Charles Schwab: One-Time Charges Related to Cost Savings and Interest Rates Pressure Stock

Charles Schwab Stock at a Glance

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

Charles Schwab Update

Charles Schwab SCHW stock may be feeling some pressure from recently announced one-time charges related to the firm’s $500 million expected cost-savings initiative. The company said it expects to incur $400 million to $500 million of costs over the remainder of 2023 and in 2024, related to reducing headcount and its real estate footprint as part of the plan. The expected savings are much more important and beneficial than the charges, so this is a net positive for shareholders.

We believe the stock has declined in recent days partly from the overall pullback in the stock market and potentially from the higher 10-year Treasury rate. In the long run, a higher Treasury rate is positive, as it will lead to higher net interest income from Schwab’s bank. However, a high rate also leads to more unrealized losses on fixed-income securities portfolios at banks and Schwab due to interest rate risk. Under current capital regulations, Schwab has abundant capital and ample access to liquidity from its normal business operations, natural periodic debt issuance, and borrowing from the Federal Home Loan Bank system and the Federal Reserve.

While we can imagine some concerns resurfacing around the previous two quarters related to Schwab and the U.S. banking system, we continue to believe the larger, relatively diversified financial institutions will be fine, and that many of them are trading at attractive valuations. We are maintaining our recently increased $80 fair value estimate for Schwab, and assess its shares are materially undervalued.