The ongoing global economic uncertainty is creating a challenging operating environment for financial services firms, especially those that rely heavily on interest income to generate revenue. Charles Schwab Corp., one of the largest investment banks in the United States, is facing challenges as clients are pulling their money out of low-interest bank accounts at a faster rate than expected.
Faster Rate of Client Money Moving from Sweep Accounts to Money Market Funds
According to reports, Charles Schwab is seeing a much faster rate of client money moving from sweep accounts into money market funds. This rate is currently at $20 billion a month, which is double the rate Morgan Stanley had predicted. These withdrawals are depriving Schwab of cheap funding and causing losses on long-term bond investments made during record-low interest rates.
Analysts Cutting Buy-Equivalent Rating on Schwab
The trend has caused concern for investors and analysts alike. Analyst Michael Cyprys cut his buy-equivalent rating on Schwab for the first time since he began covering the stock. He lowered his profit forecast for this year and next by 30%, reflecting the heightened risk analysts see in financial companies like Schwab.
Analysis and Recommendation to Buy Charles Schwab
Despite the challenges faced by Charles Schwab, many investors believe that it remains a sound investment choice. The company’s overall client cash balance has remained steady, and there have been significant movements out of its bank deposit accounts, but these were moved to money market accounts within the Charles Schwab platform as clients looked to earn higher yields.
In fact, Charles Schwab actually saw new net assets in the week ending March 16, 2023, which was one of the most volatile times for regional banks. The brand’s strength and clients’ trust in the company highlighted that Charles Schwab managed to attract $16.5 billion inflows in net new assets during the height of the regional banking saga.
Charles Schwab’s Strong Intrinsic Value, Discounted Stock Price
Based on our analysis, Charles Schwab is currently trading at 10.6x 2024 P/E, which is near the 2008 financial crisis and 2020 pandemic levels. The intrinsic value of Schwab is $81.04, and the current stock price is more than a 30% discount to the intrinsic value of the company. Therefore, we believe that the worst has been priced into Charles Schwab at the current P/E multiple.
The cost of equity is 10%, and Charles Schwab’s main revenues come from interest income, administrative fees, and trading revenues. The overall client cash balance and movements in its bank deposit accounts are not significant worries as much liquidity available to Charles Schwab today amounts to $652 billion, making up almost 80% of the total client cash balances that the company has today.
The Financial Threat Posed by Charles Schwab Corp.
While many investors remain bullish on Charles Schwab, some experts see it as a potential threat to the US financial system due to the Federal Reserve’s aggressive tightening cycle. Similar to other US banks such as Silicon Valley Bank and Signature Bank, Charles Schwab sustained paper losses when rates were jacked up by the Fed.
Investors can find clues about Charles Schwab Corp.’s troubles in Japan’s aversion to financial change. Japan’s addiction to free BOJ (Bank of Japan) money and QE (quantitative easing) has made it difficult for the country to normalize monetary policy without hurting its economy.
The Federal Reserve’s Tightening Cycle
Similarly, many experts believe that pre-emptive action by the Federal Reserve may pose a risk for US financial institutions like Charles Schwab Corp. The Fed’s most aggressive tightening cycle since the mid-1990s may pose a threat to the US financial system, as the risks of collateral damage grow by the day.
Investors are concerned that the Fed may need to halt or reverse course on its rate cycle as the cost of borrowing continues to rise. However, for now, the team seems determined to drive rates higher, regardless of potential damage.
A Better Way to Combat Inflation
As inflation concerns mount and investors seek stability, it is important to consider alternative investment strategies. A better way to combat inflation may be through investing more heavily in productivity-enhancing technologies.
Conclusion:
With ongoing economic uncertainty and market volatility, predicting future trends for financial services firms remains challenging. While Charles Schwab Corp. is facing challenges due to clients’ withdrawals and a tightening Fed cycle, there are still many reasons for investors to remain bullish.
Charles Schwab offers strong intrinsic value with its diversified revenue streams and ample liquidity. The company’s resilience during volatile times highlights its strength and trust among clients. As always, investors should consider all available information before making any investment decisions.
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