Charles Schwab Earnings: Revenue Downturn Showing Signs of Stabilization

Key Morningstar Metrics for Charles Schwab

• Fair Value Estimate: $80.00
• Morningstar Rating: 4 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Charles Schwab’s Earnings

In the medium to long term, Charles Schwab SCHW should see significant growth in earnings, and third-quarter results show stabilization in revenue that had recently been trending downward. Schwab reported net income to common shareholders of $1.02 billion, or $0.56 per diluted share, on $4.61 billion of net revenue. Net income was affected by $279 million of restructuring charges in the quarter, and adjusted earnings per share (excluding restructuring, acquisition, and certain amortization costs) was $0.77.

Net revenue decreased 16% from the prior year’s record revenue quarter, mostly due to a nearly $700 million decline in net interest income, or NII, as funding costs have increased. Net revenue declined only 1% from the previous quarter, which is a significant deceleration of the revenue declines of 7% and 9% in the prior two quarters. We don’t anticipate making a material change to our $80 fair value estimate, and assess the shares are undervalued.

The largest medium-term driver of earnings will be Schwab paying down its high-cost supplemental funding and expense savings. Federal Home Loan Bank, or FHLB, funding decreased by a significant $9.2 billion to $31.8 billion, but it was offset by a decrease in corporate cash. Both balances yield about 5%, so the effect on NII was nearly neutral.

Over the next several quarters, we believe securities maturing in the company’s bank and stabilizing client cash will allow it to pay down additional high-cost FHLB borrowings that will lead to NII growth. Schwab reiterated its target of about $1 billion of cost savings over the next year, and that 2024 adjusted expenses could be flat or even lower than in 2023.

Schwab’s regulatory capital ratios remain strong. Its consolidated tier 1 leverage ratio increased to 8.2% from 7.5% the previous quarter. Its tangible common equity seems to have remained steady.