This hasn't been the best year for the banking industry so far. The domino effect of Silicon Valley Bank's collapse sent a panic through the industry, crushing many smaller regional banks and raising skepticism about the sustainability of many other larger banks and financial companies.
Charles Schwab (SCHW 0.13%) wasn't immune to this sentiment. The company saw its stock price drop more than 36% from January to early March. It's now down around 20% year to date, which actually is an improvement thanks to a single-day 12% jump after it released second-quarter earnings.
Image source: The Motley Fool.
On first look, there doesn't seem to be much reason for optimism. Interest revenue is down, total revenue is down, expenses are up, and net income is down -- just to name a few. However, it's all about perspective and the outlook, and that's seemingly going well.
The lagging financials didn't come as a surprise
A drop in revenue was all but inevitable. It was just a matter of how much. Charles Schwab's roughly $4.65 billion in revenue was down from last year's $5.1 billion, but it was more than the $4.61 billion analysts expected. Its $0.75 adjusted earnings per share (EPS) also beat expectations by $0.04. So, all things considered, it could've been worse.
A large part of the year-over-year (YOY) revenue drop can be attributed to a drop in net interest income, which was squeezed by more expensive deposits. Rising interest rates can be a double-edged sword: Charles Schwab can charge more for loan products, but it must also pay more interest on deposit accounts. The company paid an extra $845 million in deposit expenses largely because of rising interest rates.
Client assets are moving in the right direction
One cause for celebration from Charles Schwab's financials is the increase in asset management and administration fees. The $1.2 billion it made was up 11.5% YOY and 5% from Q1 2023. In Q2, the company brought in $52 billion in new net assets, increasing its 2023 total to $180 billion.
It also added close to a million new brokerage accounts, bringing total client assets to over $8 trillion across 34 million accounts. At a time when consumers have been skeptical of the banking industry, this reassures the company has offerings that remain attractive to investors.
This increase in asset management and administrative fees should help increase the company's revenue and hedge it against the cyclical nature of interest rate movements. Charles Schwab's bread and butter will continue to be interest income, but the diversification should help it with long-term sustainability.
Looking ahead from here
We can't predict how Charles Schwab's stock will move from here, but signs point to the company heading in the right direction. While the near-term drags have seemingly run their course, Charles Schwab is making progress in the metrics that could drive long-term growth, such as additional accounts and inflows of assets.
As an aside, Charles Schwab's Tier 1 leverage ratio -- which essentially measures a bank's financial stability and risk -- came in at 7.5% in Q2, up from 7.1% in Q1 and 6.4% in Q2 2022. Bank regulations state that a bank must have a minimum ratio of 6%. Its balance sheet may be a bit smaller than a year ago, but it's more stable and built to withstand the economic conditions the U.S. may experience in the near term.
Any quick short-term profits in the stock price probably are already over and done after the post-earnings surge. But the stock seems fairly valued for long-term investors. You may not want to invest a lump sum right now, but slowly building a stake seems like a good move.
