Charles Schwab Earnings: Revenue Growth In 2024 Uncertain, but Long-Term Outlook Bright

Key Morningstar Metrics for Charles Schwab

• Fair Value Estimate: $80.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Charles Schwab’s Earnings

In 2024, revenue growth is less certain for Charles Schwab SCHW due to expectations of falling interest rates, but the company’s business model and longer-term trends still paint a bright picture. In 2023, it reported net income to common shareholders of $4.6 billion, or $2.54 per diluted share, on $18.8 billion of net revenue. On an adjusted basis, which excludes nearly $1.5 billion of restructuring and acquisition-related costs, earnings per share was $3.13. Net revenue decreased 9%, primarily due to a nearly $2 billion decline in net interest income and bank deposit account fees.

While high interest rates are generally good for net interest income, Schwab and other financials were negatively affected by clients moving their cash from low-cost bank deposits to higher-cost certificates of deposit and lower-yielding money market funds. Sequentially, revenue declined 3% in the fourth quarter, an improvement over the 7% decline in the first quarter and the 9% decline in the second. We expect to decrease our 2024 revenue and earnings forecasts as we update our interest rate assumptions, but we don’t anticipate making a material change to our fair value estimate of $80 per share for Schwab. We currently assess its stock as moderately undervalued.

Market expectations for interest rates dramatically changed during the past quarter. In the third quarter of 2023, the market seemed to believe rates would be higher for longer because of the unusual strength in the economy. Expectations now have the federal-funds rate declining 75 basis points or more by the end of 2024, as inflation has trended down. Interest rates are a key factor for Schwab, with related revenue being over 50% of its net revenue in the fourth quarter. While falling interest rates are a headwind for earnings, they are a positive for the company’s capital position, as they reduce unrealized losses on fixed-income securities.