Charles Schwab's discount brokerage business grew in the first quarter while its banking operations stumbled, underscoring the discomfort of having two distinct financial institutions under one roof amid the worst banking crisis since 2008.
Fears of wider contagion from the collapse of two banks in March, along with higher interest rates that have nudged clients out of low-yielding savings accounts, created two reasons for customers to pull out their bank cash.
Lawrence Glosten, a professor of banking and international finance at Columbia Business School in New York, said that "historically, banks have been slow to raise interest rates on deposits, and so we have people moving stuff out of banks and into money market funds. And an easy way to get a money market fund is to get a brokerage account. People are looking for an alternative way to save and are turning to brokerages."
Westlake, Texas-based Schwab Monday
"In light of recent events within the U.S. banking sector, and the resulting regulatory uncertainty, we have decided to pause our active buyback program," CFO Peter Crawford said in a statement.
Unusual among its peers in combining a retail brokerage, corporate retirement plan services, custodial services for financial advisors and banking, Schwab has been punished by its shareholders. Its share price is down nearly 40% so far this year. While the stock ticked up nearly 3% in early trading Monday, the company said it was pausing share buybacks, a move that allows it to conserve cash.
Like most banks, Schwab earns a big chunk of its income by "sweeping" idle cash in clients' brokerage accounts to its bank, then reinvesting those dollars in higher-earning products. It pays interest to clients but earns more for itself, a core financial metric known as net interest income.
Amid the Federal Reserve's interest rate hikes, bank depositors grew annoyed by Schwab's paltry interest rate of 0.48% (as of April 17) and yanked out their dollars to put them in the company's
That shift, known as cash sorting, fueled bank deposit outflows that caused Schwab to shore up its balance sheet by borrowing $45.6 billion from the Federal Home Loan Bank system, nearly three times more than it borrowed in the last quarter of 2022. Schwab didn't tap that resource at all — widely considered assistance for financially stressed banks — over January-September last year.
"Our top priority this quarter was to stay connected to our clients — to help them understand what is happening in the marketplace — and empower them with the tools and support to navigate the current environment," CEO Walt Bettinger said in a statement. "I believe our robust asset gathering speaks to our success on this front."
Last month, Bettinger told The Wall Street Journal, referring to the company's bank, that "there would be a
Brian Lauzon, a chartered financial analyst and managing director at InCap Group, an investment bank in Wayne, Pennsylvania, that caters to the financial services industry, said that the strain on Schwab's deposit base shows that depositors "are mindful of the fact that deposits are a loan to the bank and contingent on the bank's liquidity and health." Still, he added that Schwab's shareholders should "take some solace knowing that there are several business lines" at the company, "not just one depository institution."
For a look at the key takeaways for financial advisors from Schwab's first-quarter earnings, scroll down the slideshow. For insights on the ongoing TD Ameritrade integration from an interview with the head of digital advisor solutions of Schwab Advisor Services,
