Charles Schwab Corp. shares took a nosedive, marking their steepest intraday fall since last year’s regional-bank crisis, as the investment giant announced plans to downsize its banking operations to safeguard profits.
CEO Walt Bettinger revealed Schwab’s strategy to shift more customer deposits to off-balance sheet arrangements, partnering with institutions like Toronto-Dominion Bank to optimize capital usage.
“These various actions should lead — again over time — to a bank that is somewhat smaller than our bank has been in recent years, while retaining the ability to meet our clients’ banking needs, lower our capital intensity and, importantly, protect the economics we’re able to generate from owning a bank,” Bettinger explained in a call with analysts.
This move echoes challenges from a year ago when rapid interest rate hikes by the Federal Reserve left Schwab with significant paper losses from its bond investments.
Concurrently, customers were withdrawing deposits in search of higher yields, forcing the company to resort to costlier funding options.
Schwab is now aiming to pay down this high-cost debt, potentially reallocating excess capital intended for stock buybacks.
Additionally, the business plans to restructure its balance sheet to shorten the duration of its investment portfolio, a shift Bettinger noted could introduce short-term earnings volatility but reduce reliance on supplemental borrowing.
“This definition of a transition year is being realized,” Bettinger said. “All of these issues position us for a strong period of growth in client metrics and financial results in the coming years.”
At 11:56 a.m. in New York, Schwab shares had plummeted 8.9%, their largest drop since March 2023, making them the worst performer in the S&P 500 Index.
Despite this, the stock had climbed 9.1% earlier this year.
Competitive Landscape
Schwab’s latest report showed fewer new brokerage accounts in the second quarter than analysts anticipated, with 985,000 new accounts compared to the expected 1.04 million.
Nonetheless, Schwab posted a net income of $1.33 billion for the quarter, surpassing analyst estimates of $1.23 billion, and earnings per share of 66 cents, also above expectations.
The retail brokerage sector has become increasingly crowded, with pandemic-era traders maintaining their activity.
Schwab, known for its traditional approach compared to crypto-friendly competitors like Robinhood, plans to launch an alternative investments platform for qualified, self-directed investors. Bettinger noted that 60% of new clients are under 40.
In May, Schwab announced that Mike Verdeschi, a Citigroup veteran, will replace Peter Crawford as CFO. Crawford had steered Schwab through the financial turmoil affecting its banking division last year.
Founded over 50 years ago by Charles “Chuck” Schwab, the company manages more than $9.4 trillion in client assets.
Strategic Shifts
Through off-balance sheet arrangements, Schwab customers would still open accounts with Schwab, but their deposits would be held by third-party banks, reducing Schwab’s capital requirements.
This approach aligns Schwab more closely with competitors like LPL Financial and Raymond James Financial, whose stocks outperformed Schwab’s due to lower funding risks, according to Keefe Bruyette & Woods analysts.
Schwab continues to focus on lending to enhance returns, with plans to expand offerings such as residential mortgages and home equity lines of credit.
“Most of our significant competitors have the ability to assist clients with both their investing needs as well as their borrowing needs,” Bettinger remarked.
“We believe firms that do not offer lending services are at a strategic disadvantage. That will show itself more and more over time, so we are committed to offering quality lending services.”
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