What to Expect From Charles Schwab’s Q1 2023 Earnings Results

Charles Schwab Stock at a Glance

• Fair Value Estimate (USD): 70.00
• Star Rating: 4 Stars
• Uncertainty Rating: High
• Economic Moat: Wide
• Earnings Date: Before market open on Apr. 17, 2023

Charles Schwab Earnings Preview

For Charles Schwab’s SCHW 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%.

While we expect some accelerated cash sorting, it shouldn’t be alarming. Looking at weekly money market fund flow data for Schwab, it’s actually been fairly steady in the $4 billion-$7 billion range for the previous month. For perspective, Schwab’s monthly average net inflows into money market funds has been about $22 billion from August 2022 to February 2023, according to Morningstar Direct. Some clients have also directly bought fixed income that reduces their cash balance, but if it’s similar to what we’ve seen with money market funds, it shouldn’t be a tremendous shift. One negative item we’ll be looking out for is if clients have shifted any material assets outside of the Schwab ecosystem.

We continue to believe that wide-moat Charles Schwab has access to sufficient funding sources (even if some of them are higher cost that could pressure net interest margins) and that it has sufficient capital. 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.