Charles Schwab Earnings: Key Metrics for Net Interest Income Show Improvement

Key Morningstar Metrics for Charles Schwab

• Fair Value Estimate: $76.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Charles Schwab’s Earnings

Charles Schwab’s SCHW revenue and earnings recovered in the third quarter, and signs point to further strengthening. The company reported net income to common shareholders of $1.3 billion, or $0.71 per diluted share, on $4.8 billion of net revenue—the highest such figures since the first quarter of 2023. Net revenue increased 3% sequentially and 5% from the previous year, thanks to a sequential rebound in net interest income and healthy growth in asset management revenue from the upward-trending stock market. We don’t anticipate making a material change to our fair value estimate of $76 per share. We assess the stock as fairly valued after its recent runup.

Schwab’s client-cash-related revenue remains the focus of its growth story. NII sequentially increased $64 million, or 3%, mainly thanks to higher interest revenue in margin loan balances and broker/dealer cash and lower interest expense from bank supplemental funding, which includes high-cost certificates of deposit and Federal Home Loan Bank borrowings. While the previous quarter saw an increase in supplemental funding, disappointing both us and the market, this quarter had a marked decline.

CD balances decreased $6.3 billion and FHLBank balances decreased $1.8 billion from the previous quarter. Lowering these high-cost funding sources is the key short-term lever to higher net interest income and earnings.