Charles Schwab, a leader in wealth management and brokerage, has witnessed a notable rebound in its core net new assets in November, marking a significant recovery from the slump experienced in October.
The firm reported an impressive $21.7 billion in core net new assets, a substantial increase from October's $11.3 billion, though still trailing behind the $33.1 billion reported in the same period the previous year, as detailed in Schwab's monthly activity report.
This positive development spurred investor confidence, reflected in the stock's immediate surge to $70 per share, a 6% increase in early trading. Schwab, with its headquarters in Westlake, Texas, boasts $8.18 trillion in total client assets, representing a 12% increase from November 2022 and a 7% rise from October 2023. The company stands as the nation's largest custodian of assets for registered investment advisors and is among the top online brokerage firms.
Despite facing challenges this year, including concerns about deposit outflows and cash sorting, Schwab's stock has recently pared losses, buoyed by an improved outlook, dovish signals from the Federal Reserve, and strategic cost-cutting measures. Currently, shares are trading at $69.99, down 17% this year, and below the 52-week high of $86.63.
Schwab’s acquisition of TD Ameritrade in 2020 and the subsequent integration process led to some attrition of TD Ameritrade customers and advisors, impacting net new assets in recent months. Despite these challenges, the transition is largely complete, with most advisors and retail investors now on Schwab’s platform. The complexity of changing custodians means that any advisors planning to switch would have likely done so before this transition.
The regional bank crisis earlier in the year saw a decline in Schwab’s stock, triggered by concerns over deposit outflows and unrealized losses in its bond portfolio. However, these securities are held-to-maturity, indicating Schwab's intention not to sell them prematurely. Additionally, Schwab has been grappling with cash sorting, where customers transfer uninvested cash from low-yield bank sweep accounts to higher-yield options, impacting the firm’s profits and pressuring its earnings and share price.
Despite these challenges, there are indications that cash sorting is diminishing. The end of the Federal Reserve's rate hikes and the movement of uninvested cash out of sweep accounts contribute to this trend. Schwab’s November report shows transactional sweep cash at $402.9 billion, the largest monthly increase since March 2022. Moreover, Schwab bank CDs, often viewed as a measure of cash sorting activity, have risen to $48.9 billion.
Looking ahead, Schwab anticipates a full-year 2023 revenue decrease of 9.5% to 10% compared to the previous year. This forecast, a slight adjustment from earlier predictions, will be further clarified in the upcoming fourth-quarter earnings report.
Analysts remain optimistic about Schwab's future, anticipating a more favorable earnings trajectory in 2024 and a return to normalized earnings in the following years. J.P. Morgan analyst Kenneth Worthington, in a recent research note, expressed confidence in Schwab’s ability to manage high-cost borrowings as cash sorting subsides, paving the way for a stronger financial performance.
