on $5.1 billion of net revenue. Net revenue increased 9.5% from the previous year but sequentially declined 7%. Most of the net revenue decline was from higher funding costs that affected net interest income, as clients shift their transactional deposits into money market funds and fixed income securities and Schwab has to substitute for the deposits with higher-cost certificates of deposits and FHLBank borrowings. While net revenue and earnings sequentially declined, the company still reported a strong annualized return on equity of 23% and operating margin of 41%. We plan to maintain our $70 fair value estimate for wide-moat-rated Charles Schwab and assess shares as undervalued.