Charles Schwab: August Metrics Nothing To Be Alarmed Over; Shares Undervalued

Charles Schwab SCHW released August metrics, and while there were areas showing some weakness, there was nothing alarming. The three areas that caught our attention were net new client assets, proprietary money market fund balances, and the certificate of deposit balances. Net new client assets in August were $8.1 billion, a decrease of 81% from a year ago and 37% from the previous month. The main reason for the lower net new assets is that Charles Schwab did a $1.3 trillion movement of TD Ameritrade assets onto its platform over the Labor Day weekend. The movement to the Schwab platform was a catalyst for clients to move their assets elsewhere, such as for registered investment advisors who didn’t want to concentrate all of their assets at Schwab, and for Schwab to end some client relationships that didn’t meet its criteria.

Legacy TD Ameritrade asset outflows were $23.2 billion in the month of August and $17.4 billion year-to-date, as there were net inflows for much of the year. There will be some additional TD Ameritrade client attrition as assets won’t completely be moved onto Schwab’s platform until mid-2024. However, Schwab had $8.1 trillion of client assets at the end of August, so the TD Ameritrade outflow for the month is about 0.3% of client assets and year-to-date is 0.2% with the company previously estimating a total attrition rate of 1%, which isn’t anything to get too perturbed over.

Proprietary money market fund balances increased to $19 billion in August from about $10 billion the previous two months, and certificate of deposit balances increased $4.3 billion from zero growth in June and a $1 billion decrease in July. These are mildly negative, as they show a likely uptick in core deposits moving to lower profitability money market funds and an increase in high-cost funding. We think this is only a temporary uptick in an overall downtrend.

We are maintaining our $80 fair value estimate for wide-moat-rated Charles Schwab and assess shares are undervalued.