Charles Schwab Earnings: Clear Signs of Positive Medium-Term Results

Key Morningstar Metrics for Charles Schwab

• Fair Value Estimate: $73.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Charles Schwab’s Earnings

There were clear signs of Charles Schwab’s SCHW positive medium-term earnings narrative in its first-quarter results. The firm reported net income to common shareholders of $1.25 billion, or $0.68 per diluted share, on $4.7 billion of net revenue. Excluding acquisition-related and restructuring costs, adjusted diluted EPS was $0.74. Net revenue was 7% lower than a year ago, but more importantly, it increased 6% sequentially—the first sequential increase since the third quarter of 2022.

There was broad strength across revenue lines, with trading increasing by 7%, asset management by 9%, and net interest revenue by 5%. Adjusted expenses were little changed from a year ago at $2.8 billion. We don’t anticipate making a material change to our fair value estimate of $73 per share, and assess the stock as fairly valued.

Multiple company metrics showed improvement in the quarter. We estimate tangible common equity ended the quarter around $22 billion, compared with $20.8 billion at the end of December and a low of $15.7 billion at the start of 2023. As the firm retains earnings, securities on its balance sheet mature, and interest rates eventually fall, its capital position will meaningfully increase. Net new client assets were $88 billion in the quarter, compared with about $50 billion-$65 billion in recent quarters and often over $100 billion in 2021 and 2022.

Some client asset attrition from TD Ameritrade clients will continue as the integration progresses, but it’s good to see a material increase in new client assets from recent quarters when the magnitude of attrition was a larger topic of discussion. Most importantly from an earnings perspective, net interest income increased about $100 million sequentially with the company’s net interest margin increasing to 2.02% from 1.89% the previous quarter. Net interest income remains the key pillar of the Schwab investment thesis.