Brokerage Charles Schwab (SCHW -0.09%) is facilitating fewer trades than it was a year ago. It's also earning less interest income. But, net customer gains mean it's at least generating more management fee revenue now than it was at this point in 2022.
That's the broad takeaway from Schwab's second-quarter earnings report morning. In line with results from some other banks and brokers, the firm is reaping the benefits of a stabilizing, mostly bullish stock market and higher interest rates even as its own interest expenses soar.
Perhaps more than anything, however, investors should know that Charles Schwab is shrugging off the first quarter's liquidity debacle that upended Silicon Valley Bank and other midsize lenders.
Q2 results are a pleasant surprise
All in all it was a healthy enough quarter. Revenue fell 9% year over year to a little less than $4.7 billion versus analyst expectations of $4.6 billion, while Q2's non-GAAP (adjusted) earnings fell from $0.97 per share to only $0.75, versus estimates of $0.71 per share. But these lulls were expected.
That's because interest rate hikes imposed since mid-2022 catapulted interest revenue from $2.7 billion a year earlier to $4.1 billion during the three-month stretch ended in June, but at the same time ratcheted Schwab's own interest expense up from nearly nil to $1.8 billion. End result? Second-quarter net interest income slipped from more than $2.5 billion to just a bit less than $2.3 billion.
Trading revenue also tumbled from $885 million in Q2 2022 to only $803 million this time around. Revenue-bearing trades fell 15% year over year, with the market being much less exciting (read "less volatile") so far in 2023 than it was during the first half of last year.
Despite the revenue dip, the brokerage firm's single biggest expense -- compensation -- rolled in slightly higher year over year at just under $1.5 billion.
The big bright spot from last quarter's results was that asset management fees grew from a little more than $1 billion during Q2 2022 to nearly $1.2 billion in the second quarter of 2023, extending a trend evident as of Q1. Although investors are doing less trading, they're still bringing their assets to Schwab where they can be monetized in multiple ways. The brokerage firm's total client assets grew to more than $8 trillion last quarter versus a little more than $6.8 trillion as of the second quarter of last year and less than $7.6 trillion as of the end of Q1, with nearly 1 million new brokerage accounts being opened during the quarter in question.
Given what Chief Executive Officer Walt Bettinger describes as a "still somewhat unsettled backdrop," last quarter's customer asset metrics are encouraging.
Although Schwab didn't offer a forecast, the analyst community expects similar results for the remainder of the year before top- and bottom-line growth is rekindled in 2024.
Charles Schwab is on firmer footing than expected
The bulk of Charles Schwab stock's big post-earnings rally yesterday, however, arguably reflects a surprisingly solid balance sheet.
Investors may recall Schwab was one of the names battered by March and April's respective meltdowns of Silicon Valley Bank and First Republic Bank, both of which failed thanks to the mismanagement of assets ultimately backing customer deposits. While Schwab was never in the same sort of jeopardy, like most banks, rapidly rising interest rates dealt a blow to its readily available liquidity at the time.
In retrospect, though, the market overestimated the company's risk. Charles Schwab's total available-for-sale securities fell modestly from a value of $141 billion in Q1 to just under $126 billion in Q2, while its longer-term held-to-maturity securities only fell from a value of nearly $170 billion to a little more than $166 billion.
And, although the balance sheet itself is smaller, it's also arguably safer. The firm's Tier 1 capital leverage ratio -- a measure of how well a bank can withstand economic turbulence -- inched up from 7.1% for the first quarter to 7.5% as of the second quarter. A year ago the figure was only 6.4%.
In short, in some regards Charles Schwab is on a firmer fiscal footing now than it's been in quite some time, strengthened by an interest rate backdrop proving more beneficial to the economy than not. The less volatile stock and bond market also ultimately works in Schwab's favor, particularly given how the odds of avoiding a full-blown recession seem to be improving.
Start shopping for an entry point
Charles Schwab stock has been out of favor since March, when it was swept up in an industrywide bearish tide that punished most banking and financial industry stocks. Although up from its multimonth low reached in May, the scope and size of today's gain suggests the market wasn't expecting such strong results. Schwab's true strength may still not be fully priced into the stock, in fact. This bolsters an already bullish case for owning it.
Still, the scope and size of yesterday's rally also makes it a tough name to get excited about buying today. Interested investors may want to let the advance cool off a bit before jumping in.
Just don't wait too long. The rest of the market is figuring out pretty quickly that it misjudged this company's resiliency.
