Charles Schwab Corp.’s stock fell back Wednesday after the U.S. Federal Reserve held interest rates steady but said it still plans to hike its benchmark rate by 50 basis points in the coming months.
The stock reversed course from fractional gains earlier in the day, when investors mostly shrugged off Schwab’s projected 10% to 11% decline in second-quarter revenue due to “temporarily compressed” net interest margin and a smaller interest-earning asset base, along with softer trading activity.
William Blair analyst Jeff Schmitt said Schwab faces pressure on earnings in the near term and noted that additional interest-rate hikes “could add to the pressure.”
The company’s slowed-down cash sorting — money moving between interest-bearing and non-interest-bearing accounts — “gives us confidence that the issue will abate by the third quarter,” Schmitt said.
Schwab’s stock fell 0.5% in afternoon trades.
The company’s projected revenue drop of up to 11% is currently worse than the roughly 6% projected decline in second-quarter revenue, to $4.78 billion from $5.09 billion, according to analyst estimates compiled by FactSet.
Schwab CFO Peter Crawford said the company saw “strong business momentum” in May, but it booked a slowdown in the average daily pace of net outflows compared with April.
The company’s bond prices have also been under pressure in a sign of reduced confidence in Schwab’s prospects, according to data from data solutions company, BondCliQ (see chart below).
Schwab’s corporate-debt investors have been doing more selling than buying in recent days, in a negative indicator for the company.
The company has seen good selling of the name in its 2024 and 2028 bonds on healthy volume, with slightly better buying in the longest bonds, according to data from BondCliQ.
Meanwhile, Schwab’s total client assets rose 5% from the year-ago period to $7.65 trillion as of May 30, but were flat with the previous month.
Schwab’s core net new assets brought to the company by new and existing clients totaled $20.7 billion in May. Net new assets excluding mutual-fund clearing totaled $24.5 billion.
Client cash as a percentage of assets was 11.5% as of May 30, compared with 12% in May 2022 and 11.3% in April 2023.
Including Wednesday’s moves, Schwab’s stock is down 33.8% in 2023, compared with a 14.2% rise by the S&P 500 SPX, 0.43%.